Employee pay is one of the largest expenses on an organization’s balance sheet and, obviously, worth every penny because it helps fuel productivity, efficiency, and financial performance. But when there’s a bias, even discrimination, in compensation practices, there’s a disruption of the talent pool that can lead to disengagement, lower productivity and, ultimately, financial losses.
Pay equity is the idea that employees will be compensated at the same level when they perform the same or similar jobs. Yet, according to a study by The Institute for Women’s Policy Research, women receive only $0.83 cents for every dollar their male colleagues get for doing the same work — and that discrepancy has closed by only one penny since 2019. However, because of the COVID-19 pandemic and stay-at-home policies, the report found there’s been more of a disruption within various female-dominated occupations and industries, so actual pay disparity is likely further skewed. When women are back working at full capacity, the pay gap may be even wider.
Importantly, when looking at pay inequity deeper than simply men and women, the findings show a wage gap that also included racial inequity. Women of all racial and ethnic groups earn less than white men. Similarly, men of color earn less than white men. However, all men out-earn the women within their racial-ethnic group. Hispanic women earned only 58.4% of White men’s median income and 87.6% of the median earnings of a Hispanic man.
Causes of a Pay Equity Gap
Wage gaps between genders and races aren’t always as easy to identify as you might think, but their causes typically boil down to one of four general causes:
• Differences in Jobs: This is usually based on categorizing women and men into different types of industries and jobs based on gender norms and expectations. For example, when women work in healthcare and men in construction.
• Differences in Experience: Because, historically, women were pushed out of the workforce and into childcare and housekeeping, men received more time on the job and thus more experience.
• Differences in Hours Worked: Historically, women worked more part-time jobs so they could take care of the home while men took full-time positions.
• Discrimination: Although equal pay became law in 1963, it’s still violated in almost every industry in the U.S.
Steps to Ensure You’re Paying Employees Fairly
The best way to ensure your organization is paying employees fairly is to start with a pay equity audit or an analysis. According to the Harvard Business Review, a PEA simply compares the pay of employees doing “like for like” work. When comparing like jobs, there must be an accounting for reasonable differentials, such as credentials, work experience, and even job performance.
After the initial analysis it’s important to investigate the causes behind any pay differences that can’t be appropriately justified. In the past, it was recommended that pay audits be conducted every two to five years. With today’s advanced technologies, like having a proper compensation management system implemented, running PEAs can be a continuous, proactive process, rather than a reactive one. However, a recent survey of large, public U.S. companies found that only 22% performed a salary audit between 2016 and 2020.
Once you’ve completed a PEA and resolved any pay discrepancies, consider implementing these six strategies to help solidify closing the compensation and pay equity gap:
1. Rewarding Skills: Some of them may no longer apply or may open the organization to liability. Keeping job descriptions up to date ensures that the work being done, and the skills required are accurately reflected. Skills-based compensation strategies reward candidates and employees for the range, depth, and categories of the skills they offer.
2. Revamp Current Compensation Systems: If it’s discovered that your company’s compensation planning and management system is creating a gap or if you are ONLY utilizing Excel, consider making changes such as implementing standard pay ranges or guidelines for each position or job classification. Having the right compensation management system paired with analytic tools and capabilities will demystify the complex compensation management process with automation.
3. Build a Culture of Pay Equity: Ensure that everyone — including the legal team, CEO, CFO, and COO — are included in the pay-approval process. Having multiple sets of eyes on the process helps to catch compensation mistakes and biases.
4. Open Your Books: Create transparent objective metrics and systems around recruitment, performance, advancement, and compensation. Having the right DEI plan and strategy helps ensure consistency and accountability.
5. Communicate: One of the most under-utilized business skills is consistent communication with team members. Regularly communicating with employees about the metrics and their progress builds trust within the entire organization. Not only does this help foster a better company culture it helps reduce employee churn.
6. Train Leaders, Managers, and Supervisors: Make sure all decision makers understand your organization’s compensation management and planning system. Be sure to train them on how to properly communicate and document all compensation decisions.
Finally, compensation professionals should keep pay equity in mind as they develop workplace policies and procedures. And they should take a closer look at how business determines starting pay, merit increases, promotions, and bonuses.
Closing the Compensation Gap for the Right Reason
Recognizing and understanding a pay equity gap is the obvious first step toward eliminating the issue and preventing it from happening again. But just like other ideas and concepts that look good on paper, an organization must first understand why it’s acting. Affirmative action initiatives have worked for organizations that understood the cultural importance of why they were needed. They failed in companies that were motivated primarily by a desire to avoid liability or litigation.
Disparity in pay isn’t wrong if it can be appropriately justified. For obvious reasons, a receptionist shouldn’t be compensated at the same rate as a CEO. But if there’s a compensation gap between two positions within the same job description, and they perform at the same level with the same skills, talent, and experience, then there’s an issue that must be addressed.
Bias and discrimination in a company’s compensation management practices hinder performance and growth and put a company at legal or regulatory risk. Without question, addressing pay equity gaps is the right thing to do. And by enhancing performance and minimizing risk, it’s also smart business.