More than 70 percent of organisations have started taking action to address pay equity, but fewer than one-third of them believe they have been successful in closing existing pay gaps at their organisation, according to CEB report, which is now part of research firm Gartner. “With greater focus on pay equity, both in the media and among corporate leaders, many organisations struggle with how to close pay gaps and sustain pay equity among employees. In order to tackle these challenges effectively, executives must understand these five insights about pay equity,” said CEB in a statement.
There are two types of pay gaps
Pay equity issues within companies stem from two sources: group-to-group gaps and role-to-role gaps – and there is an important distinction between them. Group-to-group gaps occur among different groups of employees, where pay differences are based on something other than gender or race. These gaps can occur when women are concentrated in lower-paying roles than men – for instance, female nurses and male doctors – which may reflect an unfair distribution of expectations and opportunities. Compensation executives can’t directly and immediately control for those factors. In contrast, role-to-role gaps occur when two employees are paid differently for doing the same job, such as a male nurse earning more than a female nurse with the same qualifications. Compensation leaders can directly address these types of pay inequities.
The problem is bigger than it looks
CEB analysed employee salary data from job site Glassdoor’s Economic Research report, Demystifying the Gender Pay Gap: Evidence from Glassdoor Salary Data. CEB found that at the typical large-scale global organisation, the average gender pay gap is at 27 percent. Much of this 27 percent gap is explained by gender differences in talent factors: 9 percent is attributable to choice of occupation; 6 percent is linked to organisational factors such as size, industry, or geography; and 5 percent is related to human capital factors, including differences in education and experience. However, these talent factors cannot explain the remaining 7.4 percent gap between men’s and women’s pay.
Perceptions matter, and perceptions are worse than reality
Misperceptions around pay abound, and most employees don’t have the same understanding of the distinction between group-to-group and role-to-role gaps as compensation leaders do. This results in employees often thinking pay gaps are larger than they really are or that they exist in places they don’t. CEB research shows that one in three employees perceives pay gaps at their organisation, and that employees tend to overestimate the size of these gaps. Further, women tend to overestimate them more than men. When employees perceive a pay gap, regardless of whether tPheir perceptions are correct, it has a direct, negative effect on employee retention in the form of a 16 percent decrease in intent to stay among both female and male employees. That’s 50 percent worse than the typical impact of a pay freeze.
It will never be cheaper to achieve pay equity than it is today
Unfortunately, role-to-role gaps are trending upward. The average cost to correct gaps is increasing by about $440,000 each year. Organisations that act now to close pay gaps and sustain equity will pay less than those that delay investing in equity.
There is no “One-And-Done” solution to pay inequality
Despite an increased focus on pay equity, conventional pay practices are not effective at delivering on equal pay. In fact, role-to-role pay gaps are trending upward at an average rate of close to 0.2 percent per year. Ad hoc pay adjustments that fix current gaps will not hold over time, and they will leave organisations open to increasing legal, talent and reputational risk. Leading organisations have figured out ways to conduct equity audits as an ongoing process, rather than a one-off event.
How organisations can better address pay equity
In order to avoid the serious consequences that come with pay gaps, employers should take three actions, said CEB.
Utilize Integrated Assessments: Integrating pay equity assessments as a key process of the compensation function – not as an ad hoc initiative – is critical. Organizations can sustain equity by conducting regular analyses that identify pay gaps between employees performing similar work and integrating HR partners into audit processes.
Manage Employee Perceptions Through Open Communication: Addressing employee perceptions of pay gaps via open communication enables organizations to drive better employee outcomes than simply correcting the gaps quietly. Organizations must define what equity is and what steps have been taken to address gaps so they can prepare managers to communicate pay adjustments effectively.
Prevent Pay Gaps From Reemerging: Proactively preventing the creation of pay gaps throughout the employee life cycle – instead of only assessing and correcting existing gaps – is necessary to ensure sustainable pay equity. The most progressive organizations do this by providing hiring managers with guidance for determining equitable salary offers and ensuring HR partners review for equity in performance decisions.