Pay equity matters more to your people than level of pay
The goal of pay equity is simple: equal pay for equal work. Under the surface, however, it’s a complex concept, encompassing skills, work location, experience, qualifications, performance management and much more. Companies who can truly achieve it realise immense benefits, such as higher profitability, greater customer satisfaction and being a winner in the war for talent.
However, there has been a shocking lack of progress towards pay equity. According to a year-long pay equity study I led with The Josh Bersin Company, looking at 448 companies around the world and their management and HR practices, 95% of surveyed companies are not demonstrating high maturity when it comes to pay equity. Meanwhile, half the companies are only addressing pay equity to mitigate legal issues, while 37% view pay equity work as a sporadic process.
In the current economic environment we found - unsurprisingly - that pay has now become the top concern for employees and companies alike. However, perhaps more surprisingly, well-communicated pay equity is 13 times more important for employee retention and engagement than high levels of pay and benefits.
This tells us that how businesses distribute pay and rewards is critically important. If workers are hung up on their pay compared to colleagues, teamwork will be less effective. When employees feel the system is unfair due to bias, racism, sexism or politics, their sense of trust is damaged. The result is higher employee turnover and low levels of engagement.
Microsoft, for example, doesn’t necessarily offer its employees the highest pay levels in the tech industry, when compared to others like Meta, Google or Apple. Yet, its focus on making rewards fair and equitable creates a more sustainable business environment and sees it consistently ranked as the best-managed company in the US.
There are not enough businesses following in Microsoft’s footsteps. We found that while 71% of CHROs and the C-suite see pay equity as a critical component of their people and business strategies, just 14% of organisations dedicate sufficient budget to tackle pay equity issues.
Pay equity goes well beyond pay – it touches every business decision. Every time a company hires somebody, promotes a person, decides on development opportunities, puts people on projects, assigns goals or evaluates performance, there is potential to introduce inequities that eventually show up as pay issues.
Pay transparency legislation has gone some way to tackle this. But, while pay transparency is a step in the right direction, it doesn’t create equity if systemic biases or issues are not addressed. To do this, compensation, people analytics, DEI, talent acquisition, learning and development, organisation development, talent management, leadership development, as well as finance, IT and the business must all combine to address the pay equity problem.
Support from AI-based technologies
Determining pay equity does not stop at a simple pay gap analysis that just compares the pay levels of different demographic groups. It requires iterative regression models to isolate factors such as location, experience level or span of control. We found that just 14% of companies use these technologies, but those that do have much better people outcomes.
Technologies like Salary.com, Trusaic, Syndio, OpenComp, ADP and others provide sophisticated models to identify existing pay equity issues, determine root causes and give warnings if a new hire salary might introduce pay inequities further down the line.
Effective steps towards pay equity begin with fostering buy-in across all levels of leadership. Leaders must agree on a pay philosophy and be prepared to put in place tools and systems to monitor pay variances and train managers so that they understand the issue.
The companies that our research established as the pay equity leaders show that pay equity is not just about fair and equitable pay and bonuses, but about creating a culture of equity and inclusion throughout the organisation. Every decision must be explored through an equity lens, from hiring and promotion to compensation and benefits.
Take action to improve it
There are actions organisations can take to improve pay equity practices:
First, be clear why you are pursuing pay equity. Is it for compliance? Are you checking a box or are you enhancing your brand? Are your people asking for it, or are you looking to get ahead of the emerging demand for greater transparency around people practices?
You then need to conduct a statistical analysis of pay variations. Then take a critical look at the factors that determine pay, such as skills, capabilities and job responsibilities. Are these factors evaluated objectively and without bias? This is likely to lead to an evaluation of broader talent processes like hiring, growth opportunities and performance management, and questioning whether these processes are equitable.
At this point, you may need to define the scope of your pay equity strategy. Do you want to encompass your entire workforce or do you want to focus on certain groups, such as management? Do you just want to cover base pay levels or include all elements of compensation?
Correctly distinguishing between pay gap analysis and pay equity audit is crucial. Pay gap analysis involves examining demographic and pay data to identify the unadjusted pay gap between groups of employees, while pay equity audit goes deeper to examine individual employee compensation and identify any disparities or biases that may exist. Ideally, it is important to do both, as pay gap analysis can help identify broad patterns of pay disparities, while pay equity audit can identify specific issues that need to be addressed to achieve pay equity and determine root causes - all necessary to make an impact.
Companies like Salesforce, SAP, CapitalOne and United Health have been on this journey for years, so don’t expect this change to happen overnight. It’s a culture change, not just a compensation project.
Enjoy the positive impacts
Fair and equitable pay is not just a business priority and a way to engage and retain your employees, it's a way to make a positive impact on societies and communities at large. And our employee experience definitive guide revealed that companies making rewards and recognition fair and equitable are more than four times more likely to have outstanding financial and customer outcomes, more than five times more likely to accomplish outstanding people outcomes (retention and engagement), and more than six times more likely to innovate and adapt well to change.
Through adopting a sophisticated approach to pay equity, companies can make a meaningful impact to make employees happier, the work environment fairer - and build a sustainable future where everybody can do their best work and get the rewards they deserve.