It’s that time of year again – when leaders of people across the world make decisions on employee increases. The impact of these decisions can have broad implications to the workplace in the year to come.
This HR Scoop provides an analysis of the engagement and legal risks associated with pay decisions and provides ideas on how cooperatives can limit the risk and maximize the value of their compensation investment.
Engagement Risk refers to the impact pay decisions have on employee engagement. It’s a best practice for compensation increase decisions to be based on the following factors:
Between December and March, it’s common for friends and family members to share their happiness - or more often frustration - with their annual increase at gatherings. Whether it’s a cost-of-living allotment or merit increase, these numbers have a significant mental impact on an employee’s perception of their value to the cooperative.
When employees perceive their increases to be out of alignment with what they feel is fair or just, it impacts their engagement – how motivated they are to go above and beyond for your cooperative. Low engagement can either push employees into inaction (not being effective but staying employed) or increase their flight risk.
The cost of replacing workers is expensive. In September of 2024, Gallup estimated the cost (as a percentage of their salary) of replacing the following organizational roles:
This doesn’t include the loss of knowledge and potential reduction in morale in the workplace when someone leaves.
Compensation alone won’t create highly engaged employees, but it’s typically seen as the foundation for other engagement factors to build upon. Poor compensation decisions - or poorly communicated ones – are an engagement risk and will negatively impact your cooperative’s success.
Compensation decisions can quickly become legal nightmares if the proper documentation and support are not available.
Legal risk can escalate very quickly if left unchecked.
Consider this example:
Foundations Consulting worked with an organization that had a subjective and informal performance management process. The performance reviews had very generic goals that did not accurately reflect the responsibilities of each individual during the year. Managers were not required to provide specific details about the performance level of each employee. At the same time, the organization created a very detailed compensation formula that took the results of that informal and subjective performance review to create clear decision metrics for compensation increases.
You can see how this scenario could easily occur. Unfortunately, the legal risks here were significant. The very detailed compensation decision guide provided clear structure, but it was built on a very generalized and unclear performance review process. Documentation did not exist to support their compensation decisions in a clear and objective way.
Below are a few examples.
We are all biased in different ways. It’s a human reality. Ensuring the performance and compensation process takes away that bias is very important. If you are unsure about what these biases are and now they could impact performance and compensation process, this article by Culture Amp provides an excellent overview.
How do you prove that your compensation decisions are based on valid factors and not biased decision making?Performance Documentation
Strong performance management processes will create the documentation, which is really the “story” behind your compensation decisions. Clear documentation means identifying high performers with examples of their performance, clearly articulating how/when employees have not met expectations, and clarifying performance expectations and outcomes for everyone who falls between those two opposites on the performance continuum.
Below are best practices Foundations Consulting recommends cooperatives use to minimize engagement and legal risk in compensation decisions.
Foundations Consulting regularly works with cooperatives to create performance management and compensation strategies and processes that add value to the organization, team and individual employee. When performance management and compensation work in harmony, great employees feel valued and lower performing employees get the feedback they need.
Contact Beth Ostrem or Amy Ryan for more information.