How does a salary discussion (without raising pay) help to motivate an employee?

3/12/2024

Aet Purk, Figure Baltic Advisory senior consultant

Wage pressure in the market continues. There is a schizophrenic situation in the economy: the recession in Estonia has been ongoing for a long time, future prospects also make it uncertain, but in the labor market, the expected catastrophe has not yet arrived: unemployment remains at around 8-10%, prices continue to rise, and salary pressure persists, although less intensely than a year ago. In our compensation market forecast survey conducted in December 2023, 85% of respondents indicated that they feel salary pressure, especially among non-sales and office workers.

True, this year the proportion of companies that feel they need to make unplanned wage changes due to market pressure has decreased. Economically this is good, but it puts even more pressure on managers when conducting salary discussions – they must deal with disappointments when employees' expectations exceed real possibilities.

Salary discussions are undoubtedly one of the essential tools that affect employee satisfaction. If they are not conducted, it can erode trust in the employer. If they are conducted poorly, it reduces trust in the manager. Therefore, it is important to talk about salary and that these discussions are conducted well.

When conducting a salary discussion, keep in mind:

1. Good preparation is half the battle! Proper preparation requires attention to 3 aspects.
   a) The company and its possibilities: Here it is certainly important to consider the general economic situation of the organization, but in the context of a salary discussion, perhaps even more important are the organization's remuneration principles. These define the basis for determining salary and the prerequisites and conditions for changes.
   b) The employee and their work contribution, performance, the history of pay (lates changes and their argumentation) and current position in the pay range.
   c) The employee as a person – what is important to them, whether and what changes have been in their life, specifically, not just at work! Changes in life affect the employee's expectations and possible disappointment or satisfaction with the decision.
2. Deliver information briefly and with justification. A good salary discussion is short and focused. Do not bother with lengthy small talk. A great way to start is by recognizing and showing respect for the work done so far. Clearly link the salary change to the employee's contribution and results. Show the person their position in the salary range for their job and where they currently stand, and where they will stand after the change.
   If the salary does not change or the increase is smaller than the employee's expectations, explain specifically and clearly why the person does not currently meet the criteria for a raise. E.g., there have been no changes in work, the employee is already at the top of their pay range; the employee's pay is equal to the pay for other jobs of similar complexity, budget constraints, etc. Explain how the employee's results are related to their pay increase. Decide if you can offer something else, e.g., flexible working hours or participation in an important project, etc.
3. Encourage asking questions and expressing opinions. It's better to address dissatisfaction or questions immediately rather than leave them festering inside the person and causing further problems. Ask the employee the reason for their dissatisfaction to find out what bothers them. Take dissatisfaction and questions as a desire to find opportunities to earn more. Listen, ask clarifying questions. The real problem may not be the words first spoken, but somewhere deeper. Provide additional information based on the actual problem. For example, the problem may not be the number of the pay raise itself, but the knowledge that someone else's pay raise number was higher.
   Stay on topic and park other issues – deal with them in a separate discussion. Wage discussions can reveal issues you are not prepared for. For example, you may find out that an employee's family-member has a health concern that requires extra attention and resources, the employee's expenses have increased, etc. These are important issues for the employee that affect their expectations regarding pay but are not directly related to work contribution. Park these issues aside and agree to talk about them at another discussion. It would be wise to also schedule a specific time and way to discuss these issues so that the person feels that the issues important to them are considered important.
4. Talk about what happens next, focusing primarily on what needs to be done to qualify for a pay raise. If there is no reason to raise the employee's salary to match their expectations, also explain the conditions under which a raise is possible. What has to happen in the development of the person's competencies? How to ensure this development – what are the activities and how can you as a manager help? If the employee is at the top of their pay grade, what are the opportunities to move forward in their career? Set clear and specific goals for what should change for a pay raise to be justified. Agree on a deadline and interim discussions of results (e.g., 1:1 discussions).
5. Keep the wage discussion short and to the point!

For wage discussions to be useful to both parties, it is important that both the remuneration principles and the manager's skills and confidence in conducting the discussions are in place. It's not too late to prepare for the wage discussions in March! Contact us and we will help your managers prepare for the wage discussions.