How to discuss pay with your employees

Not sure how to approach employee pay? In this introductory guide, HR consultant Gemma Dale maps out how businesses can manage pay structures and how to discuss pay with your employees.

Pay can be an emotive subject in the workplace.

It isn’t necessarily the main motivator for everyone, but it is one way that people compare themselves to others both internally and externally. Pay is also central to people’s sense of fairness at work and plays a role in the employee engagement and motivation mix. With the introduction of gender pay gap reporting and regular press headlines about executive remuneration, organisational pay is more visible and controversial than ever before.

There are many ways to approach setting pay rates. Some organisations link pay to performance, whereas others determine it through market rates or grading schemes. In some organisations, the annual salary is all there is, whereas others will offer a range of other financial benefits such as bonuses, allowances, or commission schemes.

There’s no agreed right or wrong – but context matters. What works for one role, industry or business might not work for another. Whatever approach an organisation decides to take, it is a good idea to have clear policies around how pay decisions are made, and people managers should understand their roles and responsibilities in respect of pay too.

The dos and don’ts of managing pay at work

Calculating and managing employee pay

When it comes to decisions and discussions about pay, there are some important considerations for all organisations – and some important things to avoid. Here is a list of those pay and reward dos and don’ts.

Do take a strategic approach

A strategy should set out how pay will be determined. This should align to the organisation’s objectives and be specific to its needs and goals. An effective strategy should enable pay to be used as a mechanism to attract and retain talent.

Do be evidence-based

The strategy should consider relevant evidence (internal and external) on effectiveness. For example, although many organisations operate performance-related pay systems, there are potential downsides to doing so and they can have unintended consequences. Organisations should be guided by research and evidence about pay and check that their own pay strategy is delivering on its objectives.

Do aim for transparency

Wherever possible, be clear about how decisions relating to pay are made. This may include publishing pay policies, having a job evaluation structure, or explaining how annual reviews are conducted. A transparent approach and clear communication will help employees to feel that the organisation is being fair in its approach.

It also helps to make sure employees can easily access their pay and benefits information through the use of pay and benefits tracking software

From time to time difficult decisions about pay must be made; perhaps bonuses cannot be paid, or the organisation cannot afford an annual pay rise. Where this is the case, clear and timely communication is critical. This should be led by senior management and a straightforward explanation provided to all employees. Wherever possible, it is also good practice to provide information about when the situation may be reviewed.

Don’t just focus on basic pay

Pay includes all the financial benefits provided to employees, such as pensions, allowances, bonuses, or any other form of compensation. When determining an approach to pay, organisations need to consider each element and how it contributes to the overall reward mix.

Don’t ignore inclusion

Employment law sets out certain requirements, including the need for men and women undertaking the same (or equivalent) work to be paid the same. However, this is the minimum standard. Organisations must strive to ensure that decisions on pay are free from discrimination and bias, and made only on merit. Manager training can help with this. It’s a good idea to audit pay decisions; who gets what pay rises or bonuses, and who gets put forward for other financial incentives? This can tell a powerful story about diversity and inclusion.

Learn more: Managing diversity in the workplace

Don’t forget people managers

Although they might not be setting the pay strategy, people managers are often involved in day to day decisions about pay, especially when it is linked to performance. Managers should be trained in pay processes and performance management – as well as unconscious bias. They need to be able to talk about pay with the people that work for them.

Discussing pay with employees: key takeaways

Employer discussing pay with employee

Pay is a key part of the employment relationship – but it’s important to remember that it isn’t everything. Pay rises are important, but even big increases in basic pay do not make people happier for long. What really motivates people is often something else entirely; the opportunity to make a difference, work that has meaning and purpose, and the ability to learn and grow as a professional are often just as important – if not sometimes more so.

Looking to oversee your employees' pay and benefits data with more oversight? See our pay and benefits tracking software, which helps managers oversee and employees get insights into pay and benefits information.

Written by Gemma Dale

Gemma Dale is an experienced senior HR professional, CIPD Chartered Fellow, HEA Fellow, and a regular speaker and writer on a variety of HR topics. Gemma is the co-author of the book 'Flexible Working' published by Kogan Page in 2020. She is also a lecturer in the Business School at Liverpool John Moores University and runs her own business, The Work Consultancy.