Conducting Salary Conversations: Fair, Reasoned, and Well Prepared

Why salary conversations so often go wrong

An employee asks for a conversation about his salary. The owner does not know exactly what the others on the team earn, what the market pays, and what the business can afford. The conversation ends with an amount somewhere between the request and the offer. Six months later a colleague finds out and feels passed over. That is how one conversation turns into a problem for the whole team.

The question this article sets out to answer: How does an owner conduct salary conversations so that the result is reasoned and experienced as fair? To answer it, I first clarify the terms and introduce Adams's equity theory. Then I summarize what studies show about transparency and secrecy, weigh two views, put the legal situation in context, and describe the preparation and course of a conversation.

Terms: pay band, criteria, and three kinds of fairness

A pay band is a range with a lower and upper limit for a particular position or level. It defines the range within which pay can move and requires deviations to be justified. Pay criteria are the characteristics used to decide within the band, such as experience, responsibility, or performance.

Research on fairness in organizations distinguishes three kinds. Distributive fairness concerns the amount: is it appropriate? Procedural fairness concerns the route: do fixed criteria apply, equally for everyone, and can the employee contribute their view? Interactional fairness concerns treatment: is the decision explained respectfully and comprehensibly? The same three kinds appear in the article Bundling customer inquiries in connection with customer complaints.

The thinking model: Adams's equity theory

In 1965, the psychologist J. Stacy Adams described how people judge whether they are treated fairly. According to his equity theory, everyone compares the ratio of what they contribute to what they receive with the ratio of a comparison person. Contributing means time, performance, experience, responsibility. Receiving means pay, but also recognition, development, and security.

If the comparison turns out unfavorably, a sense of unfairness arises, and people try to restore balance. According to Adams, they have several ways to do so: contribute less, demand more, change the comparison person, adjust their own perception, or leave. For the business, the first way is the most expensive, because it goes unnoticed the longest.

An everyday analogy: in a restaurant, hardly anyone minds that the food costs something. What bothers them is when the next table pays less for the same dish. The anger is directed not against the price but against the unequal treatment.

Pay is not experienced as high or low but as fair or unfair. The first can be solved with money, the second only with reasons.

What studies show about transparency and secrecy

Henn, Houghton, and Neck (2025) surveyed 643 full-time employees in the United States. They distinguished two kinds of transparency: transparency about amounts, meaning who earns how much, and transparency about the procedure, meaning how pay is set. Both were positively related to pay satisfaction through perceived fairness. The effect of procedural transparency was stronger.

In a multi-round lab simulation, Belogolovsky and Bamberger (2014) showed that pay secrecy lowered performance because participants were less able to see the link between performance and pay. The effect was stronger when pay depended on comparison with others and weaker when performance was measured objectively.

Alterman, Bamberger, Wang, and colleagues (2021) refined the question. In two studies, one at the level of employees and one at the level of firms, the effect of secrecy depended on how fair pay was already perceived to be. The authors also refer to an earlier study by Card and colleagues (2012), according to which more transparency led to more job searching, especially among employees with below-median pay. Transparency is therefore not a cure-all. It makes visible what was previously hidden, and those who then come off worse draw conclusions.

A survey of 353 employees in Croatia found that public sector employees favored transparency more strongly than private sector employees (Braje and Kuvač 2022). For German businesses, data from the Socio-Economic Panel show that perceptions of pay fairness in eastern and western Germany converged between 2009 and 2023, mainly because wages at the lower end rose (Adriaans and Sauer 2026). Perceived fairness therefore also follows actual differences, not just communication.

Two views: openness or discretion?

The first view recommends discretion. Pay is personal, any disclosure invites comparisons, and in small teams differences are easily traced to individuals. The findings of Card and colleagues show that transparency can cause unrest.

The second view recommends openness. Pay is discussed in teams anyway, and secrecy reinforces the suspicion that there is something to hide. The studies by Henn and colleagues and by Belogolovsky and Bamberger speak in favor of transparent procedures.

I consider a mix the sustainable solution, and the findings of Henn and colleagues also show which one: openness about the procedure, discretion about individual amounts. If you disclose pay bands, criteria, and the route to the next level, you enable fair comparisons without making every amount known. This solution has an advantage that will soon become more important: it matches the direction in which the law is moving.

The legal situation: the German Pay Transparency Act and the EU directive

Germany has had the Entgelttransparenzgesetz (Pay Transparency Act) since 2017. It gives employees in establishments with more than 200 employees a right to information about how colleagues of the other sex doing comparable work are paid. For most small businesses it has therefore changed little so far.

That will change. The EU Pay Transparency Directive (Directive (EU) 2023/970) should have been transposed into German law by June 7, 2026. Germany missed this deadline. According to reports available at the time of writing in November 2026, no implementing law has yet been adopted. Among other things, the directive provides:

• Applicants receive information on the starting salary or salary range before the contract is concluded.
• Employers may not ask applicants about their previous pay.
• Employees get a right to information about their pay and the average pay of comparable employees, regardless of the size of the business.
• Contract clauses that prohibit employees from discussing their own pay are not permitted.
• Reporting obligations on pay gaps apply from 100 employees, phased in from 2027 and 2031.

For the business, this leads to a sober recommendation: if you set pay bands and criteria now, you will hold better conversations and be prepared for the coming obligations.

Preparation: pay band, criteria, budget

A good salary conversation begins weeks in advance. Four things should be settled before you schedule the meeting. A worked example shows what a simple pay band for an inside sales and office position might look like.

• Market comparison: Obtain comparison figures, for example from the pay atlas of the German Federal Employment Agency, from industry collective agreements, or from your trade association.
• Criteria: Define what is needed to move to the next level, for example independently looking after customers or training new colleagues.
• Budget: Determine in advance how much the business can spend on raises in total this year, and distribute this budget according to criteria, not negotiating skill.
• Full picture: Compile what the employee receives beyond pay, such as allowances, training, or flexible working hours.

The budget set before the conversation is particularly important. If you only set it during the conversation, you reward those who negotiate most skillfully, and that violates procedural fairness. How to set a negotiating range in general is described in the guide Negotiating as an owner.

The course of the conversation in six steps

1. Set the frame

   Say at the start what the conversation is about and how much time you have. The salary conversation is not part of another meeting.

2. Listen

   Ask the employee to describe their view: what they contribute, what they expect, and what they compare themselves with. Do not interrupt.

3. Name contributions

   Describe specifically what you see in their work, with examples. This shows that their contribution is noticed.

4. Explain band and criteria

   Show which level they are at, why, and what is needed for the next one.

5. Communicate the decision

   State the result clearly and justify it with the criteria. If the raise is smaller than expected, say so openly.

6. Agree on the next step

   Agree on what should happen before the next conversation and when it will take place. Put it in writing.

Pay is not the only reason people stay or leave. The guide Employee retention in a small business shows that connections and fit often hold people more. But pay well below the market cannot be compensated by anything. For salespeople, there is also the question of variable components, which the comparison Sales compensation covers, and the question of what motivates besides money is described in the article What motivates salespeople.

Conclusion: what makes a salary conversation fair?

We began by asking
an owner conducts salary conversations so that the result is reasoned and experienced as fair. According to Adams's equity theory, people judge their pay by comparison with their contribution and with others. The studies show that the procedure counts particularly: those who know the criteria by which pay is set are more satisfied, even without knowing every amount.

A salary conversation therefore becomes fair not through the highest possible raise, but through a pay band, clear criteria, a budget set in advance, and a conversation that listens, gives reasons, and shows a way forward. With the EU directive, part of this will become mandatory anyway. Introducing it beforehand has the advantage of doing it voluntarily.

For this week, one step is enough: for each position in the business, write down today's pay range and two criteria for the next level. Wherever that is difficult, you have found your first task.