Pay equity is a corporate social responsibility. In this post, we look at the landscape — and ways in which organizations can bridge the gap.
Employees from underrepresented groups have always suffered the consequences of pay equity.
Compared to their white male colleagues, employees whose gender, race, ethnicity, and sexual orientation are different from the mainstream get lower salaries even though they are doing comparable work.
And while DEI efforts have started to become a priority in recent years (though there is still a lot progress to be made here), there is a lot to uncover and improve around the E in DE&I: equity.
Read on to learn:
- How pay equity impacts organizations
- How pay equity practices help create a healthy organizational culture
- How to attract top talent with pay equity
- Initiatives and examples around the globe and industries
- Step-by-step process to identify, analyze and establish pay equity
Creating space for equity
When organizations decide to create a compensation system, there is a tendency to focus on external factors (external equity) such as the industry sector, location, and company size.
Yes, all these factors are important, but companies often forget that the perception of the employee regarding equal and fair pay (internal equity) is a critical factor to take into account.
While external equity might help attract new talent, internal equity helps retain the existing ones.
And let’s face it — replacing a great employee is so much more expensive than retaining them.
Based on Equity Theory, your employee continuously monitors their inputs and outputs of the job. When the value of the output is not equal to the input, your employee will perceive the situation as unfair.
Studies have shown that when compensation (output) is perceived as inequitable, it directly influences employee turnover intentions, employee behavior, and performance.
To avoid these consequences, companies should make sure they are implementing fair pay practices.
This means that employees should be equally compensated when the role requires similar or the same responsibilities to be performed regardless of their gender, race, ethnicity, or sexual orientation.
Why is pay equity important?
Companies are experiencing strong external pressure to report the data regarding the way they pay their employees.
Newspapers, investors, and activists are challenging companies to make their pay transparent. In addition, countries are implementing pay-transparency practices. Employers are also facing high competition for talent. Reports show that companies with pay transparency practices are more likely to receive a higher number of applicants than those without.
External pressure is not the only reason why employers feel the need to adopt more pay equity practices, though. Equitable pay practices lead to employee commitment and healthier organizational culture.
Build a healthier organizational culture through pay equity
Researchers define employee commitment as the psychological contract and emotional bond that connects the employee with the organization. And studies show that it is this bond that can make organizations more successful. There is also evidence that when employees perceive that there is a noticeable effort from the company side to support them, employees become more committed.
In this process, the perception of fairness is a major dimension of perceived support. A slightly negative perception of fairness at the workplace will directly decrease commitment and engagement.
In addition to leading to positive individual outcomes, pay equity also influences the overall organizational culture. When companies have clear values, norms, and policies, this directly helps set a tone of what the company stands for.
Having well-communicated processes and practices regarding pay equity provides all employees with the insurance that everyone is fairly compensated, it also makes the culture more people-oriented and inclusive.
Equitable pay practices help attract talent
Work as we know it is changing and the job market is becoming more competitive than ever. Candidates now have more of an upper hand in the recruitment process, which makes the candidate experience a crucial part of accepting or rejecting a job offer.
From a candidate’s perspective, there is nothing worse than having to go through hours of interview rounds, just to find out in the end that the budget of the company for the role is far below the candidate’s expectations. Based on a Glassdoor survey, 98% of candidates think it is helpful to see salary ranges included in job listings.
Having pay transparency in your job listing can make the job post stand out. However, it is only safe to include pay ranges in job postings once the company has gone through a robust process of reaching external and internal pay equity.
Not conducting an external pay equity analysis will either make you post jobs with a very low pay range than your competitors, which will make the job less attractive, or you will post salaries that are so high than the market range, impacting the financial performance of the company, and leading to potential layoffs in the future.
If you put a salary range that is higher than those of internal employees, this will lead your employees to perceive the situation as unfair, which can lead to losing existing employees.
This is why you should do a detailed pay equity analysis before including pay transparency in job postings.
Current pay gap landscape
In Europe, women earn 13% on average less than men. In the US, women only earn 82% of what men get on average. While these numbers might suggest that we are heading in the right direction in closing the gender pay gap, men in Africa are getting 30% more than women are making.
The gender pay gap gets even more complex when other factors are taken into account. In the US, black women earn 62 cents for every dollar earned by a white man, while Native women earn 60 cents and Latinas earn 49 cents.
Even though the pay gap is not as pronounced for men, they are not completely immune to it. In the US, Black men earn 76% of what a white man gets.
By matching employee-employer data in 16 countries, recent research suggests that nearly 80% of the gender pay gap is caused by pay inequity within companies.
Legal actions based on pay equity
Pay equity is a social responsibility but before that, it is a legal topic.
Google paid 118$ million in settlement for a pay equity lawsuit. This settlement covered 15,500 women employed by Google and holding 200 different job titles who were getting paid almost $17,000 less than men with the same jobs.
Moreover, the US healthcare giant, Kaiser Permanente, settled two class-action lawsuits concerning pay equity. The first lawsuit was initiated by four employees on behalf of 2,225 Black employees, and the second was filed by an employee on behalf of 2,500 Latino employees. Overall, Kaiser paid 18,9 million for the settlement because it paid employees from racial minorities less than white workers.
Most employers think that having a policy for not talking about salaries can protect them from these lawsuits, however, employees are becoming more aware of pay differences within their company either directly from their colleagues or other platforms (e.g., Glassdoor). By ensuring internal pay equity, employers will be able to avoid such legal issues.
How countries are fighting for pay equity
In Germany, employees who work within a company with a workforce above 200 employees have the right to ask what criteria and practices are applied to establishing the salary and also salary information of an employee of different sex who is doing comparable work with equal value.
In Austria, companies with a workforce above 150 are required to publish a report with pay distribution between men and women every two years. Iceland makes it an obligation for both private and public sector organizations to report their data regarding gender equality and salaries.
Employers in Iceland are also asked to provide an equal pay policy plan and an action plan on how equal policies can be operationalized. Italy asked organizations with more than 50 employees to report the gender pay gap. Other countries including Canada, the US, the UK, and Australia have also set policies in place to make it mandatory for employers to report pay equity data.
While there are many suggestions on how to address pay equity, few of them are scalable.
Based on a study conducted by the International Labour Organization, reporting can lead to more pay transparency, which in return can close the pay gap and decrease issues related pay equity.
Implementing pay transparency policies also helps organizations identify and address internal pay discrimination that could have been otherwise overlooked.
Moreover, when salary information is included in job postings, published publicly, or transparent internally it provides both candidates and employees with the insights needed to negotiate their pay, thus, empowering them to challenge discrimination and pay equality.
How organizations can improve pay equity practices
1. Start early
Based on a recent report by Mercer, 82% of companies want to target pay equity as part of the compensation strategy. However, only 32% have developed a process to address inequalities.
One reason might be that companies try to address pay equity when they are legally required to do so, and that happens when the company reaches a certain stage (e.g., 250 employees). At that stage addressing the compensation strategy becomes a large change management project and difficult to execute. Thus, pay equity should be a core part of the HR strategy from the get-go.
2. Implement data-driven HR practices
People positively judge and promote others who look and behave like them. To avoid biases and discrimination in pay-related practices, companies should have clear guidelines on how to measure performance, how promotion is decided, and incentives are given.
In addition, having standard pay ranges across levels and departments can help keep transparent and consistent pay processes.
Finally, having transparent salary ranges helps the employee understand their potential progress in the company, providing them with clarity regarding their growth, and keeping them motivated to progress and advance their skills to constantly increase the value they provide to the company.
3. Keep track of your data and constantly analyze pay equity
Data is an important part of your HR strategy. In a constantly changing world, the only way to make effective HR decisions is to rely on a data-driven approach. More specifically, pay equity analysis can only be conducted through the data collected by the HR department.
4. Conduct pay equity analysis
Pay equity analysis requires employers to analyze, identify, and understand pay gaps based on data, and address them accordingly. While country regulations focus more on reporting the data, internal pay equity analysis is a step further after the reporting.
Pay equity analysis requires the company to follow a systematic process to understand the reported data and generate conclusions and action points. While there are different ways to conduct pay equity analysis, the recipe for this process should include:
a. Identifying under-represented groups
Gender, ethnicity, sexual orientation, disability, and other under-represented group data should be collected. Sometimes, it is difficult to collect data regarding certain diversity dimensions, but it is important to start wherever you are and make an effort to collect more data to better understand your employees.
b. Define comparable work
Simply put, comparable work for equal pay means that when two employees whose skills, responsibilities, value, and effort are substantially similar they should be equally paid. In order to determine if the job is equal or not, companies should conduct an analysis to identify to which extent employees’ job is similar. In this definition, substantially means skill, effort, and responsibility are alike to a great or significant extent but are not necessarily identical.
c. Collect pay data
When collecting data, it is important to keep in mind that the more employees you have the more reliable the results will be. Researchers and practitioners recommend at least collecting data from 250 employees. However, if you have less than 250 employees, it is still important to identify the trends in your current workforce through descriptive analytics, while thinking critically about the results and the conclusions.
The variety of data collected determines how insightful your result might be. Generally, the data that need to be collected can be grouped into three categories.
First, salary information which includes based salary, bonuses, variable compensation, or any salary increase in the past.
Second, position information, which includes job title, job level, team, department, as well as the comparable group the employee belongs to.
Finally, employee information which includes but is not limited to gender, working hours, age, ethnicity, seniority, and performance.
d. Analyze the data
Once you have identified under-represented groups, defined your comparable work, and collected data from your employees, you are ready to work with your dataset.
There is no one solution fits all to analyze the data but it will be insightful to look at some general topics first. You can explore the salary distribution among men and women, or between other groups. This will give you a good idea about how pay is distributed.
You can also calculate the gender pay gap, by calculating the difference between the average male and female salaries. While this information may be influenced by other variables (e.g., average seniority level of men in the company), you can statistically control for the effect of these variables which can give you the chance to explore the direct effect of gender on the pay gap between men and women.
Looking to identify pay gaps in your organization? See Orgnostic Pay Gap Insight in action:
e. Interpret the data and share the results
After the analysis, it is important to carefully report the data regarding which variables influence the pay gap within the company:
- is it gender and/or ethnicity?
- Is it performance?
- And to what extent do these variables influence the pay gap at the company?
- How is the pay of under-represented groups impacted in different departments and levels?
Running the correct analysis can make us answer these questions and gain insightful information about the pay equity status within the company.
Once you interpret the data and you are sure about the results, it is time to inform key stakeholders and take action.
When communicating the results, it is important to have a business case behind it. Many stakeholders may not know why it is important to address pay equity, therefore, instead of just reporting data, your result should tell a story to generate buy-in. Keep in mind that sometimes the results may not be positive, but they are still the best starting point you have to ensure pay equity at your company.
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Thanks to Hicham Samma for penning this piece! Hicham is a Work and Organisational Psychologist, writer, and a photographer. Hicham is passionate about the intersection of HR, Psychology, and data. With Orgnostic, he is bridging the gap between science and HR practices by reviewing and writing about state-of-the-art Organisational Psychology topics.