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.
Employee pay is typically one of the largest expenses on a company’s income statement — and with good reason. Pay drives financial performance, efficiency, and productivity and helps to attract and retain the best talent. Plus having a diverse talent pool can significantly improve financial performance.
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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