When I was a kid, my father owned a coffee shop. For his 10 or so employees, my Dad had a simple pay philosophy: If he liked someone, he paid them more.
Of course, that’s not how major corporations pay people—in theory, anyway. Most corporations have a detailed compensation policy that explains how everyone, from employees to contractors, should be rewarded. But at the individual manager level, these policies are often overshadowed by personal opinions. Most compensation politics are hard to enforce at scale, and as a result, pay remains a frustrating and deeply emotional issue for workers. And pay discrepancies have led to entrenched inequities, disappointed employees, and calls for improved pay transparency.
A 2022 survey from Gartner found that just 32% of U.S. employees think they’re fairly paid. And when my company surveyed workers, eight out of 10 said they wanted pay transparency from their employer.
I believe how we pay people is fundamentally broken. But I also believe there’s a way to fix it. Here’s why compensation is such a mess — and how companies can make it better.
Why is pay so difficult, and what’s at stake?
Pay is always personal. No matter how clear a company’s compensation policy is, it’s ultimately left to individual managers to implement. This is what I call the “last mile” of pay equity.
And that last mile is littered with wreckage. As much as employers like to think that pay is a science, compensation decisions at organizations large and small often come down to gut instinct and mental math, leaving some employees overcompensated and others shortchanged.Worse still, bias—whether unconscious or not—is widespread. We’ve all seen how favoritism can count as much as performance and tenure. Meanwhile, factors like gender and race still sway compensation. In 2022, Pew Research estimated that on average, female American workers earn 82 cents for every dollar earned by men—a number that’s barely budged in two decades.
When managers do try to make data-driven choices—by drawing on internal and external benchmarks—the information they need is often locked away in spreadsheets. The research and calculations required to systematically calculate individual compensation can slow pay decisions to a crawl and add an extra burden on already overworked managers.
This invariably leads to shortcuts. Managers might base raises on the last few employee interactions, unduly reward “squeaky wheels” while overlooking quieter workers, or simply give all team members a uniform bump across the board in order to save time.
At an individual employee level, the fallout from poor pay decisions can be dire. Unhappiness with compensation leaves people less engaged and often drives them to quit. During the so-called Great Resignation in the wake of the pandemic, more than 60% of workers who left their jobs did so because of low pay.
At a company level, the result is systemic inequities around compensation that can be hard to root out. That’s why there is a growing push for pay transparency throughout the U.S. and the European Union. States like California and New York now have laws that require employers to reveal compensation pay bands. In the EU, a transparency directive aims to ensure that all employees get equal pay for equal work.
As businesses tackle pay inequity, it puts even more pressure on managers, many of whom lack the experience and skills to navigate the complexities of compensation.
How can we fix the last-mile pay problem?
Fixing the last-mile problem in pay starts with helping managers make simpler and fairer decisions.
A healthy company culture and ethical leadership can make a big difference here. Leaders need to educate their managers about the value of making data-driven pay decisions rather than relying on a hunch. To that end, managers must ensure that people understand the company’s pay philosophy, along with the key factors that should determine compensation, from internal guidelines to external benchmarks.
But it’s not enough to have your pay policies in a PowerPoint deck. Whether we’re talking about a few dozen or a few thousand employees, getting compensation right requires not merely guidelines but a way to implement them, equitably and at scale. Managers need more than rules; they need tools.
Here, a new breed of smart compensation tech is showing promise. These productivity tools can crunch the mind-numbing array of variables in play and factor in the intricacies of company policies and industry benchmarks, to provide compensation suggestions. In this way, many new compensation tools are multidimensional in ways that spreadsheets can’t match. For instance, a spreadsheet doesn’t understand if you are making pay decisions based on performance or tenure. But new compensation tools can account for compensation philosophy. They factor in up-to-date information on salary levels and incentives. They adjust for geography and market demand.
But the best of these tools go far beyond that. They also incorporate rich data on individual employee performance and engagement to make pay suggestions. Is a team member exceeding sales targets? Consistently working late? Spearheading new initiatives? New tools can integrate these people data points into the overall pay picture.
Instantly, employee performance is benchmarked against job standards. Salary is compared with median pay for a similar position inside or outside the company. Pay gaps attributable to race, gender or other factors are flagged.
When it comes to pay transparency, every organization has its own comfort level with the types of tools they use. But, no matter the means, the benefits of achieving pay transparents add up. Pay transparency boosts retention by 30% or more, one study found. Roughly three-quarters of U.S. workers are more likely to trust organizations that include pay ranges in their job postings. And more than two-thirds of workers would switch to an employer with more pay transparency, even if compensation was the same.
Of course, humans remain a vital part of solving pay inequities. But I would bet you a cup of coffee that removing bias and guesswork will leave workers feeling better about their paychecks and their jobs.
AI is taking these smart comp capabilities to the next level. Instead of diving into charts and tables, managers can pose questions in plain language. For example, a boss might ask, “Which people in my department deserve a raise?”
A process that may have taken hours or days is compressed to a few minutes. Armed with that data-driven insight, managers can justify their pay decision to an employee, bringing transparency to what might otherwise be a tough conversation. On top of that, HR has a record of the rationale. Even more important, there’s consistency across departments.
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