Pay Equity: Focus Is on ‘What’ and ‘How,’ But Don’t Forget the ‘Why’

Goal-driven perspectives — for compensation or any other aspect of total rewards (TR) — often result in a focus on what needs to be achieved and how it is to be done. Although establishing targets and identifying strategies for hitting them is important, it overlooks a critical prerequisite: deciding why the target is the target.

Considering the ‘What’

Pay equity has become a major issue of late within the TR space. Being treated fairly is a basic human need. What a person is paid is often viewed as a metric for determining the value of an employee to the organization. This can result in pay equity being a major determinant of employee satisfaction.

The emotions that are a response to inequitable treatment are understandable. Many employees view their pay as an indicator of their worth as a person — as opposed to the value of their contributions to the organization’s performance. Although that is typically not the intent of the organization, what employees believe is their reality and they act on it. If employers are accused of paying inequitably (however defined), they can be subject to legal/regulatory action. They also may suffer damage to their employer brand.

There is currently a proliferation of statistical analyses that measure the “pay gap.” The gap is determined by comparing the average pay of one group of individuals to that of another (e.g., male workers in the U.S. versus female workers — men are paid 15% more on average). Every time a government entity publishes these reports, there typically is a surge in resentment about how prevalent pay inequity is. Yet, this overlooks the reality that the gap is a measure of pay parity, not pay equity.

Overaggregated statistics can lead to conclusions that are unwarranted. Employers often fall into the trap set by the pay gap statistics and do similar analyses on their own workforce. People belonging to groups that are shown to be paid less have an understandable emotional reaction and can conclude illegal discrimination is the cause.

Confusion about the “what” can make progress difficult. Pay parity could, for instance, require organizations to pay administrative support personnel (a female-dominated occupational group) the same as electrical engineers (a male-dominated occupation). If people entered occupations voluntarily, the fact that some have a higher percentage of one gender or race does not make differences in average pay an equity issue. However, if artificial (biased) exclusion based on personal characteristics is the cause of the concentrations, equal opportunity is absent and illegal.

A focus on pay parity also would require the same pay for incumbents of any occupation, irrespective of their competence level and performance. Pay equity analysis should be focused on “similarly situated” employees, not genetic makeup.

Until you clarify the confusion about what goal is sought, there is little chance of meaningful progress.

Considering the ‘How’

The pay rate of an employee should be determined by three things:

• The value (internal and external) of the role an employee plays;
• The employee’s competence in that role; and,
• The employee’s performance in that role.

The pay rate of an employee should not be influenced by his or her personal characteristics.

Organizations often include these three legitimate criteria as objectives in their compensation philosophy. They also often commit to preventing how someone looks, where they came from and what they believe from influencing pay and other conditions of employment.

How an organization defines, measures and rewards performance (contribution) likely will have a major impact on employee satisfaction and effectiveness. It is incumbent on management to develop policies and programs that result in equitable treatment. Unbiased performance ratings are a requirement, as are administrative systems that base rewards on performance — however the organization defines it. There also is a need to convince employees that pay equity exists.

Psychology research shows cognitive biases that all individuals are subject to cause them to believe they are better performers than they are. That research also suggests the median employee will believe their performance ranks at the 75th to 80th percentile. Individuals also are more likely to accept information that agrees with what they believe or want to be true. Finally, people attribute success to their efforts and failure to uncontrollable outside causes.

All this can make employees prone to feeling underpaid, and it can be easy to attribute that condition to one’s personal characteristics. People who have been subject to past discrimination based on gender, race and other personal characteristics are unsurprisingly prone to expect to be the victim of inequitable treatment.

Considering the ‘Why’

When committing to equitable treatment (the “what”), an organization must demonstrate the fairness of its policies, programs and administrative processes (the “how”). But by taking the next step and explaining why there is a commitment to pay equity, an organization can breathe life into the policies and communicate a deeper understanding of people’s needs to be valued and treated fairly.

Statements like “each person has a basic human right to be treated fairly” are often viewed as empty words. Yet if the organization’s culture reflects a sincere commitment to that principle, it can inform all parties they must act in a manner consistent with this underlying belief.

Avoiding legal action or bad press are certainly legitimate “whys.” But those reasons do not communicate a commitment to fairness. The recent attacks on diversity, equity and inclusion (DEI) programs, in the U.S. and abroad, have further clouded the issue. Is a program that promotes equity illegal? Will pursuing equity result in financial harm (imposed by a government or other entity)?

Diversity as an objective is questionable since achieving a demographically diverse workforce does not necessarily result in a more effective workforce. Cognitive diversity can lead to increased capabilities, particularly when different specialties and varied knowledge/skills are required for effectiveness, but diversity in personal characteristics is generally the focus of DEI programs. Inclusiveness can only be achieved through the creation of a culture that promotes it.

Policies that promote behavior not supported by the culture are unlikely to have the desired effect. So, is there resistance to a program that is no longer a DEI program, but solely an “E” (for equity) program? The reaction of many organizations to recent government orders seems to suggest a waffling commitment to equity. Rather than wholesale abandonment of anything looking like a DEI program, why would an organization committed to equity not reshape and focus programs on equity?

Putting It All Together

When it comes to compensation strategy, clearly defining the “what” is the first prerequisite. Differentiating between pay parity and pay equity should be mandatory. It also is necessary to disregard the pressure caused by published statistics that result from invalid aggregation and to define how the organization measures pay equity.

Evaluating the compensation philosophy, policies, programs and administrative processes to determine how pay equity will be measured and evaluated is the next step. The “how” must then be communicated to all parties-at-interest to ensure the approach is viewed as appropriate.

Explaining why the organization is committed to pay equity is a critical prerequisite for gaining acceptance that its beliefs and values are consistent with those who it employs. Resisting government or societal pressures that precludes the pursuit of equity may be required. Focusing on the needs and desires of the people the organization relies on to succeed likely will result in the right “why”.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Equitable and Diverse Workplaces
• Employee Compensation
• Total Rewards