5 Things Most Companies Don’t Realize About Pay Equity

5 Things Most Companies Don’t Realize About Pay Equity

Pay equity and pay gaps, especially the gender pay gap, have been drawing greater and greater attention in recent years, both among corporate leaders and in the media. As organizations ramp up their diversity and inclusion strategies, they are feeling a need to close these gaps to demonstrate that the organization is serious about not only hiring for diversity, but also ensuring that compensation is fair for women and minority employees.

However, the coverage of pay gaps in the popular press often misses key details about the problem that compensation leaders need to understand to face this challenge effectively. Here are five things you might not know about pay equity that will make a real difference in your ability to achieve it:

1) Pay Equity Actually Refers to Two Things

Pay equity issues in companies can come from two sources: group-to-group gaps and role-to-role gaps. These terms are often used interchangeably in the media, glossing over an important distinction between gaps among different groups of employees, where pay differences are based on something other than gender or race, and role-to-role gaps, where two employees are paid differently for doing the same job. In the first case, you may have women concentrated in lower-paying roles than men (such as female nurses and male doctors, or male principals and female teachers), which may reflect an unfair distribution of expectations and opportunities, but compensation executives can’t directly and immediately control for those factors (although they can collaborate more broadly to influence them). A role-to-role gender pay gap, on the other hand—male nurses earning more than female nurses—is something compensation leaders can and should address.

Both group-to-group and role-to-role gaps contribute to the pay equity problem as a whole, but it is important to recognize that your compensation strategy alone can’t solve them both.

2) The Problem Is Bigger Than It Looks

In the US, the gender pay gap is often reported at around 20 percent, meaning women earn about 80 cents for every dollar men earn (and women of color earn substantially less). At a large-scale global organization, CEB (now Gartner) research has found, the average gap is even wider: 27 percent. However, that doesn’t all reflect pay discrimination: 9 percent is attributable to choice of occupation; 6 percent to organizational factors like size, industry, or geography; and 5 percent to human capital factors like differences in education and experience.

The gap that remains unexplained is 7.4 percent, and that is the discrepancy that can be ascribed to no other factor than gender. This is the role-to-role gap—and that’s the part that rewards professionals can actually fix. HR owns this gap has an obligation to close it before it becomes a serious problem for the organization.

3) It Will Never Be Cheaper to Achieve Pay Equity Than It Is Today

These role-to-role gaps are growing. Ten years ago, that 7.4 percent figure was a full percentage point lower, and ten years from now, it will be close to 10 percent. That means there will likely never come a time when it will cost less for companies to address pay equity than it does today. For a typical large company, that cost is growing by as much as half a million dollars a year. The bigger the organization and its payroll, and the wider the gaps, the faster that cost is accelerating.

Companies looking for a financial justification for addressing pay equity today need look no further than the fact that it will only get more expensive the longer they wait.

4) There Is No “One-And-Done” Solution to Pay Inequality

In the past year, we’ve seen several companies come out with announcements that they had made sweeping adjustments to their compensation budgets and closed their gender and/or racial pay gaps. These efforts are commendable, and earned these companies great press, but how many of them have a plan for what to do if and when the pay gap re-emerges in two years? Addressing pay equity issues through a series of ad hoc audits and adjustments consumes more resources and exposes organizations to greater risk than if they found a way to address them continuously. Leading organizations have figured out ways to conduct equity audits as an ongoing process, rather than a one-off event.

5) Perceptions Matter, and Perceptions Are Worse Than Reality

Remember that the gender pay gap and pay inequality are often conflated in the public consciousness, and most employees don’t have the same nuanced understanding of group-to-group and role-to-role gaps as compensation leaders do. That means they often think pay gaps are larger than they really are or that they exist in places they don’t. In our research, we’ve found that employees tend to overestimate these role-to-role gaps and that women tend to overestimate them more than men.

When employees perceive a pay gap, regardless of whether their perceptions are correct, this has a direct, negative effect on employee retention resulting in a 16 percent decrease in intent to stay. That’s 50 percent worse than the typical impact of a pay freeze. Because pay equity perceptions have such a strong influence on retention and employee morale, it’s incumbent upon organizations to be more transparent and communicative with employees about their pay gaps and what they are doing to close them. Fewer than 20 percent of organizations we surveyed said they communicate this information externally or to employees.

Even as more organizations take on the challenge of closing their pay gaps, and as governments like the UK begin to mandate public disclosure of these gaps, most organizations don’t feel confident that they’re succeeding at addressing pay equity. No matter what, understanding the problem is an important first step toward solving it. Our work on pay equity has looked at several organizations that have taken innovative and proactive approaches to uncovering, communicating, and closing pay gaps. CEB Total Rewards Leadership Council members can read all of our latest research on pay equity here.

And click here for more highlights and insights from CEB’s ReimagineHR conference in Washington, DC.