Shining a Light on The Black Box of Compensation

Today, we are inundated with information all right at our fingertips. There are more resources than ever before, making it appear that we either have all the answers or can quickly find them. But that’s not always the case — even when it’s something essential to our very own well-being. For example, many candidates and employees don’t understand everything that’s included in their compensation packages. They are unsure about the very value their company places on them for the hard work they do each day.

It has become too difficult for job candidates and existing employees to calculate the value of their compensation. Up to 80% of employers reported that employees do not open or read the information in their compensation packages. For those who do open it, nearly 50% don’t understand the information, and 31% do not perceive value in their benefits at all.

The mystery surrounding compensation packages has even been dubbed a black box at times. Stop for a second and think about how a ‘black box’ is defined: “anything that has mysterious or unknown internal functions or mechanisms” (emphasis added). We would argue that this is not something you want as analogous with any candidate or employee experience, especially something at the very foundation of the employment relationship: compensation.

Employees Don’t Understand What Total Compensation Entails

You could say that the four sides of the black box are made up of the numerous reasons employees don’t understand their compensation packages. First, as we know from above, 80% of employees tend not to read the materials provided. This is not because they don’t care, of course, but rather because they fear they won’t understand it. Additionally, 31% do not perceive value in their benefits at all. These are staggering percentages, each one adding to the opacity of that black box, especially when you consider that 40% of total compensation is non-cash.

The uncertainty surrounding compensation is not a new challenge. Studies conducted by SHRM date back to 2014 and 2016 on this very issue, finding that nearly 60% of employers believe that either most or virtually all of their employees do not understand the organization’s pay policy. That’s a lot of employees wondering if they are being compensated fairly or not. And with the current high demand for employees, questioning the fairness and transparency of their compensation may be all the impetus they need to look elsewhere.

An Opportunity is Shining through that Black Box

As with most challenges, opportunities find a way to present themselves. And there is one shining brightly through the seams of that black box. It’s not merely a time for employees to imagine a more certain, more fulfilling work life (as evidenced by the record number of vacant positions). It’s also a time for employers to provide radical transparency regarding compensation packages.

The key to identifying that opportunity is being nimble enough to accommodate changing needs and demands, especially as they relate to securing new talent. According to Startup Hiring Trends in 2021, companies “need flexible internal processes that can help them adjust seamlessly to these changing times. Hiring trends have seen major changes in recent years and … these changes will most likely remain in a post-pandemic economy, especially the innovative selection practices startups have adopted to improve talent acquisition.”

It’s About Education on What Total Compensation Entails

At its most basic level, radical transparency is all about education. Proactive, transparent, meaningful conversations are a great start, but they aren’t enough.

Employers should educate employees about all that’s included in the package, as well as their total compensation value. Employers should also provide support and guidance . Specifically, employers should address how salary, equity, benefits, bonuses, and perks complete the package to provide total rewards.

Here are some best practices to incorporate as you start to improve transparency around compensation.

Develop a plan and communicate it with your team

The more information that is communicated, the more educated your candidates and employees become.

Provide team training

To have the necessary critical conversations, managers also need the training and resources to be equipped to answer the difficult questions. “Anyone delivering an offer should be trained to explain total compensation. An emphasis on equity can offset a heavy focus on cash.”

Managers should understand and be prepared to answer questions about:

  • What the job grades are.
  • What the salary bands are.
  • The parameters used in setting job grades and salary bands.
  • The reasons why each employee earns what they do.
  • Comparable data in the market.
Educate on even the basics

Clearly define what each part of the package is (even if you think it’s self-explanatory) and provide examples, visuals (many people learn better this way), suggestions, and resources. Bring customized approaches to ensure your education reaches every employee. For instance, you can send electronic and print materials, host benefit education sessions throughout the year, designate a point person for all compensation questions, and send periodic employee surveys. When you’re transparent about aspects of the package, the value each provides, and potential challenges, employees will understand you’re not trying to sell them on something or convince them you know best. Instead, they know you’re educating them so they know best.

Candidates will then be empowered and engaged from the very beginning of their employee lifecycle as a result. This benefits you as well as employees. Increased transparency means improved acceptance rates among candidates and improved retention among employees. In fact, we’ve seen Loop surpass the team’s annual acceptance rate goal by 20% by helping candidates better understand their compensation.

Building a compensation structure that is equitable, transparent, and easy to put into place addresses what employees are struggling with now. Compensation is more than dollar signs and vacation time. When employees can understand it in its entirety, it shows them how much you value them and their time. You now have a unique opportunity to provide some certainty and clarity at a time when employees need it most and it doesn’t hurt that you’ll be collapsing that black box at the same time.

Ready to eliminate the black box of compensation with increased transparency and clarity for your candidates and employees? Download our guide.

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