Only about 4 of 10 employees and managers in a North American survey said they know how they can increase their base pay or cash bonuses.
The results suggest employers lose much of the value of the pay raises and bonuses they distribute by not communicating effectively, according to one of the authors of the study.
"Many employees and managers simply don't understand why they get paid what they do," said Rob Heneman, professor of management and human resources at Ohio State University's Fisher College of Business.
"Businesses can't get a good return on their compensation investment if people don't understand how their pay is determined."
Heneman was one of the leaders of The Knowledge of Pay study sponsored by WorldatWork, an association for professionals in compensation and benefits.
The study involved a survey of more than 6,000 managers and employees in 26 organizations in the United States and Canada.
The results showed a serious lack of knowledge among both employees and managers about their compensation, Heneman said. Most people surveyed felt their employers did a good job explaining their performance objectives and how their performance is measured. However, they were unclear about how performance was related to pay.
Only 40 percent said they agreed or strongly agreed with the statement "I know what I must do to increase my base pay." Only 38 percent agreed or strongly agreed that they knew how to increase the size of their cash bonus.
Surprisingly, employees reported they knew more about stock options at their companies and how they are determined than how base pay is determined. But the results showed that base pay knowledge plays a larger role in overall pay satisfaction than do other forms of compensation, such as bonuses.
"If companies want employees to work harder and meet certain goals, they have to do a better job of explaining what exactly they need to do to increase their base pay," Heneman said.
Employees who had higher levels of pay knowledge showed higher overall pay satisfaction, according to the study. And higher levels of pay satisfaction were linked to higher levels of retention, commitment to the company, and even trust in management. In other words, Heneman said, ensuring that employees understand their pay is good for a company's bottom line.
Moreover, pay knowledge was nearly as important as the amount of pay itself in determining workers' overall pay satisfaction.
"Obviously, workers would like both more pay and more knowledge about their pay," Heneman said. "But we found that additional increases to actual pay are not necessary to improve pay satisfaction -- more knowledge is all that is needed."
Heneman said corporate culture is often a major problem in dealing with the lack of pay knowledge among workers. In many companies, it is considered taboo -- or even explicitly forbidden -- to discuss matters dealing with pay.
The authors of the study don't advocate disclosing actual pay amounts of employees to others within the company. However, companies can provide more information about pay practices and policies, such as the process used to determine pay, and the average pay raises in a particular year. Workers want more than generalities: they want to know how pay policies apply to their particular situation, Heneman said. That often means managers need to sit down with their employees one-on-one.
The survey showed about two-thirds of employees thought talking to their supervisor or manager was an effective way of learning about their pay plans. Fewer than 40 percent thought that manuals, new employee orientations, or formal classroom training were effective.
"The traditional ways of informing employees about pay issues just aren't seen as very helpful," he said. "Employees want to talk to their managers and learn how the company's pay policies affect them personally."
Results of the study held true for employees in all pay ranges. In other words, highly paid employees were just as confused about pay policies as lower-paid workers. Other demographic factors -- such as age, education and seniority at an organization -- had no impact on the results. Results were also not affected by the size of the employer and the type of pay plan it offered.
The survey was conducted for WorldatWork by The LeBlanc Group. Heneman co-authored the study with Paul Mulvey, associate professor of management at North Carolina State University; Peter LeBlanc, former president and CEO of The LeBlanc Group and now senior vice president of Sibson Consulting/A Segal Company; and Michael McInerney, managing director of Seurat.
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