Is the last mile the hardest? 

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Getting employees to understand the value of their compensation is crucial, but challenging. One of the biggest opportunities to sharpen employees' understanding of comp is at the end of the merit cycle. After months of gathering recommendations and making final decisions on comp adjustments, the hardest part begins: communicating compensation adjustments. 

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In this article, we’ll share the best practices on how to prepare for, execute, and close out compensation conversations. 

Compensation conversations can be difficult, especially in a tough economic climate 

Comp conversations can be difficult for a few different reasons. 

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First, compensation is an emotional topic; it underscores the value an organization places on an employee’s work.

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Second, a tough economic climate makes having comp conversations even harder. When the median percentage increase to overall salary (across eligible employees) barely keeps up with inflation at 3.3%, employees can have more pointed questions about how comp decisions are being made.

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And third, while Total Rewards teams are well-versed in compensation principles and data, the messengers of these decisions are often managers who are less practiced in talking about comp. Without the right preparation, managers can miss an opportunity to reinforce or reward performance, or worst case scenario, create distrust. 

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Based on our experience and work with top tech companies, we’re sharing four key steps to nail employee communication at the end of your merit cycle.

Best practices for communicating compensation decisions

When employees’ expectations about compensation are managed ahead of, during, and after a merit cycle or performance review process, it can build and reinforce trust and credibility.  

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Managers play an outsized role in ensuring employees understand how comp decisions were made during merit cycles and communicating outcomes. Here are four ways to set them up for success, which we'll expand on below: 

1. Plan compensation communications first, not last. This will help create consistency with org-wide communications.
2. Prepare managers for compensation discussions with employees. With the right training, managers are able to build more trust with direct reports. 
3. Set clear expectations for employees on what their comp conversation will entail. Mapping out the conversation ahead of time can ease anticipation and build trust.
4. Reinforce compensation adjustments. Following up with written communication can close out the process with clarity.  

1. Plan compensation communications first, not last 

Communicating comp decisions is often viewed as the last, crucial stage of the merit cycle process. But our most successful customers indicate that they “put comms first”, developing communication plans and sharing them with managers before recommendations are submitted. 

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Why? This gives managers enough time to absorb what they’re going to say and how to connect it back to the compensation philosophy.  

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Compensation teams can also take some of the onus off of managers by communicating timelines to all employees throughout the merit cycle season. During Pave’s merit cycle, over-communication across both managers and employees was a key part of our process. We published merit cycle timelines before the process kicked off, shared internal resources, and gave weekly updates in Slack and during All-Hands meetings. 

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Additionally, company-wide training on these conversations can ensure that the comp process is communicated consistently throughout the organization. Centralizing communications and training allows compensation teams to mitigate inconsistencies across how managers prepare their teams for comp conversations. 

Communicating compensation to employees: A checklist for HR teams

An org-wide training for employees can be a great way to manage expectations. Here’s what employees should know before a compensation cycle.

Key topics to cover in an employee training session include: 

1. Eligible compensation adjustments - Let employees know the types of adjustments that are eligible for each cycle like cash, equity, market rate adjustments, merit increases, promotions, etc. 
2. Eligibility requirements for compensation adjustments - Talk to employees about the factors that make someone eligible for any compensation change. For example, what are the tenure requirements for market, merit, or promotion adjustments? 
3. Which stakeholders influence compensation adjustments - Outline which stakeholders (like department leaders, managers, outside consultants, etc.) worked together to develop a solid comp review process. 
4. Company compensation philosophy - Share the main pillars of your comp philosophy with employees and explain how they connect to comp decisions. 
5. For consideration: Recommendation logic for merit and promotion increases - In some cases, it may be helpful to share a little bit about your recommendation logic. This also manages employee expectations before they have comp conversations with their manager.
6. Key dates - Let employees know the general timeline for when they’ll have comp conversations and the effective dates for any changes.

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Giving employees insight into the data, strategy, and effort that was part of the comp review process will increase trust with their managers and organization. 

2. Prepare managers for compensation discussions with employees

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Employees are much more likely to walk out of comp convos feeling confident about (or at least understanding) their compensation if their managers walk into the conversation prepared. 

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To prepare, managers should: 

1. Brush up on the company’s compensation philosophy 
2. Understand how and why the compensation adjustment for each individual was made (the recommendation logic) - You’ll want to give managers guidance on how much of this can and should be shared with employees 
3. Familiarize themselves with the compensation history for each of their reports
4. Review feedback from the latest performance reviews 
5. Carve out time specifically for comp conversations - We recommend 45 minutes, and it should happen outside of a regular 1:1

Managers should also have a strong grasp of key data points related to compensation adjustments. You can pull this information directly from Pave’s compensation planner.

3. Set clear expectations with employees on what their compensation conversation will entail

Managers should be clear with direct reports on the outcomes of the compensation meeting. At the end of a successful comp conversation, employees should understand their level, performance (although they might know this before if performance conversations are decoupled from comp convos), whether or not they received an adjustment, and what it is.

Most importantly, they should feel connected and on the same page as their managers. They might disagree with the decision but should understand how it was made. 

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When it comes to having the conversation itself, managers should: 

1. Set the stage beforehand - Let direct reports know whether a reward letter will be sent before, during, or after the conversation. We recommend asking employees what their preferences are. 
2. Reiterate level and performance evaluation - In most organizations, compensation is performance-based, and these conversations are good opportunities to reinforce this as part of the company’s compensation philosophy. 
3. Share compensation adjustment - This can be framed based on the latest performance rating. 

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The biggest pitfalls managers should be coached to avoid are: 

• Not preparing enough - The above checklists should help! Based on how transparent your company is in sharing its recommendation logic, managers should be able to explain how they arrived at certain numbers.
• Not owning decisions - Discussing comp is uncomfortable, and it can be tempting to shift blame (on leadership, budget constraints, etc.). One way to mitigate this is to equip managers with scripts to guide them through tough feedback and comp decisions. 
• Making future promises - Another escape from an uncomfortable conversation. It’s okay for managers to take a beat and come back to the conversation once their reports have had time to process the outcomes. This should be a manager’s go-to tactic instead of making promises in the moment to assuage employees’ concerns. 

4. Reinforce compensation adjustments

As a final celebratory step, managers should set expectations of when their employees will receive their reward letter if their comp was adjusted and when the increase should hit their paychecks. Pave’s Total Rewards letters automatically pull in key information like newly promoted titles (for promoted employees), current titles, job profiles and levels, performance scores, salary adjustments, and equity adjustments. Letters can be released by managers or at a certain date mandated by HR. 

With a little preparation, compensation conversations can drive trust and confidence

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Compensation conversations are one of the hardest steps of the merit cycle process. But when done well, they’re an all-around win for the org.  Managers take more accountability for comp decisions, reinforce a high-performance culture, and build trust within their teams. Employees walk away with a better understanding of how compensation decisions were made and how their contributions are being valued. And compensation teams build confidence in their comp strategies from across the organization.

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Whether you’re wrapping up your merit cycle or gearing up for the next one, Pave can help. Request a demo to see how our platform can help you run merit cycles more effectively and build trust with employees through clear communications.