Yes, if you get it wrong.
Jane owns a chain of retail stores and good management staff are hard to find. When recruiting she has to negotiate a salary which is attractive to the candidate but fits within her budget. As these decisions are made on a case by case basis she swears each new recruit to secrecy.
What's wrong with this? Nothing if it works. However, any strategy that relies on employees not discussing salaries with each other and threats of discipline if they do, is not really viable in the long term. It also implies that something is not quite fair.
Here is a test. If a list of employees and their pay was accidentally left on the photo copier and someone put it on the notice board, would it just be embarrassing or a major problem?
Although people should be actively discouraged from talking about salaries, it is personal and confidential, individual salaries should have a rationale behind them which can be explained when necessary.
Let's leave out award covered jobs for now, although they can be included if desired, and talk about those positions where there is a degree of discretion as to how much can be paid. An effective salary system needs to meet a few criteria.
Internal relativities
Pay needs to be perceived as fair relative to others in the organization. They understand that different jobs get paid at different levels but they want to see some equity when it comes to rewarding jobs of similar worth to the business. While some businesses and industries pay more than others, and people generally accept this, they want some sort of consistency within their own organisation.
External relativities
This is where people look outside the business and compare jobs. Again, they recognise that there are differences but they will look at what they may be able to earn in another organization. So while an accountant in a not for profit organization may realise that the oil industry is going to pay more, she may weigh up the demands of each job and decide the differential is too much. Having a good knowledge of the market is necessary to establish the right level for each type of job.
Performance based
People like to be rewarded for their efforts, so giving the same pay increase for everyone can be very demotivating. The concept of providing an automatic increase every year based on the cost of living may be done with good intentions but if nothing else is done about performance issues, good and bad, it will quickly lead to a culture of mediocrity. Your performance management system needs to be carefully linked to your pay system.
Fair and equitable
The whole process needs to be transparent so people realise it is based on objective decisions. This way, although they may want more money they at least accept that there is a process and it is not based on favouritism or unreasonable prejudices. Communications to all staff on a regular basis is the key to this - especially when there are salary increases provided. They should know on what basis their salary has been increased, or not, as the case may be.
Consistent Administration
To achieve all the above you will need a system that can be consistently applied. While salary administration is not an exact science, the system should be objective and any deviation from it should be only for well considered reasons. Any recommendations for salary changes should be based on a reasoned decision taking into account all the elements discussed above.
There is a big incentive for organizations get this right. Research, most notably that by Frederick Herzberg, tells us that pay is not usually a motivator but pay that is considered to be inadequate or unfair is certainly a demotivator. He labelled these types of factors "hygiene factors" - they had to be in place before people could be motivated. More recent studies into employee satisfaction tend to confirm these findings.
If you would like a summary of Herzberg's research including those factors which are motivators and hygiene factors, please send me an e-mail and request it.
Time invested in establishing and managing a salary system provides significant benefits to a business as it frees up managers and their staff to focus on activities that deliver results.
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