When I graduated from college, I took a job as an entry-level employee at a printing production facility. I worked hard, climbed the shop floor ladder and a series of promotions later, I became a manufacturing supervisor. I loved the job, the benefits, the salary.

Until one day, I found out a much older, much less productive supervisor earned a lot more than me. Suddenly, I loved my job a little less. And I loved my salary a lot less. My boss noticed the dip in attitude.

“I know it’s wrong,” I told him. “But I can’t get over the fact (Bob) makes that much more than me.” He pursed his lips, then nodded. 

“For one thing,” he said, “you shouldn’t be having those conversations. Employee guidelines strictly forbid discussions regarding employee pay. (More on that in a moment.) And maybe you are a better performer, but that’s not the sole criteria. He’s been an employee for over 30 years. Employees who get satisfactory ratings get annual increases. He’s been here longer, so he makes more. When you’ve been here for a long time, you’ll make more than less senior employees.”

“Besides,” the boss continued, “I know you want to keep moving up. What do you care what he makes?”

While I hated to admit it, he was right. Seniority was a major factor in our pay. And more than that, my goal was not just to reach the next level but to someday reach the top: running a plant.

Comparing my pay to that of others — and letting that comparison affect my performance — was the last thing I should do.

I didn’t love the answers he gave me. But I understood.

KNOW THE LAW

Can you forbid employees from discussing pay at work? In a word: No. Many employers actively discourage employees from discussing pay and benefits with other employees. Some employee handbooks explicitly forbid discussing salary at work. But know that if you create a similar policy, you can’t enforce it.

The National Labor Relations Act protects your employees’ rights to discuss conditions of employment like pay, work hours, safety and so on. The NLRB considers conversations that help employees “take action for their mutual aid or protection regarding terms and conditions of employment” to be “a protected concerted activity.” In short, the NLRB favors transparency: Disciplining or firing employees for discussing salary at work is unlawful. 

Legalities aside, why would you do this? Telling your employees they shouldn’t be discussing pay at work only implies you have something to hide, or that you can’t justify your decisions regarding pay, benefits and rewards. 

Not only is forbidding discussions about “work conditions” against the law, but it also sets the wrong tone and fosters a culture of secrecy instead of trust and transparency.

BE UPFRONT ABOUT COMPENSATION

Ad hoc, one-off decisions are hard to explain and even harder to justify — especially where employee pay is concerned. While I didn’t love that seniority was the primary compensation driver in my case, at least I understood how compensation was determined.

That’s why many companies openly share how they determine pay rates. Some, like Buffer, the social media management company, provide a calculator that shows how employee salaries are determined. Existing employees can use it, and candidates can also calculate what they would make if they joined the company.

The Buffer salary formula factors in job type, experience, seniority and location (Buffer employees work remotely) to determine final rates of pay. While some team members may not agree with the formula, they’ll be able to see how their salary and their co-workers’ salaries were determined.

Outlining the process determining employee pay outright eliminates all the water cooler chats and gossip that a strongly worded but unenforceable policy hopes to avoid. While you don’t have to create a calculator, you should have a system in place to objectively determine starting pay.

Whether it’s skill, experience, credentials, performance or seniority, decide which factors drive the results you want to see and create a compensation framework that works for your business.

And then follow it. 

For one thing, adopting objective criteria for making pay decisions will help you defend yourself against unequal pay claims. But more importantly, you’ll be much better prepared when an employee gets frustrated by what they perceive as unequal pay. 

WHEN QUESTIONS ARISE

Small business employees are smart. They know your business has financial constraints, that competition is stiff, and revenue is rarely stable. (If they don’t, it’s your job to keep them informed.)

They understand why you might not be able to pay market-leading salaries. But what they will never understand is feeling unfairly compensated compared to other employees in similar positions. When that happens — or when an employee thinks that is happening — you might face an awkward conversation.

Here’s what you can do if an employee comes to you with questions:

1. Take a deep breath.

Don’t respond defensively. Don’t overreact. Take a moment to think. Better yet, say:

“I’m happy to discuss that with you. In fact, I want to give the conversation the time and attention it deserves. Let’s meet this afternoon.” Pressing pause allows you to…

2. Be as prepared as possible.

Review how their pay was calculated, your pay practices and the employee’s recent performance and career goals. Get your ducks in a row so the conversation can be as logical, reasonable and fact-based as possible. When you have difficult conversations with employees, emotion is never your friend.

3. Don’t compare employees.

Evaluate the employee’s pay and performance in comparison to company pay practices, standards, goals and targets. As I did, the employee may want to compare their salary to (Bob’s). Avoid direct comparisons. Focus on how your pay policies relate to the employee.

4. Detail a path to a higher salary.

Ultimately, your employee wants to earn more. Unless you made a mistake in determining their compensation, agreeing to a raise on the spot — especially if the employee is threatening to leave — implies you paid the individual unfairly in the past. Instead, describe how the employee can earn more in the future through performance, taking on more responsibility, gaining additional skills or assuming a leadership role.

5. And if you can’t afford to pay the employee more, say so.

Be empathetic, but don’t apologize. Use facts, figures and logic to help the employee understand. Lay out what you’re trying to achieve, what you hope and plan for your business, and how that will impact your employees. Be genuine and transparent. Most employees will understand.

IT’S ABOUT MORE THAN MONEY

Follow this plan and hopefully employees will walk away feeling a part of something bigger than themselves. Happy, engaged employees work for more than just money. They feel a sense of meaning and belonging. We all work for a paycheck, but we all want to work for more than just a paycheck.

Be open to having tough conversations about pay, and you’ll help your employees feel like they matter. Not just to your business, but also to you.  

Jeff Haden is a contributing editor for Inc.com and a LinkedIn Influencer.