Age of Adaptability: The Future of Compensation
In ManpowerGroup’s 2024 Age of Adaptability report, we discussed how workers are expecting greater customization in all aspects of the employee experience – which, of course, includes compensation and benefits.
Since the business world became more structured more than a century ago, fixed and consistent compensation among groups of employees has been the standard, but increasing hyper-personalization is a thread that runs through all our considerations about the future of total rewards.
In HR.com’s 2024 report on the future of compensation and total rewards, 70% of leader respondents agreed that updating their organization’s total rewards strategies will help keep pace with changing attitudes around compensation. In addition, 85% said that it’s important to modify reward strategies for individual contributors.
In this piece, we’ll explore compensation best practices as we approach the quarter mark of the twenty-first century, such as agile compensation models, pay transparency and equity strategies, lifestyle and financial wellness offerings, and the involvement of AI in decision-making – which could paradoxically make compensation more uniform at a time when employees are demanding the opposite.
Pay Grades and Salary Bands No More
Traditionally, organizations made compensation decisions based on pre-set pay grades and salary bands, but in the post-pandemic business world, many question whether this model is fair, equitable, or well-suited to rapidly evolving conditions.
My research suggests that the most effective compensation strategies are more agile and allow organizations to recalibrate total rewards based on real-time factors inside and outside the company. And rather than being assigned a one-size-fits-all title, salary, and benefits package upon hiring, employees can now customize the total rewards package that best matches their individual preferences based on an a la carte menu of options.
As Anita Lettink, a global future of work expert and the author of Equal Pay for Equal Work, told me, this approach works better because we can no longer view employees in homogenous groupings when offering rewards. “People don’t adhere to specific life stages anymore – for example, needing childcare in one’s 30s – so it makes sense to let employees pick and choose on a monthly basis,” she said.
In practice, a new hire may exchange lucrative stock options or company-funded retirement for a lower base salary. In tandem with this trend, more organizations are offering company equity to individual contributors rather than reserving it for senior leaders. Lettink said companies are also launching “employee sharing” initiatives in which workers receive payouts for something the organization created or revenue they helped to generate. “These programs encourage behaviors that are beneficial to company growth,” she added.
Agile compensation models don’t rely on a once-a-year performance review to determine an incremental salary bump or bonus, but rather leverage technology to auto-adjust rewards frequently in keeping with industry and market developments, larger economic factors like inflation, and peer feedback. These nimble strategies involve a broader range of metrics for assessing value including specialized employee skills, innovative contributions to company growth, and supervisor effectiveness.
Pay Transparency and True Equity Will Sweep the Globe
Pay transparency, which refers to openly disclosing the salary range for a given position, is considered a critical step in the journey toward pay equity. Although Lettink correctly noted that pay transparency is driving positive change for employees – especially at the lower levels – many organizations tend to drag their feet until they are mandated to deploy it. However, the concept is gaining momentum all over the world and we should prepare for it to be universal in the coming years.
Despite increased attention to the issue over the last decade, pay disparities based on race and gender remain stubborn problems. In response, a bevy of equal pay regulations designed to promote fairness have taken root. Organizations are ensuring compliance with these regulations by increasing their use of pay equity software to run statistical analyses of their compensation models, develop benchmarks, and derive core insights by comparing internal and external data.
Equity analysis isn’t just for leveling the playing field for women and underrepresented minorities. These tools may also illustrate pay disparities between employees at a specific location, function, or level and employees with similar characteristics inside and outside the company. Objective and ongoing reporting of pay gaps facilitates their immediate resolution and prevents these gaps from becoming systemic and leading to legal liability.
Holistic Employee Care is Front and Center
The COVID-19 pandemic launched a new chapter in the employer/employee relationship. Many organizations have become appropriately aggressive in their support of employee mental health as well as benefits that facilitate better work and life integration.
In an article for LinkedIn, Thrive HR CEO Jason Walker described the introduction of Lifestyle Accounts, which offer flexible allocations for various personal needs such as fitness, childcare, and automotive repairs. He also noted an increase in programs that alleviate financial burdens and promote long-term security. One such program in the U.S. leverages recent changes in 401k-related legislation so employers may now match worker contributions to student loan repayment.
Organizations are also taking more responsibility for upskilling and reskilling employees beyond the scope of their current roles. As they are doing with benefits packages, many companies are personalizing professional development opportunities and contributions to improve their employees’ engagement and satisfaction.
According to Walker, total rewards statements themselves are morphing into sophisticated digital dashboards that showcase the full spectrum of compensation and benefit options, allow for greater interactivity, and enhance openness and understanding.
Speaking of openness, the caring-centered culture created by the pandemic has made it possible for organizations to ask workers more direct questions about their personal requirements. Lettink observed that in the past, inquiring about wage garnishments (for example) would be a privacy violation. “Now, companies just genuinely want to know if people are okay,” she said.
The Rise of AI-Infused Decision-Making
HR.com’s 2024 survey found that 60% of leaders want to use AI to offer more competitive pay, and 53% want to use it to identify compensation disparities.
In terms of pay equity, the benefits of AI – provided that the tools are unbiased and that they rely on sound data – are obvious. But other applications of AI are potentially trickier.
For example, OpenAI claims to provide a more straightforward approach to compensation decisions. The model relies on smart algorithms to standardize pay across job levels and families. Called simplified pay, this structure takes most human-to-human negotiation out of the hiring equation and pays a set fee for each role – without considering things like an individual’s unique experience or adjacent skillsets that could be beneficial to the organization down the line.
If not overseen properly by human leaders, this use of AI could derail the progress the compensation and benefits world has made in meeting employees where they are. Fortunately, though, this HR function is finally receiving the careful consideration it deserves.
In HR.com’s research, nearly 75% of respondents agreed that compensation and total rewards programs will be a priority for their businesses over the next two years. Future-focused compensation professionals understand the need to continuously revisit how to pay people fairly and transparently. They recognize the value of agility and personalization to staying competitive in the market and holistically motivating employees to do their best work.