The Do's and Don'ts of Pay Equity and Transparency

August 9, 2018 Sarah Mulcahy


When we talk about creating a more human workplace, it’s impossible not to talk about compensation. After all, a company can’t claim to be progressive, but also not take the issue of basic fairness and transparency seriously. We’re seeing this come to light more and more in the regulatory environment. Every state is approaching pay equity differently, and the legislation is changing at a dizzying pace.

In the second part of our interview with Tom McMullen, senior client partner at Korn Ferry Hay Group, we talk about the ideal investment level for recognition programs, the truth behind the global pay gap numbers, and why transparency is becoming the new normal when it comes to compensation.

Catch up on part one of our conversation here. You can read the rest below, or click above to listen to the latest episode of WorkHuman Radio, embedded above.



Globoforce: Korn Ferry Hay Group did a study with Globoforce looking at the business impact of recognition. What were some of the main takeaways from that research?
Tom: The pendulum has really swung from the old notion of recognition, e.g. seniority milestone awards, to being much more performance- and business strategy-focused and aligned with values. If a company really wants to focus on customer intimacy, innovation, operational excellence, etc., the most direct way to couple those priorities is through a recognition program.

These are relatively lower-cost programs versus the incentives or base salary programs. But more and more organizations are seeing much higher upside value opportunity for the cost. We've seen a clear trend in implementing these programs primarily to transform the culture of the organization. Recognition systems are very practical ways to make that come alive.

We're also seeing organizations use the information coming from the program, like who's being recognized more frequently, who's recognizing others, etc., and incorporating that into their talent management processes. This is a very robust set of inputs to identify key talent in the organization.

While it is relatively a lower level of investment, the organizations that report the most significant results and the highest level of effectiveness of these programs tend to have investment levels in their recognition programs of at least half a percentage of payroll.
Globoforce: On the topic of pay equity, where do you see the biggest pay gaps? What's the risk if a company doesn't take action to resolve pay inequity in their organization?
Tom: It is a very hot issue, primarily because of the shifting regulatory environment. Recently, California, New Jersey, Massachusetts, New York City – and there are more in the queue – have passed new legislation. While they all vary a bit, there have been some common themes.

Statute of limitations has been broadened. In some states, you can only go back two years for equal pay for equal work violations. Some states are pushing this to six years. There are higher levels of punitive damages. There is more accountability and responsibility on the shoulders of employers versus employees in terms of showing the evidence that they're complying with these regulations.

There are new definitions of protected classes. A recent law passed in New Jersey has 17 different classes of protected groups. So it's not just gender and ethnicity anymore. Companies have to retool their executive handbooks and their reward strategies in terms of how they look at fairness. Many companies have to do new statistical analyses to see if they have inequities.

Also a number of states have been banning the compensation history question. It used to be a pretty nice crutch to say, "Hey Sarah, how much did you make in your previous job?" A lot of states can't ask that question anymore. And the impact is we need to have more buttoned-up hiring ranges, job evaluation processes, and market benchmarking processes. 
In terms of the biggest gap … the gender pay gap issue can mean different things to different people. In the U.S., it's primarily about equal pay for equal work – when we control at the job level, are there gaps? In places like the U.K. and France and Germany, the focus is on the overall pay gap. Instead of equal pay for equal work, it's really about all males versus all females – what's the delta in pay?

Globally, men tend to be paid about 18% more than females. In the US, that number is 21%, and that's largely a function of the distribution in work. In every country, the reason why that pay gap exists is because there tends to be a higher percentage of males in executives roles and higher-paying roles than females. There are also some differences in STEM (scientific, technical, and mathematics fields), which tend to pay better than the liberal arts, and there tend to be more males in those functions. 
If you control salaries at a job level, that 18% global gap starts to dwindle down to about 6% or 7%. If you look at job grade or job title, that 18% starts to get down to single digits. When you further control on same function, same company, same job level, that 18% difference becomes about 1.5% difference. It doesn't totally go away and some companies still have real issues.

The headline of the 18-20% difference is very much true, but it’s much more of a staffing distribution issue. The big opportunity is to have more of a talent pipeline of diverse candidates to take those jobs and then more rapid development programs to get those classes into the higher-paying fields. It's about diversity and inclusion initiatives. It's about career development. It's about broadening our talent pool. That tends to be where the action needs to be focused in companies. 
Can an organization sit on its hands and not do anything? It's becoming less and less of an option to do so because of the changing regulatory environment. It's not just the laws that are changing. Societal expectations are changing.

The mindset of a millennial is very different than the mindset of a baby boomer. The notion of transparency, fairness, and putting things out there that may have been behind closed doors previously, all goes in the mix. Everything we've seen in the media – on the #MeToo movement and pay parity in Hollywood between males and female actors – that clearly goes into the mix as well.

The best companies are also seeing this as an opportunity to do what's right and to enhance their brand and their value proposition. Research shows organizations that have more diverse senior leadership teams tend to have higher financial returns. McKinsey did a study that shows companies that have greater gender diversity at the executive level tend to have 15% higher financial returns. In Fortune 500 companies, women in leadership roles increase ROE and ROI and return to shareholders by about a third.

In our own research, we've seen a two-times difference in employee engagement results between organizations that have better diversity and inclusion programs than those that don't. It's not just the right thing to do, the legal thing to do, but there are business reasons.

Globoforce: Can you clarify what you mean when you say we need more transparency and fairness?
Tom: The notion of transparency is multidimensional. There can be transparency at the overall strategy level, which I'm a big proponent of. If your organization and executives believe in the notion of gender equity, get the word out. Why is it a key principle for you? Why is it good for business? Why is it good for employees? What are you doing about it? Tell that story and you will get mileage. It has to be a true story though; it can’t be hollow words.

At the individual employee level, there's still a conservatism. Whenever you’re talking about pay, a lot of leaders get very twitchy. There are still a number of them who believe your compensation is your business, that you really shouldn't share it with others. If you're a manager, that also makes your life easy.
Globoforce: Wasn't it a law that you couldn't share your salary?
Tom: You're absolutely right. The first company I joined, this was several decades ago, had in their employee handbook if you talk about your pay with a colleague, that could be grounds for termination. You don't see that language anymore. In fact, some states have explicitly passed laws saying that you can't be terminated if you share your information. But there's still a lot of twitchiness with executives who don’t want to go there.

If you receive an adjustment because of gender pay equity analyses, a majority of companies will not tell you that explicitly. Couching those messages in broader terms linked to performance and market and fairness tends to be the theme. Employers get nervous saying, “Hey, we gave you a 3% gender pay equity adjustment because relative to males, you're under paid." Companies don't want to go there.

Globoforce: With these new laws, do HR departments have the resources to continuously be analyzing this data and making sure it's all fair?
Tom: It's tough to be an HR professional these days. HR budgets are not going up. Staffing levels are not going up. This is a new challenge/opportunity for HR. At a minimum, they have to be compliant with the new regulations. We see a lot of HR functions working with either an internal or external legal function and also getting some analytics support. These pay equity analyses tend to be equal parts statistical data analysis, legal issues, HR issues, and change management issues. All those capabilities don't necessarily sit with one function. You've got to bring together a team of people to be able to look at this.

About the Author

Sarah Mulcahy

Sarah is senior content marketing manager at Workhuman. When not writing and reading about all things culture, leadership, recognition, and appreciation, she enjoys iced coffee, running, and spending time with her daughters, Mabel and Eva.

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