How-to-Guide to Compensation Conversations with Employees: Build Trust and Motivation

Mastering compensation conversations involves preparation, transparency, empathy, and strategic communication, which collectively foster a positive work environment and employee satisfaction.

Follow this guide for conducting productive compensation conversations that build transparency, trust, and motivation.

General talking points for managers holding compensation conversations

Consider some of the most relevant talking points for a compensation conversation.

Refresher on the compensation philosophy of your company

Communicate your organization’s compensation philosophy, covering areas such as:

• The principles and values underlying the compensation framework
• Its goals, e.g., to attract and motivate top talent
• How you incorporate market comparisons
• Pay scales for different job types or levels of seniority
• Compensation structures, e.g., base pay, benefits, bonuses, additional rewards, and perks

Discuss market rates

Assess the market rate for the role under discussion to contextualize your compensation conversation. Use the following approach:

1. Benchmark the job description: Look beyond job titles and identify a suitable job type with a sufficient overlap (say, 70% or more) of the responsibilities, required skills, and deliverables with the role
2. Position your organization in the marketplace: Identify your organization’s peer group to allow comparisons with companies of a similar size (since larger companies tend to pay more while smaller companies tend to offer other benefits, like better access to senior management)
3. Evaluate performance attributes: Assess the employee’s skills, experience, and competencies relative to the role’s requirements, including personality attributes such as attitude, work ethic, and teamwork

Discuss non-salary benefits

Non-salary benefits are becoming more critical in compensation packages as employees emphasize lifestyles over monetary rewards, so highlight these.

Non-salary benefits include:

• Flexible, remote, or hybrid working arrangements
• Wellbeing and health programs
• Paid parental leave, long service leave, and increased holiday allowances
• Mobile phones (paid for by the company)

The most recent performance review may offer insights on how to evaluate compensation for the role based on:

• Job performance—how the employee contributes to goals if they met deadlines and deliverables
• Employee strengths—competencies and areas of excellence
• Areas for improvement—goals not achieved and future focus areas
• Career outlook—personal and professional goals and aspirations within the company

Acknowledge the employee’s contribution

When you recognize your people at work, they’ll feel more valued, appreciated, and satisfied.

As part of your compensation conversation, use these recognition guidelines offered by Harvard University’s HR department:

• Be genuine: offer your full attention and sincerity
• Be specific: describe the activities or accomplishments you want to recognize and the value they added
• Offer recognition: make it commensurate with the behavior or activity being recognized
• Be personal: accommodate the preferences of the employee, e.g., some people prefer rewards (such as movie tickets or a restaurant meal). In contrast, others prefer a public acknowledgment (such as a “call out” during a future work forum)

Are you looking for meaningful ways to recognize your people? Consult these 30+ employee recognition ideas that boost morale.

Communicate the compensation decision

Communicating compensation decisions can be challenging—employees may be dissatisfied with their outcomes or have misaligned salary expectations.

Pearl Meyer, a compensation consultant, suggests the following do's and don'ts:

• Do—use language that the employee can understand, keep a neutral stance (i.e., explain rationale rather than opinion), reiterate how you made compensation decisions and put the compensation decision in the context of the target range for the role
• Don’t—use complicated terminology, express dissatisfaction with the decision, blame HR, or reveal the compensation arrangements of other employees

Be clear and consistent when communicating the decision, using the right tone and delivering the message with empathy. Also, be prepared for questions that employees are likely to have and allow ample time for discussion.

Discuss future opportunities

Compensation discussions are an opportunity to develop your people alongside your organization’s employee development program.

Use these suggestions from members of the Forbes Business Council:

• Understand your people’s aspirations—assess how best to align and develop their skill sets to fit your organization’s priorities
• Encourage skills training—allow the opportunity to enhance current skills and train in areas of passion for employees
• Offer career advancement opportunities—encourage professional growth within the company and beyond, demonstrating your organization’s commitment to developing its people
• Help define a development path—track progress towards goals and empower your people with more control over their career destinies
• Help identify strengths and passions—help build personal capabilities and boost self-awareness as a key to growth

Ask for feedback

Employee feedback is an essential part of the compensation discussion.

“The person whose opinion matters the most in the entire review process is the employee because they are often the most affected by the outcome,” says Ranee Zhang of Airgram, “so listen to their feedback on the updated compensation and the organization’s compensation philosophy.”

Zhang suggests asking questions like:

• How do you feel about the outcome?
• Do you think it’s fair or sufficient?
• Do you have any thoughts on the organization’s compensation philosophy?
• Is there anything you’d like to change?

Find out what your people care about the most other than pay, suggests Zhang.

And remember that managers get the best feedback when they’re open and transparent.

Tough questions to be ready to address employee compensation discussions

Being prepared for tough questions enables managers to handle compensation talks confidently and transparently. Here are the top five questions that might arise:

How is my salary calculated?

1. If your organization hasn’t already got a transparent compensation model, consider making it more transparent—this will become more relevant as workplace transparency requirements increase
2. Explain the factors contributing to employee pay, e.g., responsibilities, market comparisons, experience, and (sometimes) location
3. Emphasize how the employee’s salary is based on its fit with the contributing factors

Is my pay fair?

1. Don’t be tempted to say “yes” without being sure it’s true
2. Try to understand the specific areas where the employee feels they may be underpaid
3. Once you’ve established it, explain why the employee is being paid fairly based on their competencies and experience and how they relate to the market

3. Why am I paid less than others in the same job?

1. Bring the focus back to the employee rather than others
2. If necessary, set up a separate meeting to assess their specific circumstances
3. Point out why employee comparisons may not always be relevant due to background, experience, or competencies differences

4. Can I have a pay rise?

1. Explain the criteria at your organization for salary increases, e.g., time in the role, performance improvements, and changing responsibilities
2. Consider your organization’s financial health and growth prospects and the competition for similar roles in the market—strong performers may warrant a pay rise
3. If the employee’s performance doesn’t warrant a pay rise, highlight areas of focus they can work on for future pay rises

5. How do I get a promotion?

1. Promotions depend on the available opportunities relative to employee skills and competencies—they aren’t always available
2. If the employee isn’t performing to a level warranting a promotion, revise their development plan to help boost the areas they need the most

Scenarios each manager should be able to handle (with talking points)

Compensation discussions can be challenging—prepare your managers with talking points for likely scenarios.

Always start by recognizing the employee’s contribution and showing appreciation for their efforts, highlighting any noteworthy accomplishments.

1. When an employee’s performance isn’t up to the standards that justify a raise

• Explain your organization’s compensation framework and where the employee fits within it
• Clearly explain why the employee’s performance does not merit a compensation increase
• Set specific goals for the employee to work towards and establish progress milestones

2. When an employee’s pay is already sufficiently high

• Describe the market value associated with their role, capabilities, and experience
• Explain that the employee’s compensation compares favorably with the market and your organization’s compensation framework and why an increase isn’t warranted

3. When an employee is dissatisfied with the compensation outcome

• Describe the market value associated with their role, capabilities, and experience
• Explain your organization’s compensation framework, how it accounts for market pay rates, and where the employee fits
• If the employee brings up any other colleagues’ compensation arrangements, explain that you cannot discuss other pay packages and bring the conversation back to the employee’s situation
• Explain how the employee’s accomplishments link directly to their compensation package
• Seek feedback and discuss their concerns, noting any areas that have value beyond monetary compensation, e.g., increased flexibility or career advancement opportunities

4. When it’s not possible to increase compensation due to economic conditions or budgetary constraints

• Describe the compensation framework at your organization and how it links to the company’s overall performance, which in turn depends on economic factors and market conditions
• Communicate the reasons for being unable to increase bonuses or pay, i.e., the economic conditions or budgetary restrictions placed on your organization
• Be transparent about the process underlying the compensation decision.
• Allow ample opportunity for questions and feedback

If setting a performance management system for the first time in your organization, consult our in-detail step-by-step implementation guide.

Sample compensation conversation agenda

Need more help preparing for a compensation discussion?

Here’s a sample agenda to guide you through the whole process.

Introduction and purpose

1. Welcome the employee and explain the purpose of the conversation, which is to discuss their compensation and any updates or changes
2. Then, provide a brief overview of the agenda

Conclusions from the latest performance evaluation

1. Review the employee’s job responsibilities and performance evaluation over the past year
2. Highlight their achievements, strengths, and areas for improvement

Compensation review (Including non-salary benefits)

Discuss any changes or updates to the employee’s compensation package and be transparent about the company’s budget constraints.

1. Discuss any changes or updates to the employee’s compensation package
2. Clarify when the changes will come into force
3. (Optional) Explain how the employee’s current compensation compares to the market rate
4. Discuss non-salary benefits like health insurance, retirement plans, and vacation time
5. Explain how these benefits contribute to the employee’s overall compensation package

Feedback and questions

1. Encourage the employee to provide feedback on the conversation and their compensation package.
2. Address any concerns or questions they may have. Be open to their feedback and suggestions

Future opportunities

Discuss opportunities for the employee to grow and develop within the company.

1. Explain how career growth can impact compensation
2. Encourage the employee to share their career goals and provide guidance on achieving them

Conclusion and follow-up

1. Summarize the discussion and confirm the employee’s new compensation package details
2. If applicable, agree to communicate the conversation’s outcome to other relevant parties
3. If applicable, agree on when and how to follow up with the employee in the future

Primary principles to consider when discussing compensation

The following compensation principles are worth considering when discussing compensation with your workers.

1. Transparency and fairness

Transparency in compensation fosters trust and clarity in the workplace. Employees are more likely to feel valued and respected when they understand how their compensation is determined and how it compares to others within the organization. This includes being open about salary ranges, bonuses, and the criteria used to determine pay increases.

Fairness, both perceived and actual, is critical. If employees believe that pay decisions are based on favoritism or bias, this can lead to dissatisfaction and decreased morale.

Transparent and fair compensation practices ensure employees feel their efforts are appropriately recognized and rewarded, which can improve retention and loyalty.

2. Alignment with performance

Linking compensation directly to performance can significantly enhance motivation and productivity. When employees see a clear connection between their hard work, skill development, and financial rewards, they are more likely to engage in behaviors that drive business success.

This alignment encourages a performance-driven culture where employees are motivated to meet or exceed expectations for higher compensation. However, to avoid frustration or demotivation, it is essential to ensure that performance metrics are clear, attainable, and aligned with organizational goals.

3. Market competitiveness

Ensuring competitive compensation within the market is vital for attracting and retaining top talent.

Employees are aware of the value of their skills in the broader job market, and if they feel underpaid compared to industry standards, they may seek opportunities elsewhere. Regularly benchmarking compensation against industry norms helps organizations stay competitive and demonstrates to employees that their value is recognized.

Competitive pay attracts high-caliber candidates and reduces turnover, as employees are less likely to leave for better-paying opportunities.

4. Total rewards perspective

Compensation should be considered part of a broader “total rewards” package, including benefits, work-life balance, career development opportunities, and recognition.

Employees increasingly value a holistic approach to rewards going beyond just salary. Comprehensive benefits like health insurance, retirement plans, flexible working arrangements, and professional growth opportunities can enhance job satisfaction and loyalty. Organizations can cater to diverse employee needs and preferences by promoting a total rewards perspective and fostering a more engaged and committed workforce.

5. Communication and expectations

Effective communication about compensation helps manage employee expectations and reduces misunderstandings.

Clear, ongoing dialogue about how pay is determined, how raises are awarded, and what factors influence bonuses or promotions helps align employee expectations with reality.

When well-informed, employees are less likely to experience frustration or confusion regarding their pay, leading to higher satisfaction. Additionally, open communication about compensation can reinforce the organization’s values and goals, helping employees understand how their roles and rewards fit into the bigger picture.

Drive learning and performance with Deel Engage

Compensation conversations are crucial for maintaining employee satisfaction and retention. Proper preparation, transparency, and effective communication can transform these discussions into positive experiences.

Ensure productive compensation conversations with Deel Engage:

• Communicate your organization’s compensation and total rewards philosophy with a learning journey and share it from the onboarding stage
• Use our salary insights tool to benchmark compensation for various roles and regions
• Train managers in communication and negotiation skills for effective and empathetic compensation conversations
• Collect employee feedback on compensation to enhance satisfaction and gain valuable insights from the employee perspective
• Evaluate employee performance as a basis for more objective compensation decisions
• Deel HR, our truly global HRIS solution, is always included for free

Book a demo to see how our solutions will help you build a high-performance workforce.