By evaluating incentive pay structures and wage-influencing demographic traits like gender and age, HR leaders can achieve pay parity and improve salary transparency.
By Maggie Mancini
Amid a push for transparency and fairness in compensation, organizational leaders are looking for ways to improve their approach to pay equity without breaking the bank, according to research from Trusaic. By addressing key barriers to achieving pay parity, HR leaders can develop comprehensive, data-driven pay equity programs that can help them address hidden disparities and avoid compliance risk.
Although companies are becoming more vigilant in establishing and monitoring the fairness of their employees’ base pay, the study finds their efforts have not extended to all forms of compensation. In fact, just 13% of organizations include long-term incentives (restricted stock options) and 24% include short-term incentives (annual bonuses) when conducting a pay equity analysis. Though many industries emphasize these incentives as an important part of their total compensation strategy, the study finds that few include them in their pay equity analysis. This can lead to hidden inequities, the study finds.
“I suggest HR leaders ask themselves the following questions as they consider whether it’s time to conduct a pay equity analysis on short-term and long-term incentives,” says Gail Greenfield, executive vice president of pay equity and total rewards strategy at Trusaic.
Greenfield says that if HR leaders answer “yes” to the following statements, they should consider incorporating an evaluation of incentive pay into their pay equity program:
- incentive compensation plays a significant role in the organization’s compensation strategy;
- incentive compensation is not limited to just C-suite executives;
- incentive compensation decisions are not completely formulaic; and
- managers have discretion in making incentive compensation decisions.
The study also finds that it’s important to address pay equity before implementing pay transparency practices within an organization.
“Given the quickly shifting norm toward greater pay transparency, organizations would be wise to implement a regular pay equity review to identify and address pay inequities, as well as implement systems and processes to prevent pay inequities throughout the employee lifecycle,” Greenfield says. “Implementing these strategies will position an organization for greater pay transparency.”
Some aspects of pay transparency are mandatory, Greenfield says. For example, certain states in the U.S. like California, New York, and Colorado require organizations to include pay ranges in their job postings. Similarly, under the EU’s Pay Transparency Directive, job applicants have a right to pay range information from a prospective employer during the application process. Dozens of jurisdictions around the world have pay data reporting requirements in place, she says.
“In my view, mandatory pay transparency and strategic pay transparency are two sides of the same coin,” Greenfield says. “Strategic pay transparency moves beyond what is legally required and refers to the extent to which an organization chooses to share information about its compensation philosophy, policies, and practices.”
Additionally, fewer than half of organizations that are conducting pay equity analyses are factoring in age, the study finds. Greenfield explains that adding age and other demographic characteristics to a pay equity analysis is straightforward and can help eliminate age-based discrimination in the workplace.
“A key part of conducting a pay equity analysis is running a multiple regression analysis that estimates the relationship between an outcome of interest, such as compensation, and multiple factors that are related to that outcome,” Greenfield says. “Starting with compensation as the outcome of interest, relevant wage influencing factors like career level, job function, performance rating, or position tenure, are added to the regression model. Once these factors are accounted for, protected characteristics are added to the model to determine if any are statistically related to compensation.”
She explains that if the analysis determines that these protected traits—like gender, race, ethnicity, or age—are related to an employee’s compensation, a remediation strategy can be put in place to address the inequities.
The study also finds that the most cited barrier to achieving pay equity is the cost of correcting pay inequities that are identified through analysis. This fear is misplaced, the study finds, because there are ways to make progress on pay equity even when resources are limited.
Greenfield suggests three strategies for making progress while spending less on remediation.
- Reduce pay disparities so that they aren’t statistically significant. When conducting pay equity analyses, organizations will flag groups where there are significant pay disparities based on protected demographic characteristics. “One option is for an organization to limit its budget to the amount needed to reduce the size of its disparities to the point where they are no longer statistically significant,” she says. While this won’t fully eliminate the disparity, it can provide incremental change.
- Remediate those in an underpaid demographic class who are the most underpaid. Organizations often generate a prediction of pay for each employee based on wage-influencing factors during an analysis. During this process, the company may decide to remediate based on how far someone is from their predicted pay, Greenfield explains.
- Set a specific budget based on available resources. This budget would be informed by the magnitude of pay disparities identified during the organization’s pay equity analysis and where pay equity fits in with other organizational priorities, Greenfield says.
- Ensure pay decisions are aligned with internal equity. Whether deciding on new hire pay, merit pay adjustments, promotions decisions, or off-cycle pay adjustments, it’s important to take advantage of the pay equity analysis to confirm equity, Greenfield says. The pay models developed during the analysis can be used to generate a predicted pay range for individuals new to the organization, promoted, or experiencing another type of employment change. This allows employers to remain neutral and prevent existing disparities from worsening, she says.
