How an open salary system can work as a retention tool

Want to attract and retain Gen Z? “Be transparent, open and candid”, will be the most common advice employers receive. In today’s competitive job market, companies are increasingly adopting innovative strategies to attract and retain top talent. One such strategy gaining popularity is the implementation of an open salary system.

An open compensation system essentially aims to promote transparency by disclosing a designated salary range, based on market standards, for specific job positions. It does not involve making everyone’s individual salary public. Instead, it involves making the salary ranges for specific roles transparent and ensuring that employees within those positions are compensated within the designated range. How can this serve as a retention tool?

Benefits of a transparent salary system

Clarity: “The benefit of an open salary system lies in its ability to address uncertainty and prevent misunderstandings regarding salary increases,’ points out Vivek Tripathi, VP-HR, Newgen Technologies.  In many cases, when companies do not disclose their compensation criteria, employees are left unsure about the basis on which raises are granted. This ambiguity often results in employees resorting to resigning and presenting competing offers in order to secure higher salaries. Consequently, this practice sends the message that salary negotiation is the key to obtaining a fair increase, which can be demoralising for those who believe that their performance alone should dictate their compensation.

An open system also helps companies align their words with the right course of action and promotes transparency and clarity. Citing an important example from his previous organisation, Mukul Harish Chopra, CHRO, ConveGenius, explains, “To ensure transparency and clarity, companies establish a proper index to define the conditions on which the variable pay is dependent. This index should be countersigned by the employee”.

Chopra recalls having used interview evaluation sheets and documented business commitments, which were signed at the time of hiring. “It is important to emphasise that the variable pay is not directly linked to individual ratings, and I would often write ‘not applicable’ and counter sign or fill in the committed details to maintain a record,” he reveals.

Control & empowerment: “Openness also refers to employees having more autonomy and influence over their compensation conversations. This flexibility provided by the organisation offers several benefits that are highly valued by employees,” opines Shailesh Singh, CHRO, Max Life Insurance. This also creates a sense of ownership in employees, that they have control over their own compensation. The ability to have a say and be involved in structuring their own pay is highly empowering. This level of flexibility demonstrates that the organisation values and respects the individual needs and preferences of its employees.

“An open salary system provides a solution to this issue by setting market-based salary ranges for different job roles. When employees know that their compensation falls within an established range, it reduces feelings of inequity and discourages turnover”

Mukul Harish Chopra, CHRO, ConveGenius

One common factor leading to employee dissatisfaction and attrition is the perception of unfairness in salary discrepancies. “An open salary system provides a solution to this issue by setting market-based salary ranges for different job roles. When employees know that their compensation falls within an established range, it reduces feelings of inequity and discourages turnover,” asserts Chopra.

Trust & fairness: An open salary system eliminates any unfairness and possibilities of bias that may develop within an organisation. When employees have access to information about salary ranges and the factors that influence compensation, it reduces uncertainty and minimises potential perceptions of bias or favouritism. “This transparency builds trust between employees and the organisation, as it ensures that compensation decisions are made based on objective criteria rather than hidden agendas,” believes Tripathi.

Finance management: An open salary system helps employees effectively manage their financial needs. Singh recalls utilising digital tools to facilitate this process during one of his previous stints. “For instance, if I had a medical expense and my medical reimbursement at that time was tax-exempt up to INR 1,250, amounting to INR 15,000 per year, I had the flexibility to utilise the entire amount upfront rather than spreading it out over months,” he explains. This flexibility allowed Singh “to address immediate financial requirements, such as medical expenses, without being constrained by a fixed monthly allocation”.

According to him, “This need-based approach enabled employees to manage their finances more effectively by tailoring their compensation to meet their individual needs, creating a more personalised and adaptable system.”

“An open salary metrics serves as an individual checkpoint that needs to be met in order to receive the variable pay, assuming the company has performed well. It makes employees feel more secure and motivated as they understand what they are getting for their hard work and efforts,” enunciates Chopra.

“An open salary system provides a solution to this issue by setting market-based salary ranges for different job roles. When employees know that their compensation falls within an established range, it reduces feelings of inequity and discourages turnover,”

Vivek Tripathi, VP-HR, Newgen Technologies

Moreover, organisations implementing open salary systems often seek feedback from employees to make informed decisions. This includes addressing any tax-related concerns or making adjustments to certain components of the salary to ensure tax compliance while maximising tax exemptions.

“Any organisation’s openness to employee input and its commitment to compliance with tax regulations will create a sense of ownership and trust among employees,” feels Singh. This is because, employees appreciate the fact that the company listens to their feedback and takes proactive steps to address their needs. This fosters a stronger connection between employees and the organisation, enhancing a sense of ownership and commitment,” points out Singh.

However, it’s equally important to adopt this approach with full caution, calculating all the associated risks with it, in terms of privacy and confidentiality.

“Being open and flexible with individuals regarding their own compensation does not compromise privacy in any way. However, problems may arise when employees begin comparing their salaries,” warns Singh. “Therefore, it is crucial for employers and supervisory teams to establish clear boundaries when implementing an open salary system,” he advises.

“Confidentiality should be clearly outlined in appointment letters or employment contracts, stating that employee salary and sensitive information should not be disclosed. Multiple departments, not just HR, should be responsible for data security and confidentiality,” suggests Chopra. He goes on to add, “While leaks can happen through various channels, if any breach is reported or detected, a thorough investigation should be conducted to identify the source of the leak and take appropriate action’.

Companies can ensure that the specific individual salaries will not be disclosed to anyone. Instead, they can focus on providing transparency regarding the overall structure of compensation for specific job roles.

The organisation can disclose information such as the total cost of the company’s salary range for a particular job, the salary structure, and the parameters based on which salary increments are determined. This disclosure should also clarify where an individual fits within the salary range, especially for entry-level positions.

Additionally, the organisation can provide information about the highest possible compensation that can be attained within that job role. “By making these aspects clear, the organisations can emphasise that individual salaries are confidential and not disclosed to anyone. The focus is on providing employees with an understanding of the broader compensation framework rather than divulging specific salary details,” enunciates Tripathi.

“Any organisation’s openness to employee input and its commitment to compliance with tax regulations will create a sense of ownership and trust among employees”

Shailesh Singh, CHRO, Max Life Insurance

“The subjectivity and sensitivity surrounding compensation can lead to risks such as employees comparing themselves to one another and feeling shortchanged or overlooked. To address these concerns, organisations can implement a clearly-articulated compensation philosophy,” opines Singh.

First and foremost, it is important to benchmark salaries annually against the market, externally, to establish a baseline. Based on this benchmarking, organisations can define their compensation philosophy. This philosophy can be communicated to employees, emphasising the organisation’s commitment to competitiveness.

Sharing how it’s handled in Max Life, Singh says, “We annually benchmark our jobs and make sure no one is lagging behind. If some employees are already ahead in terms of compensation, there may be a slight slowdown in their salary growth. On the other hand, for those who are lagging behind, the company not only provides the regular annual increase but also makes salary adjustments and corrections to align them with the desired compensation philosophy.”