What is pay equity?
Pay equity is the act of paying employees the same for the same value of work they perform while accounting for factors like experience level, job performance, skill, effort, responsibility and working conditions involved in doing the work. In short, can be defined as equal pay for equal value.
Equal pay for work of equal value appears in the 1919 ILO founding constitution. The ILO Equal Remuneration Convention (1951) ratified by over 90% of ILO members, reiterated the legal principle that wages should be the same for jobs of equal value, without any discrimination based on sex. In the same context, ILO (2017) issued several guidelines and documents specifying that work is of “equal value” even when the jobs differ but are of comparable value based on skill, effort, responsibility and working conditions.
Many countries across the globe have not to reach pay equity yet as women continue to earn less than men. Women, on average, earn less than men in nearly every single occupation for which there is sufficient earnings data for both men and women to calculate an earnings ratio (UN Women, 2018). In middle-skill occupations, workers in jobs mainly done by women earn only 66 per cent of workers in jobs mainly done by men.
IWPR’s report(2016) on sex and race discrimination in the workplace shows that outright discrimination in pay, hiring, or promotions continues to be a significant feature of working life concentrated in different jobs than men. Even though the work itself may require equal or more effort and skills, it’s valued and remunerated less.
This stubborn inequality in the average wages between men and women persists in all countries and across all sectors because women’s work is under-valued and women tend to be concentrated in different jobs than men. Even though the work itself may require equal or more effort and skills, it’s valued and remunerated less.
In a PayScale report, women earn 81 cents for every dollar earned by men (March 2020). In other words, the median salary for men is roughly 19% higher than the median salary for women. However, this figure represents a 2% improvement from 2019 and a 7 per cent improvement from 2015, when the median salary for men was roughly 26% higher than the median salary for women.
Now more organisation are working towards achieving pay equity in their organisations as companies such as Adobe, Apple, Intel and Starbuck shave publicly disclosed that they have closed the gap (Economic research Institute, 2019). Bloomberg now publishes an annual gender equality index, and the 2019 Bloomberg Gender Equity Index includes 230 companies across the globe recognized for its work on gender equality. Moreover, according to the PayScale Compensation Best Practices Report, 38% plan to conduct some type of pay equity analysis in 2020.
The OECD is also promoting pay equity. A 2012 report on Gender Equality states: “Almost all respondents to the 2011 OECD Survey (95%) have introduced legal provisions that seek to guarantee to pay equality (equal pay of women and men for equal work, e.g. Chile) and 85% to guarantee pay equity (equal pay for work of equal value requiring similar qualifications, but not necessarily the same work). Moreover, 40% conduct regular assessments of jobs of equal value to ensure pay equity (e.g. Austria, Belgium, Spain and Sweden).
However, pay equity cannot eliminate all sources of women’s economic inequality. Other initiatives, including easier access to unionization, protecting public service jobs, raising the minimum wage, eliminating the training wage, ensuring access to not only education, but also training and retraining, employment equity, and access to child and elder care are necessary to improve women’s overall economic equality.
Pay equity policies are, however, necessary to reduce the gendered devaluation of jobs and counter a pernicious form of discrimination against women. This will improve a considerable number of women’s (and some men’s) economic well-being. If women have the opportunity to earn higher wages, they are also likely to increase their attachment to the labour force, thus improving elements of human capital that are related to wages (Will 1999). In the longer run, pay equity programs should be implemented that will raise awareness of the value of women’s work, undermining prejudices that contribute to other forms of labour market discrimination against women. At the same time, it must be acknowledged that conventional approaches to pay equity have several potential limitations and drawbacks, and these limitations are likely to be particularly relevant in the private sector. These problems are not insurmountable, but they do suggest that we do need to think carefully about how pay equity is implemented.
Internal Pay Equity
Internal equity is a comparison of positions within the organization to ensure equal compensation. As companies use market data to determine pay ranges, the data is incorporated into their overall wage structure. The same grade level is allocated to jobs of equivalent importance, and the pay range is the same for those jobs which promote equity. This assures that employees within an organization are paid fairly compared to each other.
External Pay Equity
Competitiveness of wages relative to the market. Pay equity cannot be ensured without the use of industry and regional-specific market data to determine appropriate wage levels for each role.
In a 2018 Pay Practices and Compensation Strategy Survey by Salary.com's, they discovered that by use of HR-reported market data, the most organization can ensure they are keeping up with a rapidly moving job market, and never falling short of fair pay for any of its positions. Nearly 17% of organizations in the survey use market data to ensure pay is competitive. Additionally, 12.5% use market data to help establish pay ranges for positions within the company’s overall salary structure.
Unlike HR-reported data, consumer-reported should never be relied on for external pay points. The correlation between accurate market data and fair pay is not a coincidence.
According to the survey, 23% of companies that agree or strongly agree that their employees are paid fairly used market data.
What factors are compared when determining pay equity?
- Working Conditions
Working conditions cover the physical environment and workplace hazards. For example, some positions provide better pay when they are performed in a designated hazard area. This factor measures the frequency and degree of exposure to disagreeable elements and hazards in the physical and psychological environment, such as deadlines, conflict, health hazards, interruptions, stress, noise from open office environments, crowded conditions, and confined uncomfortable spaces.
This factor measures the skill required to do the job which includes education and experience. For example, if a job requires a high school degree, then a pay difference cannot be given to an employee who has a college degree based solely on the fact that the employee has a college degree. The jobs do not have to be identical to each other, however, the jobs must at least be “substantially equal” to each other.
- Knowledge, Education, Experience
- Interpersonal Skills/Contacts
- Problem Solving/Judgement
This factor measures the level of accountability for things like confidentiality, decisions, quality control, production, financial, human, information and material resources, results, safekeeping and teamwork.
All jobs require physical and mental effort. Mental effort measure the amount of attentiveness and concentration when it becomes a consideration in performing the job. However, physical effort measures the amount and frequency of physical activity and the duration of the job.
How do you support pay equity?
Internal equity and job evaluation are closely related concepts within a company. Job evaluations are tactics used by an employer to assess the value of a given position to the company and the associated pay for that position. To compare the skill, effort, responsibility and working conditions of job classes, as required by the Act, employers and bargaining agents usually use a job evaluation system. A job evaluation system helps in placing value on job classes in your workplace. Job evaluation is proposed as a tool to achieve more equitable pay. When there's a union, the selection of a system must be negotiated between the employer and the bargaining agent.
Having a robust, consistent, gender-neutral method for assessing and comparing the value of different jobs is vital to achieving equal pay. Job evaluation schemes provide a basis for grading and pay structure, as well as a means to check and demonstrate you are providing equal pay for equal work.
Job evaluation provides the data to support an equal pay audit so that equal pay is being checked across:
- Like work – where similar tasks are performed which involve similar skills. Job titles are the most common indicator of like work.
- Work rated as equivalent – where roles have similar job evaluation scores and are in the same grade. A fair job evaluation scheme is required to make this assessment.
- Work of equal value – work which is not the same or rated as equivalent may be of equal value in terms of effort, skill and decision-making. Jobs that may be entirely different in content might be considered work of equal value when the demands made on the employees doing them are assessed.
Pay structures are designed to support both internal equity and external competitiveness.
A well-designed pay structure is key to successful remuneration practices. Although pay is not the only engagement factor for employees, it is most likely to be an attraction factor, and can certainly be a dissatisfier if it is perceived as unfair or poorly managed.
Implementing a well-designed salary structure is critical for any organisation. While the objective is to provide fair and competitive salaries to attract and retain talent, a well-designed pay structure will encourage internal pay parity while ensuring that individual performance is rewarded fairly.
Pay systems that have not kept up with the marketplace may become obsolete, and issues with compression will become more prevalent. Analysis and adjustment of the annual salary structure will typically suffice to remain competitive in the marketplace. Salary structures which are either too narrow or too broad can contribute to salary compression issues. Also, a salary structure with too many salary grades and a low midpoint progression from grade to grade can lead to salary compression. It is important to keep your internal workforce moving consistently with the outside labour market, while also ensuring internal equity.
Building a market-based pay structure from scratch encompasses the following steps:
- Gathering the background information needed for project success.
- Determining the sources of external market data and getting the data ready.
- Conducting market data analysis.
- Developing salary structures.
- Calculating the costs of salary structures.
- Implementing and evaluating the new pay structures
Salary ranges help employers control their pay expenses and ensure pay equity among employees. Employers must have rational explanations for why they pay their employees a certain rate, and defined salary ranges help accomplish that.
According to the Economic research institute, it is common to see salary range midpoint progressions (the per cent difference between midpoints) within a salary structure as follows:
- Administrative/Operative: 5-10%
- Professional/Management: 10-15%
- Executive: 15-20%
A salary range represents the minimum, midpoint, and maximum rates an organization is willing to pay employees doing a job. The midpoint or control point is usually set to provide a company with competitive, equal and equitable salaries on the market based on a competitive market. However, an employer can choose to lead, lag or match the market when compensating employees.
Salary Range Overlap
The overlap gives managers the flexibility to move employees to higher grades when promoted without an overly generous pay raise. Too little overlap causes barriers to promotion and inefficiencies.
According to the Economic research institute (2020), a 50%-60 is considered as a moderate overlap, which should be the goal of a typical pay structure. Salary overlaps above this result into substantial overlaps. This would occur if there are too many salary grades or too little difference in market rates between salary grades which it occurs may lead to paying equity issues.
Salary compression or wage compression arises when the relative worth of a job or the competence and credentials of an incumbent is not reflected well by the pay received by the incumbent. This can occur when there is hardly any difference in the compensation received by differing employees irrespective of any differences in qualifications, expertise, length of service, or duties. Alternatively, it can refer to instances where employees with similar responsibilities, qualifications, skillsets and experience are paid differently. It speaks to the inequity of compensation within an organisation. The most common example of pay compression in companies is where a newcomer is recruited by a company and is paid a similar or higher salary than that paid to the company’s long-serving employees. Such inequities can be rather detrimental to a workforce’s morale.
According to Pearl Meyer study (2017) titled “Salary Compression Practices in the United States”, found that inflation was, in fact, the most common cause of pay compression. The study revealed that more than three-quarters of the participating companies (76.1%) believe the primary cause of salary compression within their company to be because “Longer-term employees started at lower salaries, and annual increases have not kept pace with current market demands/ inflation.”
Companies need to regularly review market salaries to prevent their pay structure from becoming out of sync with the market. This helps to ensure that pay is competitive and satisfies external pay equity. Carrying out annual salary surveys are an effective way to ascertain the level of pay prevailing in the market. This will ensure the pay structure issues adjustments/increases that keep “pace with current market demands/inflation”, and as a bonus, aid recruitment and retention efforts made by the organisation.
Conducting a pay equity analysis
Step to follow when conducting a pay audit/ pay equity analysis:
- Consult with labour counsel and ensure guidance throughout the study
- Consider the use of an external compensation consulting firm.
- Develop a plan and scope of the study, as well as financial and non-financial resources required for pay equity analysis.
- Collect data from all employees.
- Assess key calculations and methodology for pay equity analysis.
- Consider the development of a pay equity management dashboard.
- Ensure required HRMS database of information to appropriately conduct the analysis.
- Run required reports for analysis and conduct secondary analysis to further identify pay equity issues.
- Identify any wage pay differences.
- Take action to mitigate any pay differences.
- Implement pay equity increases to payroll.
- Managers communicate pay equity increases to eligible employees.
- Ensure ongoing pay equity metrics and reporting available for HR and management reference.
- Verify that all pay equity reporting requirements are met.
- Activate the pay equity dashboard in the human resource system.
Benefits of addressing pay equity within an organization
- Knowledge of the work that is required
- Promotes fairness in a company's compensation system
- Strengthens employee relations and morale
- Increases the recruitment and retention of employees because of a fair compensation package
- Improves productivity
- Enhances your competitiveness
- achieving fairness and respect in the workplace
- creating a motivated, happy and productive workforce
- becoming an employer of choice
- attracting and retaining the best and brightest staff
- improving staff retention and thereby reducing turnover costs
- fulfilling a business' legal obligations
- inspiring consumer confidence
- preventing negative public relations issues arising from legal proceedings or allegations of gender pay inequity
- avoiding a costly discrimination complaint
- Attracting government contracting opportunities.
What happens when there is a pay Inequity?
When employees perceive that pay inequities exist, they will take action to correct the situation. This can include slowing down their work, doing less or trying to obtain a raise and many will become disengaged. According to studies carried out by the Gallup Group (2012), disengaged employees are 41% more likely to be absent from work and 22% less productive than their more engaged counterparts. Reduced productivity is undesirable for any organisation, and in the absence of price recovery, spells out reduced profitability. Some workers encourage or pressure their co-workers to slow down and not work so hard. They also adjust their definition of what is fair by focusing on other benefits of the job, such as interesting work, the opportunity for promotion or having a strong bond with co-workers. They can change their basis of comparison by examining jobs in other departments rather than those in their department or team, or they can withdraw through increased absences, tardiness or quitting their jobs.
Keithley Tongai is a Consultant intern at Industrial Psychology Consultants (Pvt) Ltd, a business management and human resources consulting firm.