Compensation Sense: Why Compensation Communication is So Important in a Tight Labor Market

Cassandra Faurote   •   July 10, 2018

Compensation communication is too often an afterthought in many organizations. The resulting mystery surrounding compensation and total rewards can lead employees to perceive that your compensation practices are unfair, not industry-competitive, nor in their best interests. Of course, it doesn’t have to be this way. Transparent and effective compensation communication can build trust. It can help your employees understand your organization’s compensation philosophies, policies and processes – and how these relate to their personal status as an employee. Perhaps even more important is that employees who understand their compensation are more likely to be loyal to the company.

So, let take a closer look. Here’s why compensation communication can be so critical to recruitment, retention and loyalty – especially in a tight labor market when unemployment is low:

Perception is Reality

According to The Harvard Business Review, worker perception affects their engagement, satisfaction, and ultimately, loyalty. And in many other studies and reports, it has been shown that most workers perceive they are being paid below market rate regardless of whether this is true or not. The perception that pay is too low makes the employee feel undervalued and underappreciated. This, of course, leads to job dissatisfaction, lack of motivation, and a desire to seek greener pastures elsewhere.

On the other hand, using a well-designed and employee-focused compensation communication program can play a large role in correcting misperceptions about compensation and total rewards.

The Impact of Compensation Communication on Employee Retention

When one employee leaves, especially during good economic times, another employee must be hired. This requires effort to locate and recruit the replacement. And that effort doesn’t come cheaply. It has been estimated that in most organizations, the cost of turnover – including recruiting, hiring, onboarding and training – averages 1.5 to two times the position’s salary. And because a great deal of turnover is due to misperceptions about individual compensation compared to market, that cost is often avoidable. This can be especially critical in a tight labor market. When unemployment is low, available replacement talent may be scarce – and costly. In fact, when it costs more to attract and hire new workers, you might also need to increase salaries across-the-board to keep current employees in balance with market conditions.

But again, proper compensation communication can be key to bridging the gap between misperception and reality; and to keeping valued employees on the job so recruitment of replacements is unnecessary.

Using Compensation Communication Effectively

Using compensation communication to correct misperceptions and improve retention is relatively simple, with two primary parts: 1) communicating proactively to all employees about compensation programs, and 2) communicating responsively and respectfully to individual employee concerns.

I describe these in detail in another article. In general, the following are important aspects of an effective compensation communication program:

  • Making compensation communication a carefully crafted and thoughtfully implemented part of your overall compensation program design.Educate employees about the bigger picture beyond your corporate walls by sharing the results of any recent Market Rate Analysis so employees know where they stand. If your workforce lags the marketplace, explain why or correct the inequity.
  • Being sensitive to the concerns and perceptions of individual employees.Encourage them to share their compensation concerns with management. When they do, truly listen, ask questions for complete understanding, and then research and respond in a timely manner.

The Bottom Line

Especially in a tight labor market, compensation communication can be a critical link toward improving employee morale, performance, overall satisfaction, and company loyalty – and yet it is often an afterthought.

By openly and honestly sharing market rate information with employees, however, your company can align perception with reality. You can assure employees they are probably better off compared to the marketplace than they thought. And even if you are paying below market, you can explain why. Ultimately, your employees will know where they stand, and will likely feel they are being heard and respected.

One important factor in being able to communicate with confidence about compensation is knowing your market position. If you have a recent Market Rate Analysis, this helps you communicate positively with employees. If you are not confident you have a good compensation communication plan in place, or if you are overdue for a Market Rate Analysis, Total Reward Solutions can help.

About Total Reward Solutions: Total Reward Solutions ( is a trusted partner for compensation and benefit services. Led by respected and professionally certified Human Resources expert Cassandra Faurote, Total Reward Solutions offers a broad range of compensation, benefits, performance management, and reward/recognition consulting services to help your organization attract top talent, motivate employees and retain top performers.