A transparent salary system helps achieve goals

6/8/2025

Aet Purk, Figure Baltic Advisory senior consultant

Studies have shown that perceived fairness, especially procedural fairness, a fair and clear decision-making process, is strongly linked to job satisfaction and organizational commitment. When people feel that they are paid fairly and transparently for their work, their satisfaction and willingness to contribute increase. In addition, a fair pay system helps to strengthen both organizational culture and management credibility. Organizations that want to retain and motivate their employees can no longer afford to make vague or unfair pay decisions.

A systematic, transparent, and well-founded pay system is now not only good management practice, but also a legal obligation. The EU Pay Transparency Directive, adopted in 2023 and due to come into force next year, requires employers to publish the basis for determining pay, justify any salary differences and ensure that employees have access to pay data for their own and similar roles. However, without a functioning pay system, these requirements cannot be met – if there is no system, decisions cannot be justified or explained.

What is a good salary system?

A salary system is not just a formal document, but a substantive description of services. Let's imagine for a moment that the relationship between an employer and an employee is like a mobile phone service. The employer offers a certain "package" – tasks, responsibilities, development opportunities and… a certain salary. If the customer, or in this case, the employee, does not understand how much or what exactly is he or she getting, they will soon start looking around for a better package. If the salary system is not presented clearly and comprehensively, people will not feel that it is fair and understandable, and they may also start looking around. By the way, if the system does not seem fair, it no longer matters if the salary is above or below the market average – it will not bring commitment and satisfaction. For employees, salary is not just remuneration – it is a reflection of how they are valued. If this reflection is vague or contradictory, it undermines the trust in management.

In my work, I have seen various salary systems. Very often, they are like instruction manuals for home appliances – they exist, but are often unreadable, boring, and meaningless. If it says that "salary is determined according to the complexity of the work and the level of responsibility," what does that mean? How is complexity assessed? Does more responsibility mean a 10% higher salary? Or 50 euros? For what decision? For what result? And so on.

Here's a real-life example: a team has two software developers with similar experience who do similar work. One of them accidentally discovers that his or her colleague earns 500 euros more. Without a clear and transparent salary system, no one can really give a satisfactory explanation of this situation. A manager may say that "this person has greater value," but if this is not based on clearly communicated and understandable principles, the sense of justice is violated and damage is done.

A good salary system is not just about general principles, but  about helping people understand what they are valued for and how they can influence their own pay.

A pay system must be:

• understandable – clearly formulated and comprehensible to all employees;
• specific – linked to realistic expectations, roles and results;
• implementable – a working tool, not just a policy document.

Components of a transparent pay system

In order for a pay system to be transparent, understandable to all employees and applicable in practice, it should include the following components:

• General principles: what do we value and why? What remuneration components do we use and how do we review remuneration? General principles provide a framework and express the organization's values and strategy. For example, do we value and reward results or long service, which are not always correlated? Experience shows that this component is most often present, but often only formally.
• Job evaluation system: on what basis and how it is carried out, i.e. clear criteria and process. A job evaluation system makes it possible to compare the remuneration of similar jobs. In many organizations, there are so-called "umbrella positions" such as project manager, chief specialist, etc. In reality, for instance the job title of a project manager can cover a wide range of tasks and levels of complexity, from organizing summer camps to large-scale Rail Baltic procurement and construction projects. When comparing the salaries of these different types of project managers, there are logically large differences. Therefore, it is not always sufficient to compare job titles; more precise criteria are needed to classify positions, whether this is a widely used method (e.g. job classification or analytical assessment) or a system developed in-house. It is important that clear and justified criteria are in place.
• Specific salary groups and ranges based on job title or employee group. These determine the limits within which decisions are made. The minimum and maximum levels must be defined, as well as the factors that determine the specific remuneration for a position or employee within that range: experience, achievement of objectives, additional competencies, or something else. The salary range is what the EU directive requires to be disclosed. The creation of salary groups and ranges must be based on the organization's actual positions and objectives.
• Employee contribution and performance appraisal system, including goal setting and feedback. This allows for differentiation and objective justification of pay differences within the same job. Feedback also provides guidance on what the employee can do to increase their pay.
• The employee development and career system is also linked to the possibility of influencing one's own future pay, as well as to goal setting and feedback.
• Salary review process. A clear process for when, how, by whom, and with what consequences salary is discussed. A consistent process is an important part of creating a sense of fairness. It also saves managers a significant amount of time by freeing them from unexpected conversations that start with "You know, I want to talk to you about my salary...".

Where to start when creating a salary system?

• "Clean the house" – make a review of what you already have and how it works. Use an outside perspective to assess the clarity and adequacy of the information and system components you may have.
• Ask people how they perceive issues related to compensation. Figure's research shows that there is no direct link between the amount of pay and job satisfaction. However, there is a link between commitment and the perceived fairness of the remuneration system.
• Decide what kind of salary payer, or more broadly, what kind of employer, you want to be and who you compare yourself to.
• Remuneration principles – review whether and how you can make this document more meaningful. Update it if necessary. Seek outside input.
• Evaluate or group your positions. For example workers; specialists, experts, managers, etc..
• Determine salary groups and ranges, for example based on market information.
• Clearly define the basis and criteria for salary changes.
• Introduce regular salary reviews, including for employees whose salaries are not changing.
• Train your managers not only to understand the salary system, but also to talk about it and justify their decisions.

An effective salary system is not only an obligation, but also an opportunity to be a more attractive employer whose employees enjoy their work and feel valued. This, in turn, reduces staff turnover and strengthens loyalty. In the end, you will be a stronger employer, which will help you achieve your organizational goals.