As Compensation Season Begins, The Negative Effects of Unmet Expectations

With Q3 coming to an end, two important seasons loom on the horizon: Christmas and compensation.

While Christmas comes just one time a year, for most businesses, the “comp process” is a year-long effort to evaluate talent, manage expectations, and determine what level of year-end compensation — whether bonuses or salary increases — are fair and necessary.

Of course, employees’s expectations around comp are not always met. Getting this right might be one of the most significant areas of business management. As the Harvard Business Review notes, the key challenge for business leaders becomes: Understanding the potential negative repercussions and how to eliminate them.

As occurs in so many other business areas: Communication matters.

A Communications and Credibility Impact

The recent Harvard Business Review article, based on data collected from the company PayScale, found that one-third of employees who ask for a raise and do not receive it are given no rationale.

But even if employees are provided a reason for refusal, many don’t find the reason believable. Of those who were given a reason for a refusal, only slightly over 25% believed it.

The failure to provide a reason, or a believable reason, can have negative effects going forward. More than 70% of the two groups planned to look for new employment within the next six months.

If employees had been turned down for a raise and believed the reason they were given, 57% planned to look for a new job in the next six months, compared with 42% of employees who asked for a raise and received it.

So retention may suffer when employees are turned down for a salary increase. In addition, of course, the relatively low percentage of people who believe the reason indicates that organizational credibility may suffer as well. Nearly three-fourths of employees who are turned down for a reason don’t find the reason persuasive.

Managers should make sure payscales are in line with the market.

How to Minimize Negative Repercussions

Fortunately, the HBR also gives advice about minimizing negative repercussions going forward.

First, organizations should develop a standard method for evaluating raise requests. Standardization can do a lot to ensure that managers themselves have their reasons firmly in mind and can communicate them to employees. Communication is key to improving satisfaction with raise request results, whether they are favorable or unfavorable.

Second, companies should make use of market data on salaries. Knowing what the going rate is for specific job titles will eliminate feeling blind-sided by employee requests and provide a rationale for employees. It also establishes a fair and transparent system. As part of this, managers should look at pay equity within their organizations, ensuring that roughly equivalent employees do not receive discrepant pay.

Third, managers need to be proactive about adjusting salaries to achieve market equity, as part of business leadership. As the HBR points out, organizations have a “pay brand” — they develop a reputation for paying well, average, or poorly. Pay brand matters to the long-term business strategy of the organization because a well-perceived pay brand contributes to employee satisfaction with their jobs and with long-term retention.

Conversely, a poor pay brand may make it difficult to hire top-tier employees, especially in a tight job market, and may make retention challenging.