By Jessica Spellins, Trüpp.

When making compensation decisions, you’ve likely heard—and perhaps used the phrase, “it depends.”

Do we cover moving expenses? It depends.

Can we factor in additional education when setting pay? It depends.

Does position ‘X’ qualify for a night shift differential? It depends.

Employers may not realize that this flexibility can often lead to inconsistent pay practices with harmful repercussions.

Legal Liability

Considering the nationwide trend of stricter pay equity laws being passed at the state level, inconsistent pay practices can expose your organization to greater legal liability. When pay decisions (i.e., setting new hire pay, increasing pay, distributing bonuses, allocating pay differentials, etc.) are made inconsistently, it contributes to inequitable differences in pay. These differences create risk for organizations when they create pay inequities for female employees or others considered to be in a protected class. Legal actions can result in having to pay an employee back pay and substantial fines. Additionally, creating damage to the employer’s brand and reputation.

Employee Morale

Contrary to popular belief, it is not against the law for employees to discuss pay and other pay practices with their coworkers. Having well-defined pay practices that are documented and easily accessible prepares managers for having defensible discussions about pay and organizational practices with employees. Numerous studies* have shown that employees who feel they have a full understanding of their organization’s pay practices are more productive and satisfied. When employees understand and trust an organization’s pay practices, there is no need for questioning decisions.

Financial Burden

Organizations that lack well-defined and understood pay practices are more likely to:

  • Spend unnecessary time and energy to make pay decisions, including back-and-forth negotiations between recruiters/human resources, hiring managers, leadership, and candidates/employees
  • Make pay decisions that are overly influenced by the situation, business environment, and parties involved
  • Make pay decisions based on “the squeaky wheel gets the grease” mentality, resulting in rewarding departments and employees that complain the most
  • Overpay due to a lack of clarity and not being well-equipped to negotiate employee pay

If your organization’s pay practices are falling short, now is a great time to get things in order. Once your pay practices are defined, don’t forget to train your recruiters, managers, and leaders on how to apply pay practices and have effective pay conversations with employees. These steps will aid in limiting legal missteps, increasing employee morale and decrease the financial burden on your organization in the long run.

Check out our Compensation Planning Guide for an in depth look at this topic.

* Huet-Vaughn, Emiliano. Striving for Status: A Field Experiment on Relative Earnings and Labor Supply. California: UC Berkeley, 2013. Online.
Bamberger, Peter A. and Belogolovsky, Elena. Signaling in Secret: Pay for Performance and the Incentive and Sorting Effects of Pay Secrecy. New York: Academy of Management Journal Vol. 57, No. 6, 2014. Online.
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