Many business leaders are now asking if they genuinely pay equitably and fairly and the only true way to answer this is by undertaking a pay equity audit (PEA) to identify pay disparities and to quantify risk and remediation strategies.
Accountability in pay gap reporting:
Set the context
The first issue to tackle, and one that causes most reluctance to act, is potential legal challenges. Always connect with internal or external counsel.
PEA outcomes could have a wide range of legal implications, so understanding the issue of attorney/client privilege is key. But fear of litigation risk is never a good reason to do nothing; pay equity issues don’t go away, they grow.
It’s important to define your goals. Until recently, the main driver for a PEA was litigation risk, but now pay equity and fairness have become strategic business imperatives and an emerging regulatory compliance requirement commanding c-suite attention.
Increasingly, organisations are coming to us because tackling pay equity is just the right thing to do and is recognised as a reputational issue.
Define equal and comparable work
You will need a method for grouping employees into comparable or like-work in order to compare pay. This needs to be a consistent, gender-neutral approach. For many this will be some form of job evaluation or job levelling approach. It’s an important step that will prevent false positive comparisons.
The importance of data
Data is a key driver of success and can affect the type of analysis you can do. For example, you may not hold consistent data on all protected categories.
While gender is fairly commonly recorded, ethnicity, disability, sexual orientation and other categories are not. Data also needs to be accurate – ultimately it can drive pay adjustments. But don’t let this be a blocker. Start in the areas where you have data as you work to gather additional information you need. After that, consider which types of compensation to analyse.
Base pay is the obvious starting point, but some might prefer to take a total compensation approach. This could include bonuses, long-term incentives and targeted total compensation. Analysing these different components can also highlight biases in how they are administered.
A PEA should help you to determine the impact different factors (such as tenure, education, experience) have on pay and whether pay gaps can be ‘explained’ by those factors.
Identify what factors drive pay variance and review employee segments for different pay philosophies. For example, sales departments will have different pay policies to operations.
Typically, regression analysis is used to account for pay differentials based on legitimate factors in order to identify outliers. Whatever approach you take, the key issues to address are:
- To identify where different categories of employees are doing the same or comparable work and compare their pay.
- To explain the reasons for any pay differences.
- To eliminate any pay differences that are either directly or indirectly discriminatory.
When to do pay remediation
The general consensus, once pay disparities have been identified, is to effect pay remediation as swiftly as possible; this is about identifying and addressing risk. However, informing employees that a pay adjustment is to address pay equity does open up the potential for them to question how long they were paid unequally.
The preferred approach is to incorporate adjustments into the next full compensation review phase.
Communication of PEA outcomes are a critical and sensitive part of the process. Who to communicate with will determine your PEA goals.
If the objective was simply to quantify legal risk, then you may choose not to communicate to anyone outside of the working group. If the aim was to tackle pay equity to enhance employer brand then communicating more broadly is a must.
This will require a tiered approach. Starting with the executive team – who are hopefully going to be part of the solution – paint the whole picture, the level of risk, the cost to fix and where underlying root causes or systemic issues might lie and provide them with informed solutions.
Next, when communicating with managers and employees, be prepared to discuss outcomes and proposed solutions simultaneously. Start by expressing commitment to fair, competitive pay that reflects your compensation philosophy.
Then, focus on the headline outcomes of the analysis followed by plans to address them. It’s critical that managers are equipped with appropriate guidelines to tackle any questions and that they are always prepared for misinterpretation.
As pay equity has emerged as a multi-stakeholder issue, some also decide to make a public statement on their pay equity position. A number of larger companies have chosen to do this recently and this can have a significant impact on employees internally and is a wider demonstration of commitment.
Towards sustainable pay equity
Pay equity is not a ‘one-off’ and can only be maintained through fair compensation management combined with ongoing assessment. While you might achieve pay equity after a PEA, workforces are dynamic with many employee-related activities that create opportunity for pay inequities to creep back in.
You need to ensure the processes and policies that underline these employee-related transactions are free from systemic bias or structural issues that can cause inequity. It’s about making sure pay equity is part of the day-to-day.
Ultimately, addressing pay equity is a matter of integrity. It’s about being authentic when you say your employees are your greatest asset by proving you pay them equitably.
Ruth Thomas is co-founder and principal consultant at Curo Compensation