Ensuring Pay Equity in the Workplace

“Pay equity” is an umbrella term referring to the fairness of compensation paid by employers to their employees for performing comparable work, without regard to gender or race/ethnicity or other categories protected by law (such as national origin or sexual orientation). “Pay” isn’t just base pay but rather total compensation, including bonuses, overtime, employee benefits, and other monetary perks. Pay equity does not mean that all employees are paid the same. Generally, pay equity focuses on ensuring employees performing comparable work are receiving comparable compensation and that any differences in pay can be explained by legitimate job-related factors, such as differences in experience, education, skills, quality/quantity of work, tenure, etc.

It sounds simple enough to pay everyone equitably, but, surprisingly, it isn’t. According to Pew Research, the gender pay gap – the difference between the earnings of men and women – barely closed in the United States in the past two decades. In 2022, American women typically earned 82 cents for every dollar men earned. That was about the same as in 2002, when they earned 80 cents to the dollar. In 2022, Black women earned 70% as much as White men and Hispanic women earned only 65% as much.

A new study from The Josh Bersin Company, called The Definitive Guide to Pay Equity: Increasing Productivity, Innovation and Sustainability, states that while 71% of companies consider pay equity a critical component of their people and business strategy, an astounding 95% of companies struggle with pay equity. The study further highlights how companies with effective pay equity far surpass companies that do not in critical areas. The 5% of companies excelling in pay equity are:

• 1.6 times more likely to meet or exceed financial targets;
• 2.1 times more likely to attract the talent they need; and
• 1.7 times more likely to innovate effectively.

History of Pay Equity Legislation

Pay equity is not a new concept. The pursuit of pay equity in the U.S. workforce began over 60 years ago in the 1960s when three laws were enacted addressing pay inequity:

• The Equal Pay Act of 1963 which required employers to pay men and women performing substantially similar work equally.
• Title VII of the Civil Rights Act of 1964 which prohibited discrimination against employees based on race, color, religion, sex or national original. This includes pay discrimination and applies to any employer with over 15 employees.
• The Age Discrimination in Employment Act of 1967 which prohibited pay discrimination against employees who were 40 or older.

It would be another few decades before the Americans with Disabilities Act of 1990 was signed into law prohibiting wage discrimination against individuals with disabilities. Finally, the Lilly Ledbetter Fair Pay Act of 2009 extended the period for employees to file pay discrimination claims, stating each discriminatory paycheck is an actionable offense.

On a state level, currently, over 35 states have some form of pay equity, pay transparency, and/or pay discrimination laws. These laws generally prohibit an employer from restricting employees from discussing or disclosing wages or from discriminating against protected classes such as gender or race.

Barriers to Pay Equity

While pay equity legislation has certainly made inroads towards narrowing the gender pay gap, significant barriers to pay equity still exist. Some possible explanations include:

• Occupational Segregation – Occupational segregation means people of different races and genders are unevenly represented in different kinds of jobs, which have very different wages, benefits and working conditions. Even though women have increased their presence in higher-paying jobs traditionally dominated by men, such as professional and managerial positions, women continue to be overrepresented in lower-paying occupations relative to their share of the workforce. The National Partnership for Women and Families reports that woman in a high-paying job (primarily STEM fields) are among a small crowd comprising just 30% of workers in the 20 highest-paying jobs. However, women make up 60% of the workers in the 20 lowest-paying jobs such as childcare, housekeeping or in a restaurant.
• Work/Life Balance Pressures – Women are disproportionately driven out of the workforce to accommodate caregiving and other unpaid obligations and thus tend to have less work experience than men. Access to paid family and medical leave makes women more likely to return to work—and more likely to return sooner. According to Pew Research, about half of employed women (48%) report feeling a great deal of pressure to focus on their responsibilities at home, compared with 35% of employed men. Among working mothers with children younger than 18 in the household, two-thirds (67%) say the same, compared with 45% of working dads. Because women tend to work fewer hours to accommodate caregiving and other unpaid obligations, they are also more likely to work part time, which means lower hourly wages and fewer benefits compared with full-time workers.
• Discrimination. Gender-based pay discrimination has been illegal since 1963 but is still prevalent particularly among women of color. Employers who rely on prior salary history in hiring and compensation practices may inadvertently engage in discrimination when discriminatory practices were used in prior pay practices and have followed women from job to job.

What Can Employers do to Narrow/Close the Pay Gap?

While progress towards pay equity has been slow, employers are more attentive now than ever to pay disparity issues due to, among other things, an extremely competitive job market in certain high demand jobs and fields, emerging laws around the county, and a renewed focus on environmental, social and governances (ESG) mandates. When working towards the goal of pay equity, a crucial first step is to conduct a pay equity analysis or audit. Going through the analysis helps identify and rectify any existing disparities and establishes a solid foundation for equitable compensation practices. Here are the steps involved in a pay equity analysis:

1. Define the Scope and Objectives. Clearly identify the pay equity analysis goals. What is the purpose of conducting the analysis? Is the purpose to ensure legal compliance? Is the analysis being conducted because of identified or perceived pay gaps? If so, is the focus of the analysis on gender, race, or other demographic factors?
2. Research Existing Pay Policies and Procedures. Before gathering compensation data for all relevant positions, understand how historical pay practices led to current pay rates.
3. Gather and Anonymize Relevant Data: The scope of the analysis largely dictates the type of information gathered. Most audits examine employee total compensation (including salaries, bonuses, benefits, etc.) relative to job function, gender, race, tenure, experience, and job performance. Anonymize the data (remove personal identifiers) to ensure the analysis focuses solely on compensation and job-related factors. Once the data is gathered, identify comparable groups of employees.
4. Evaluate Compensation Structures. While examining the compensation structures within each comparable employee group, look for patterns or discrepancies that could be indicative of pay gaps.
5. Consider Relevant Variables. If pay gaps are identified, account for factors that influence compensation such as years of experience, education, tenure with the organization and performance metrics. If gaps are identified that cannot be explained by relevant variables, investigate further. Consider whether factors that may contribute to the pay gaps such as relying on salary histories for starting salaries, a lack of pay transparency, or unconscious bias are to blame.
6. Implement Corrective Actions. Once disparities are identified, take proactive steps to address them such as revising policies and practices, adjusting salaries or conducting managerial training.
7. Communicate Findings. To foster a culture of transparency, communicate the pay equity analysis findings to employees along with steps taken to address any disparities.
8. Regularly Review and Update: Ensuring pay equity is an ongoing process that requires periodic monitoring, analysis and corrective action.

In addition to conducting a pay equity analysis, here are other best practices employers can use to help achieve pay equity:

• Create transparent compensation systems around recruitment, hiring, performance, and advancement to help ensure consistency.
• Consider implementing standard pay ranges for each position in the company.
• Keep job descriptions current to ensure the work being performed and skills and education required to do the job are accurately reflected.
• Train managers on compensation policies and procedures and proper documentation practices.
• Consider prohibiting pre-hire compensation negotiations.
• Require a review of incumbent compensation if new hires are brought in at higher salaries than the existing workforce. Adjust the salaries of the current workforce upwards to match higher compensation offered to a new candidate unless there are objective factors that justify any pay disparity.
• Require manager compensation requests be reviewed and approved by the company’s HR Director.

Get Smart HR

Achieving pay equity can be complicated since it touches all parts of the employee lifecycle, from recruiting and hiring, to performance management and promotion. While challenging, it is possible through thoughtful analysis, transparency, and effective change management. Smart HR offers a pay equity analysis service that takes a deep dive into the client’s compensation policies, practices and procedures and identifies, when present, pay disparities. Should the pay disparities lack justification, Smart HR provides a roadmap toward effective corrective action that incudes a clear communication strategy for transparent communication between management and employees. If you want to ensure compliance with federal, state, and local pay equity laws and ensure your company is positioned to attract the best talent available with competitive and equitable compensation systems, call Smart HR today.