research Rewards Communication and Pay Secrecy A Survey of Policies, Practices and Effectiveness

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1 Rewards Communication and Pay Secrecy A Survey of Policies, Practices and Effectiveness research A report by WorldatWork Dow Scott, Ph.D. Loyola University Richard Sperling Tom McMillen Bill Bowbin Hay Group March 2008

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3 Rewards Communication and Pay Secrecy: A Survey of Policies, Practices and Effectiveness Research for this report was conducted by WorldatWork and Dow Scott, Ph.D. (Loyola University Chicago), and Bill Bowbin, CCP, Richard Sperling, CCP, and Tom McMullen, Hay Group. Dennis Morajda, Performance Development International, Inc. is acknowledged for his contribution to the data analysis and interpretation of results. Numerous presentations at WorldatWork annual conferences and articles published in WorldatWork Journal and workspan offer compelling support that communication helps improve the effectiveness of reward programs. These presentations and articles also point out that line managers and compensation professionals fall short in their attempt to communicate pay strategies and practices. Our 2007 survey of WorldatWork members found that pay communication was both the greatest strength and greatest weakness of reward programs. In that survey, 15 percent of respondents reported communications as the most positive attribute of their organization s rewards programs, but in almost twice as many cases (29 percent), it was viewed as the element of their pay program that most needed to be improved (Scott, McMullen, Sperling, and Bowbin, 2007). How much to communicate about pay is a continual debate, one for which there is not a clear answer. Those in favor of open communication contend that unless employees understand the pay system and how their pay is determined, it will not hit its mark of supporting and enabling the achievement of strategic business objectives. What s more, even proponents of reward program transparency point out that a level of employee privacy must be preserved and that complete openness, where employees know how much their co-workers are paid, can foster jealousy and performance problems. Effective rewards communication is more important now than ever as employees are being asked to make trade-offs between their economic needs (i.e., what shows up on a paycheck) and the level of health and retirement benefits they would like to receive. Fortunately, employers today have an array of communication tools to choose from, many unavailable in the past. Technology has enabled the creation of individualized reports informing employees about reward program eligibility and payouts. Computers at work and home and the Internet make dissemination of rewards information via s, Web sites, Webinars, DVDs and Page 1 of 18

4 a host of other electronic media fast and cost effective. Despite this, academicians, consultants and compensation professionals agree that rewards communications are often done poorly; employees for the most part do not understand how they are paid and what factors determine their eligibility for a variety of reward programs. As one WorldatWork member so eloquently stated in our 2007 rewards study (Scott, McMullen, Sperling, and Bowbin, 2007): Surprisingly it s not the value of pay. It s the communication. We ve spent years spending hundreds of millions on providing benefits that employees didn t value, understand or even know existed. Regular(ly) communicating the total value... significantly improved the effectiveness of our rewards programs. The strong interest in pay communication issues as found in our 2007 rewards survey and in current compensation literature, coupled with age-old debates concerning pay secrecy and the lack of employee knowledge about their pay, became our mandate for conducting this in-depth study of pay communications. Through our research project we set out to learn: What rewards information is being communicated The degree to which employees understand the organization s pay strategy and philosophy The degree to which employees understand how base pay, pay increases, incentives and benefits are determined and administered What methods are being used to communicate rewards information and how effective are these methods What level of pay secrecy (or openness) is being maintained and what is management doing to maintain this level of secrecy Page 2 of 18

5 DATA COLLECTION AND SAMPLE CHARACTERISTICS Five thousand WorldatWork association members were invited to participate in this study. The survey was open from Dec. 1 through Dec. 20, The survey required approximately 30 minutes to complete. Although we realized that a long, detailed survey would diminish the response rate, an in-depth survey of pay communication policies, practices and effectiveness was necessary to collect meaningful information, beyond what has been collected in other surveys. We received 394 valid responses from WorldatWork members. Respondent demographics are shown in Figures 1, 2 and 3 below. Figure 1: Survey Respondents by Responsibility Level Consultants, Academic/Educators, 4% Emerging/Junior Level Compensation, 9% Senior Level Executives, 9% Mid-Level Compensation, 42% Senior Compensation, 36% Page 3 of 18

6 Figure 2: Survey Respondents by Organizational Size Number of Employees 5,000 < 20,000 EE's 26% 20,000 + EE's 21% 1,000 < 5,000 EE's 28% < 1,000 EE's 25% Figure 3: Survey Respondents by Industry Manufacturing, 20% Other, 43% Finance & Insurance, 15% Professional, Scientific & Tech. Srvcs., 11% Healthcare & Social Assistance, 11% Page 4 of 18

7 FINDINGS Recognizing that communication focus and methods may vary depending on the type of rewards program, we asked about communications related to the following five components: Organization rewards strategies and philosophy Base pay Base pay increases Short-term variable pay Benefits We will discuss our findings for these categories later in this report as well as for the responses to some miscellaneous questions. Organization Rewards Strategies and Philosophy As shown in Table 1, compensation professionals believe that employee understanding of organizational reward strategies and philosophy is limited. Depending on the focus of the communication, 42 percent to 70 percent of respondents reported that only a few or some of their employees (40 percent or less) understood basic information related to their reward strategies and philosophy. Specifically, 70 percent reported that few to some employees (40 percent or less) understood how the mix of base pay, variable pay and benefits was established. Only 13 percent of respondents indicated that most to all employees (60 percent or more) did understand the reward mix. In contrast, respondents indicated that employees had a better understanding of the guiding principles of the overall rewards program, how reward programs are linked to business results, employee eligibility for reward programs, and the rationale for the performance measures used in variable pay programs. Even in these cases, however, respondents indicated that in only 33 percent to 35 percent of their organizations did 60 percent or more of the employees understand these strategic pay issues. Page 5 of 18

8 Table 1: Rate Employee Understanding of Reward Strategy and Philosophy The guiding principles of the overall reward program How the reward program links to business results Why certain employees are eligible for a rewards program and other employees are not The principles and rationale for the design of the base pay program Why pay targets or minimum and maximums are set at the amounts they are The principles and rationale for the design of the variable pay program Why the organization selects the performance measures it uses for variable pay programs The principles and rationale for the design of the benefits program How the compensation mix of base pay, variable pay and benefits was established Rate Employee UNDERSTANDING of Reward Strategy and Philosophy FEW SOME HALF MOST ALL * Don t (Under 20%) (20%-40%) (41%-60%) (60%-80%) (Over 80%) Know # Valid % # Valid % # Valid % # Valid % # Valid % # Due to rounding, Valid percentages may not total to 100%. * Valid percentage does not include Don t Know responses % 91 24% 88 23% 99 26% 33 9% % 96 26% 81 22% 89 24% 44 12% % % 73 20% 85 23% 38 10% % % % 61 16% 31 8% % % 83 22% 47 13% 25 7% % 91 26% 82 24% 61 18% 30 9% % 87 25% 77 22% 72 20% 44 13% % 80 22% 94 26% 73 20% 37 10% % 94 26% 63 17% 32 9% 15 4% 20 Page 6 of 18

9 In terms of the methods used to communicate reward strategies and philosophy to employees, respondents indicated that (90 percent), printed materials (83 percent), meetings led by HR or compensation professionals (83 percent), and intranet or Internet (78 percent) were widely used as shown in Table 2. Blogs were seldom used (28 percent) and nonelectronic bulletin boards were used about half the time (51 percent). Table 2: Rate Method Effectiveness for Communicating Reward Strategy and Philosophy Rate method EFFECTIVENESS for communicating Reward Strategy and Philosophy Use Not Effective Marginally Effective Very Effective * Not App. Method Effective / Not Utilized or letter from employee's supervisor, human resources or senior management Intranet or Internet sites, CDs/DVDs, or other digital information Printed materials, e.g., newsletters, brochures and leaflets Individualized compensation or total rewards statements sent to employees Meetings led by HR or compensation professionals % # Valid % # Valid % # Valid % # Valid % # 90% 11 3% % % 56 16% 39 78% 15 5% % % 58 19% 85 83% 8 2% % % 57 18% 64 69% 0 0% 31 12% 96 36% % % 0 0% 48 15% % % 66 Meetings led by line management 77% 9 3% 87 30% % 84 29% 90 Blogs and electronic bulletin boards where an employee can react to statements others have posted Bulletin boards or other kinds of posting in the workplace (not electronic) 28% 27 25% 54 50% 21 20% 5 5% % 47 24% % 41 21% 7 4% 190 Overall, how effectively does your organization communicate rewards strategy and philosophy information? 60 16% % 97 26% 28 7% 13 Due to rounding, Valid percentages may not total to 100%. * Valid percentage does not include Not Applicable / Not Utilized responses. Communication of organization rewards strategies and philosophies were deemed more effective when a greater number of communication methods were implemented to communicate this Page 7 of 18

10 information. Survey responses indicated a clear, positive link between the use of multiple communications methods and employee understanding. Base Pay Communications We were surprised to learn that 50 percent of respondents reported only few to some of their employees (40 percent or less) know the salary range for their position, while 60 percent of respondents reported 40 percent or less of their employees understand the pay ranges for jobs within their job family. (See Table 3) It is hard to imagine how employees can make rational judgments about seeking internal lateral moves or promotions without this important information. Only 15 percent of respondents reported most to all were aware of average pay for employees in the same job or grade, and 12 percent said most to all employees knew the average pay for employees in the same job family. Table 3: Rate Employee Understanding of Base Pay Communications The salary range minimum and maximum for the position the employee holds Salary ranges for jobs in the employee's job family or for similar jobs Salary ranges for all or most jobs in the organization Average pay for employees in the same job or grade Average pay by grade for employees in the same job family Average pay by grade for all employees in the organization Rate Employee UNDERSTANDING of Base Pay Communications FEW SOME HALF MOST ALL * Don t (Under 20%) (20%-40%) (41%-60%) (60%-80%) (Over 80%) Know # Valid % # Valid % # Valid % # Valid % # Valid % # 90 24% 93 25% 68 18% 68 18% 50 14% % % 63 17% 51 14% 31 9% % 84 24% 46 13% 28 8% 29 8% % 89 26% 63 18% 35 10% 16 5% % 94 28% 51 15% 27 8% 13 4% % 83 25% 44 13% 23 7% 13 4% 49 Actual pay for all employees % 81 24% 36 11% 28 8% 16 5% 50 Due to rounding, Valid percentages may not total to 100%. * Valid percentage does not include Don t Know responses. Respondents reported widespread use of or letters, intranet or Internet, printed materials, individual compensation reward statements, meetings with HR or compensation professionals, and meetings with line management to communicate base pay information. (See Table 4) Even though these pay communication methods were in most cases judged to be Page 8 of 18

11 effective or very effective, more than half (56 percent) of the compensation professionals responded that their overall base pay communication was not effective or marginally effective. Again, the number of methods the organization used to communicate to employees was significantly related to the overall assessed effectiveness of base pay communications. Table 4: Rate Method Effectiveness for Communicating Base Pay or letter from employee's supervisor, human resources or senior management Intranet or Internet sites, CDs/DVDs, or other digital information Printed materials, e.g., newsletters, brochures and leaflets Individualized compensation or total rewards statements sent to employees Meetings led by HR or compensation professionals Rate method EFFECTIVENESS for communicating Base Pay Use Method Not Effective Marginally Effective Effective Very Effective * Not App. / Not Utilized % # Valid % # Valid % # Valid % # Valid % # 80% 18 6% % % 72 23% 76 58% 27 12% 82 37% 83 37% 30 14% % 19 8% 82 34% % 36 15% % 4 2% 38 14% 95 36% % % 8 3% 49 17% % 98 35% 102 Meetings led by line management 73% 12 4% 80 28% % 78 28% 103 Blogs and electronic bulletin boards where an employee can react to statements others have posted Bulletin boards or other kinds of posting in the workplace (not electronic) 24% 36 39% 42 45% 15 16% 0 0% % 47 35% 56 41% 29 21% 4 3% 251 Overall, how effectively does your organization communicate base pay information? 54 15% % % 31 8% 19 Due to rounding, Valid percentages may not total to 100%. * Valid percentage does not include Not Applicable / Not Utilized responses. Page 9 of 18

12 Base Pay Increases It was reassuring to learn that 66 percent of the compensation professionals believed that most to all of their employees understood the amount of pay increase that they would receive. (See Table 5) At the same time, it is troubling that 21 percent reported that up to 40 percent of employees would not understand the amount of the increase they would receive. Further, a substantial number of respondents indicated that most to all of their employees did not understand: Goals, rationale or intent of why base pay increases were distributed the way they were (45 percent) The percentage of employees who received a zero increase (83 percent) Range or average increase given to eligible employees (40 percent) Table 5: Rate Employee Understanding of Base Pay Increases Communication Amount of increase the individual employee will receive Average increase given to employees in the work unit or for similar jobs Range of increases or average increase given to employees in the same work unit or for similar jobs Range or average increase given to eligible employees Percentage of employees who received a zero increase Actual increase amounts given to employees within their department or work unit Actual increase amount given to all eligible employees Goals, rationale or intent of why base-pay increases were distributed the way they were Rate Employee UNDERSTANDING of Base Pay Increases Communication FEW SOME HALF MOST ALL * Don t (Under 20%) (20%-40%) (41%-60%) (60%-80%) (Over 80%) Know Due to rounding, Valid percentages may not total to 100%. * Valid percentage does not include Don t Know responses. # Valid % # Valid % # Valid % # Valid % # Valid % 31 8% 50 13% 50 13% % % % 65 19% 67 19% 83 24% 34 10% % 59 17% 77 23% 73 21% 28 8% % 63 18% 77 22% 85 24% 50 14% % 46 15% 14 5% 22 7% 16 5% % 49 15% 42 13% 41 13% 21 7% % 47 14% 44 13% 44 13% 29 9% % 87 24% 90 25% 72 20% 36 10% 28 # Page 10 of 18

13 As shown in Table 6, the tools believed to be most effective for communicating pay increase were an or letter from the employee s supervisor, human resources or senior management; individual compensation or total rewards statements sent to employees; meetings led by HR or compensation professionals; and meetings led by line management. Again, blogs and electronic bulletin boards and traditional bulletin boards were infrequently used and were considered ineffective or marginally effective by most respondents who used them. Overall, 59 percent of the respondents believed that they effectively communicated pay increase information. Organizations that use more methods to communicate base pay increase information rated themselves as more effectively communicating this information. Page 11 of 18

14 Table 6: Rate Method Effectiveness for Communicating Base Pay Increases or letter from employee's supervisor, human resources or senior management Intranet or Internet sites, CDs/DVDs, or other digital information Printed materials, e.g., newsletters, brochures and leaflets Individualized compensation or total rewards statements sent to employees Meetings led by HR or compensation professionals Rate method EFFECTIVENESS for communicating Base Pay Increases Use Not Effective Marginally Effective Very Effective * Not App. Method Effective / Not Utilized % # Valid % # Valid % # Valid % # Valid % # 76% 24 8% 64 22% % 86 29% 92 52% 36 18% 64 32% 64 32% 35 18% % 31 15% 65 32% 72 35% 35 17% % 14 6% 26 11% 75 31% % % 14 6% 43 17% % 84 33% 131 Meetings led by line management 75% 12 4% 64 22% % 98 34% 95 Blogs and electronic bulletin boards where an employee can react to statements others have posted Bulletin boards or other kinds of posting in the workplace (not electronic) 24% 37 41% 37 41% 16 18% 1 1% % 49 39% 49 39% 26 20% 3 2% 257 Overall, how effectively does your organization communicate base pay increase information? 36 10% % % 55 15% 13 Due to rounding, Valid percentages may not total to 100%. * Valid percentage does not include Not Applicable / Not Utilized responses. Page 12 of 18

15 Short-term Variable Pay Seventy percent of respondents tell employees their variable pay performance targets. The remaining 30 percent either do not establish variable pay targets or do not communicate them to employees. Further, while a majority of the organizations communicate targets, fewer communicate actual payout metrics, such as the average: Payout based on performance targets (20 percent) Payout for each level of performance (14 percent) Amount of variable pay distributed to eligible employees (11 percent) As shown in Table 7, the most effective methods reported for communicating information about short-term variable pay include or letters from the employee s supervisor, human resources or senior management; printed materials; individualized compensation or total rewards statements sent to employees; and meetings let by line management. Fifty-nine percent of the respondents indicated that they believed that their organization effectively communicated variable pay information and the link between performance and rewards. Blogs/electronic and traditional bulletin boards were used infrequently and most often rated ineffective or marginally effective. The more methods they used to communicate short-term variable pay information, the higher respondents rated the effectiveness of their variable pay communications. Page 13 of 18

16 Table 7: Rate Method Effectiveness for Communicating Short-Term Variable Pay Increase or letter from employee's supervisor, human resources or senior management Intranet or Internet sites, CDs/DVDs, or other digital information Rate method EFFECTIVENESS for communicating Short-term Variable Pay Use Not Effective Marginally Effective Very Effective * Not App. Method Effective / Not Utilized Printed materials, e.g., newsletters, brochures and leaflets Individualized compensation or total rewards statements sent to employees % # Valid % # Valid % # Valid % # Valid % # 75% 17 6% 59 21% % 77 28% 91 50% 24 13% 62 34% 63 34% 35 19% % 7 3% 60 30% 89 44% 45 22% % 6 3% 33 14% 75 32% % 133 Meetings led by line management 70% 11 4% 52 20% % 89 34% 109 Blogs and electronic bulletin boards where an employee can react to statements others have posted Bulletin boards or other kinds of posting in the workplace (not electronic) 22% 30 37% 37 45% 12 15% 3 4% % 34 32% 42 40% 23 22% 6 6% 263 How effectively does your organization's short-term variable pay communication describe the link between performance and rewards? Overall, how effectively does your organization communicate shortterm variable pay information? 29 9% % % 62 18% % % % 44 13% 32 Due to rounding, Valid percentages may not total to 100%. * Valid percentage does not include Not Applicable / Not Utilized responses. Benefits Other than blogs and electronic or traditional bulletin boards, respondents reported using most communication methods and rated them positively. (See Table 8) This is not surprising because extensive benefits communication has long been a tradition and many of these communications are required by law. Overall, 81 percent of the respondents reported that their organizations were effective or very effective in communicating benefits information. Page 14 of 18

17 We also asked respondents if they provided training for retirement investments and training to help employees manage their health-care costs. Of the 49 percent who indicated that they offered retirement investment training, respondents indicated that only 29 percent of their employees attend such programs. Fewer organizations offered training to help employees manage their health-care costs (22 percent), but a larger percentage of employees attend such training (39 percent). In both cases, most respondents rated this training as effective or very effective, 79 percent and 73 percent respectively. Table 8: Rate Method Effectiveness for Communicating Employee Benefits or letter from employee's supervisor, human resources or senior management Intranet or Internet sites, CDs/DVDs, or other digital information Printed materials, e.g., newsletters, brochures and leaflets Individualized compensation or total rewards statements sent to employees Meetings led by HR or compensation professionals Rate method EFFECTIVENESS for communicating Employee Benefits Use Method Not Effective Marginally Effective Effective Very Effective * Not App. / Not Utilized % # Valid % # Valid % # Valid % # Valid % # 88% 13 4% 68 20% % % 44 90% 9 3% 52 15% % % 37 96% 3 1% 55 15% % % 14 68% 4 2% 28 11% 99 39% % % 2 1% 36 11% % % 38 Meetings led by line management 59% 16 7% 71 32% 89 40% 46 21% 153 Blogs and electronic bulletin boards where an employee can react to statements others have posted Bulletin boards or other kinds of posting in the workplace (not electronic) 26% 27 27% 39 39% 26 26% 7 7% % 30 14% 87 41% 75 36% 18 9% 168 Overall, how effectively does your organization communicate employee benefits information? 6 2% 66 17% % % 0 Due to rounding, Valid percentages may not total to 100%. * Valid percentage does not include Not Applicable / Not Utilized responses. Page 15 of 18

18 Pay Transparency As a whole, companies seem split on whether they want to discourage employees from sharing information or leave it up to employees as to how much personal pay information to share with their colleagues. One percent of respondents said their employees would be punished if they shared pay information, 38 percent said they would discourage them by giving a verbal warning or simply telling them not to share this information, 47 percent said nothing would happen, and 1 percent said they hope that employees would share this information. Other Findings The following findings relate to survey questions that do not fit into the categories previously described, but which we think are of interest: Respondents reported that they typically do not involve marketing, public relations or other communication professionals in developing pay communication programs, i.e., 4 percent always, 11 percent most of the time, 28 percent sometimes, 15 percent almost never and 42 percent never. Organizations that followed a more comprehensive pay communications strategy such as branding, involving professionals from marketing and PR, and segmenting their communication methods were more likely to evaluate their strategy and philosophy communications and their base pay communications as effective. Reward communications are seldom pilot tested, i.e., 4 percent always, 8 percent - most of the time, 28 percent sometimes, 28 percent almost never and 32 percent never. Organizations that pilot test their communications programs rate them as more effective than organizations that do not use pilot tests. Few organizations evaluate the effectiveness of their pay communications programs. Thirty-nine percent indicated they did not evaluate pay communications and 44 percent said it is done informally. Only 19 percent said they periodically asked employees what communication method they preferred, 14 percent indicated that they monitored employees who took advantage of opportunities to learn more about how they were paid, 8 percent assessed employee knowledge of pay programs and 13 percent tried to determine if the pay program had the desired results. Organizations that evaluate the effectiveness of their pay programs were more likely to consider their programs effective than those that do not evaluate them. Only 9 percent of the companies established a separate budget for communicating reward programs. Even though the reported level of employee understanding of pay programs is not very impressive, respondents strongly believe that pay communications impact: Page 16 of 18

19 Organization effectiveness and performance (78 percent) Employee satisfaction with pay (81 percent) Employee retention (79 percent) Employee engagement or motivation (78 percent) Page 17 of 18

20 CONCLUSIONS Clearly our study confirms previous research that compensation professionals believe: Rewards communication is important; it affects company performance, employee satisfaction with pay, employee retention and employee motivation. Most employees have limited understanding of rewards programs and how they work; in fact, many do not understand aspects of the pay system that directly affect them such as pay ranges, average pay rates and performance targets. Their companies are not very effective at communicating rewards information. This study indicates what communication methods are being used and their effectiveness as evaluated by compensation professionals. Furthermore, we have learned that using more methods to communicate reward programs increases the effectiveness of overall rewards communication. Not only should the results from this study encourage compensation managers to improve their rewards communication programs but they also should understand which communication methods will be most effective. If you have questions about our findings, please feel free to contact one of the authors. We will be examining this data in more detail and reporting it at the WorldatWork Total Rewards Conference & Exhibition 2008 in Philadelphia and as a submission to the WorldatWork Journal. If you have comments and insights we look forward to receiving them at dscott@luc.edu. REFERENCES Scott, K.D., McMullen, T.D., Sperling, R.S., and Bowbin, B. (2007) Reward Programs: What Works and What Needs to be Improved. WorldatWork Journal. 16(3), Page 18 of 18