Compensation And Benefits -
How to Identify — and Fix — Pay Inequality at Your Company - Sun and Planets Spirituality AYINRIN
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Summary.
Companies who say they care about inclusion and belonging can start by paying employees fairly. To start, initiate a pay equity audit in which you compare the pay of employees doing “like for like” work (accounting for reasonable differentials, such as work experience, credentials and job performance) and investigate the causes of any pay differences that cannot be justified. Next, determine how you’ll remediate any issues, and identify operational gaps that led to the salary discrepancies in the first place. Finally monitor your hiring, promotion and compensation processes on an ongoing basis.
Pay equity has been a hot topic over the last few years, fueled by national social movements, including #BlackLivesMatter and #MeToo. California recently passed a law requiring employers to file equal pay reports annually, starting in March 2021. Colorado and a dozen other states have either passed or are considering a variety of pay transparency bills. And there are “no signs of it slowing down,” says Tom McMullen, who leads the global rewards and pay equity practice at Korn Ferry.
Yet organizations still pay women and people of color less than white men
for the same work — and this earnings gap compounds over time. It’s
estimated that Black and Latina women experience lifetime earnings losses of up to $1 million or more over a 40-year career.
“All
the more reason to get it right at the beginning of the pipeline rather
than having to do it midstream,” shares Jahan Sagafi, workplace
fairness advocate and partner at Outten & Golden. Sagafi speaks from
experience — his firm led the successful litigation against Uber, which
recently paid $10 million to settle allegations of unfair employment practices regarding software engineers of color and women.
The
best way for company leaders and boards to ensure their organization is
paying employees fairly is to start with a pay equity audit (PEA). In two recent self-reported surveys, companies said that they were taking pay equity concerns seriously. However, a third survey
that looked at the disclosures of the 922 largest public U.S. companies
found that only 22% reported performing a salary audit between 2016 and
2020.
How to Perform a Pay Equity Audit
In
simple terms, a PEA involves comparing the pay of employees doing “like
for like” work in an organization (accounting for reasonable
differentials, such as work experience, credentials, and job
performance), and investigating the causes of any pay differences that
cannot be justified. HR professionals typically lead the audit at small
organizations (50+ employees), while larger employers (500+ employees)
hire consulting firms that specialize in pay and rewards.
Before
starting the audit, companies should make sure the auditors are working
with an accurate set of employee data. You should have each employee’s
length of service, job classification, and demographic information,
including gender, race, and age. Accessing this data may require a
substantial clean-up effort, depending on the complexity and quality of
HR record-keeping systems. For example, job titles, job grades, and
aligning “like jobs with like jobs” (those that require equal skill,
effort and responsibility under similar conditions) is especially
critical to pay equity analysis — and frequently out-of-date. “One
recent client had 16 data sources to integrate,” explains Jennifer
Manuel, a pay equity researcher and diversity consultant.
Once
you have a clean data set, the auditors perform a regression analysis
to account for pay differentials based on legitimate factors, such as
experience, education, and training. You’ll then be able to identify
outliers based on gender, race, and age. Companies inevitably discover
through the audit that their compensation policies “are not consistently
followed and a lot of subjective assessment gets put into place,”
observes Robert Sheen, CEO of pay equity analytics firm Trusaic.
The
next step is remediation. According to Korn Ferry’s 2019 study, most
companies find that up to 5% of employees are eligible for an increase,
and the average salary adjustment
typically ranges from 4 to 6%. The total remediation cost to
organizations adds up to 0.1% – 0.3% of their total salary budget.
Depending on budget constraints, companies may raise an employee’s
salary incrementally over a couple of years until it achieves the target
amount. Unless driven by litigation, back pay is not typically part of
the equation — pay adjustments are made on a go-forward basis.
The
final step is to identify operational gaps that led to the salary
discrepancies in the first place, such as incorrect job classifications
or decentralized hiring authority that enables vast differences in
starting salaries for the same jobs. Once causal awareness is raised, HR
(with assistance from legal) should monitor the hiring, promotion, and
compensation processes on an ongoing basis. It’s natural for
compensation programs to need a regular tune up — pay gaps start to
re-emerge as organizations experience employee turnover,
reorganizations, changes in job duties, and subjective bias. It’s a best practice to conduct “spot checks” annually, with a deep dive every few years.
Organizations
that are committed to pay equity but aren’t sure where to begin can
conduct a small-scale “test run.” For example, sample five job
classifications — one that they believe would do well under scrutiny,
one that would fare poorly, and three others at complete random — and
compare employee compensation. Pull together the C-suite, HR, and legal
counsel to review the results and determine next steps. “This will give
you a starter set and comfort with the process,” advises Jennifer
Manuel.
When Fear Thwarts Progress
While
many companies don’t have clean data to immediately begin an equity
analysis, that’s a poor excuse to delay. “Companies are afraid to
collect the data,” shares Dr. Kellie McElhaney, founder of the Center
for Equality, Gender and Leadership at UC Berkeley. “It’s the fear that
they are going to find a problem and have to fix it. But isn’t that how
you manage a business effectively?”
Given
the lack of pay transparency and a growing cynicism regarding the
fairness of employer pay structures, this generation of employees is
taking matters into its own hands. Google found this out the hard way,
when The New York Times published data from an underground spreadsheet
in which more than 1,200 employees (2% of Google’s workforce) shared
their salaries, revealing that the company paid men more than women at
most job levels.
“Google doc” activism
is real. Dr. McElhaney noted that her MBA students started an opt-in
spreadsheet two years ago that tracks detailed compensation data,
including base pay, signing bonuses, and relocation packages, for
student internships and post-graduate job offers. “It’s just so easy for
someone to start this groundswell,” she says.
Institutional investors, shareholders and state legislatures have become active allies in the fight for pay equity — increasing pressure on boards
to ensure fulfillment of their oversight role. This trend is likely to
increase. In McMullen’s experience, “half our queries are coming from
the board and insisting they do this if they haven’t done it.” In a recent report,
the National Association of Corporate Directors recommends regular
review of compensation plans and identifying “any aspect of those
programs that could be problematic” or “damaging to the culture.” The SEC is proposing
increased disclosure requirements of workforce data, including pay and
diversity plans. In the last few years, 14 states have banned employers
from asking job applicants their salary history, and recent pay transparency laws have helped to reduce the gender pay gap. As an incentive to companies, some states have enacted safe harbor laws that provide protections for companies that voluntarily undertake PEAs.
Several
large multinational organizations have been conducting PEAs and have
become pioneers in pay equity and transparency. For example, after a
two-year effort, Adobe announced it achieved pay equity based on gender and race in October 2018. A few months later, Intel
celebrated achieving gender pay equity for its global workforce of
100,000+ employees and added stock-based compensation to its ongoing pay
equity analysis.
The All-Important “Why”
For
all the reasons stated above — ethics, competitiveness, shareholder
expectations, and legal compliance — organizations must conduct PEAs. In
doing so, they will take one of two approaches: We have to do it (fear
of threat of litigation), or we need to do it because it’s the right thing to do (cultural imperative).
Organizations
that operate based on a risk-mitigation mindset will likely be more
transactional in their approach and may handle adjustments privately,
embedded in their annual pay review process. They will miss out on the
opportunity to fully engage employees in a values discussion and the
larger aspirational journey of a truly diverse, equitable and inclusive
workforce. This is because although pay equity is a critical starting
point, it is just one piece
of the broader problem of unequal representation of women and people of
color in the highest paid jobs in management and leadership.
Paradoxically, research
demonstrates that organizations that emphasize meritocracy as a core
value actually are worse when it comes to pay equity because they don’t
scrutinize or monitor their behavior. And such optimistic complacency
will hurt organizations — based on a recent Glassdoor Economic Research Study, nearly three in five employees won’t apply to work at companies with an equity pay gap (make that 72% for women).
Companies are increasingly talking about inclusion and belonging
as a desired cultural norm. As leaders, it’s a matter of integrity to
be able to look your employees in the eye and give them your word that
you value their work — and can prove it by paying them equitably. Pay
transparency is the number one thing employers can do to build trust.
And if not handled ethically, it may also become a legal and public
relations issue.
As expressed by Dr. McElhaney, “There is no way to feel more included than to be paid equal to the person sitting next to me.”
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