Employees today are more likely than ever to demand transparency about compensation practices at their organization. Total rewards leaders agree that pay transparency would benefit the organization in numerous ways. Yet even though everyone seems to be on board, organizations are slower to adopt this practice than you might expect. In our latest research at Gartner, 60 percent of the organizations we surveyed said they had not yet acted on pay transparency at all, while only 14 percent had fully realized it.
So why aren’t we making faster progress toward an outcome all stakeholders agree is the right thing to do? In a session at Gartner’s ReimagineHR event in London last Thursday, Advisory Leader Ania Krasniewska armed the total rewards leaders in attendance with strategies for surmounting obstacles to pay transparency and getting senior leaders and line managers at their organizations on board. Here are some of the most common reasons why organizations shy away from pay transparency, along with some counterarguments HR leaders can use to win over a skeptical CEO:
“It’s just a trend.”
The pressure organizations are facing today to be more transparent about their compensation practices comes from several directions: Millennial employees expect more transparency than previous generations did, employees have more access to (often inaccurate) pay information from outside sources like Glassdoor or PayScale, and governments and the media are advocating transparency as a means of driving pay equity. For an executive wary of pay transparency, it may be tempting to reason that these trends will eventually pass, but there is good reason to believe otherwise.
While Millennials and Gen Z are the employee cohorts most commonly associated with demands for pay transparency, they’re not the only employees who want it. Like other Millennial-driven trends in the workplace today, the younger generation of employees is simply more vocal in demanding things that in fact, employees of all ages would like. Their attitudes also influence their parents, neighbors, and older colleagues. Millennials aren’t the only ones using Glassdoor: Many of the employees who use these external sources to compare their salaries with those of their peers are in senior positions at their organizations. Furthermore, Millennials aren’t going away; they are already the largest segment of the workforce and Gen Z will eventually be even bigger. Gambling that these generations will stop caring about pay transparency later on is a very risky bet.
In April 2017, new regulations came into effect in the UK requiring all organizations with 250 or more employees to publish their gender pay gaps. One year later, the first round of mandatory reports showed that the median pay gap among those reporting stood at 9.7 percent, with 78 percent of firms paying men more than women. On a more granular level, the reports illustrated the great degree to which women’s underrepresentation in senior roles, especially those with high bonus potential, contributes to the pay gap in professional fields.
Now, a committee of MPs is urging the government to expand the reporting mandate to smaller firms, as well as to require companies to publish their plans for closing these gaps, the Guardian reported last week:
All companies with more than 50 employees should have to report their gender pay gap from 2020, said the business, energy and industrial strategy committee (BEIS). Currently only firms with more than 250 employees have to report their gender pay gap, leaving half of the UK workforce without knowledge of their workplace’s gap. The committee said the government had to take fresh action to close the gap, and should force companies to publish action plans and narrative reports about what they were doing to narrow it.
It also criticised the government for “failing to clarify the legal sanctions available to the EHRC [Equalities and Human Rights Commission] to pursue those failing to comply and we recommend that the government rectifies this error at the next opportunity”.
The committee called out those companies that excluded partner pay from their pay gap reports, including many of London’s major law firms, which its chair Rachel Reeves said “made a mockery of the system.”
Laura Hinton, chief people officer at PwC, told the committee that it was time for British businesses to start thinking about gender pay equity as more than just a compliance concern and couple their pay gap reporting with concrete action plans and accountability. The committee is proposing that boards of directors introduce key performance indicators for reducing pay gaps and that remuneration committees be required to explain how their pay policy decisions reflect their commitment to pay equity, according to Personnel Today.
Andy Dean Photography/Shutterstock
In an opinion piece published last weekend, Bloomberg columnist Anjani Trivedi made the economic case for paternity leave, arguing that organizations too often overestimate the costs and neglect the financial upsides of offering parental leave to both mothers and fathers. “The real question,” she points out, “is what the cost would be of replacing that employee,” and paid leave is usually cheaper, Professor Jody Heymann of UCLA’s Fielding School of Public Health and WORLD Policy Analysis Center, tells Trivedi. Considering that parental leave and other family benefits can have a major impact on employee retention, and that the costs of replacing an employee can rise to as much as twice their annual salary, universal parental leave policies may well save more than they cost.
The growing number of employers offering gender-neutral parental leave benefits in recent years reflects the fact that employees, whose opinions count more than ever in the tight labor markets of the US and other advanced economies today, are more sensitive to the availability of paternity leave: Our latest benefits perceptions research at CEB, now Gartner, finds that globally, an additional two weeks of paternity leave improves employee perceptions of rewards to a greater degree than the same amount of additional maternity leave.
In the US, which unlike most countries does not legally mandate paid maternity leave, employees are still more responsive to changes in leave for mothers, but even there, Millennial men who are now starting families are more interested than their fathers were in being actively involved in raising their children. However, many of these men don’t have access to paid parental leave or feel pressured by their peers, their managers, or their own financial concerns not to take advantage of this benefit even when they are entitled to it. The absence of family-friendly benefits like parental leave and flexible work arrangements already drives many working mothers out of the full-time workforce; if fathers do the same, the case for such policies becomes even stronger than it already is.
Following an internal review of its pay practices, Nike is raising wages for more than 7,000 of its employees worldwide, the New York Times reported on Monday, in order to equalize compensation among employees in the same roles:
Nike cast the pay changes as part of its effort to maintain a corporate culture “in which employees feel included and empowered,” according to an internal memo sent to staff on Monday. The New York Times reviewed a copy. The company, which is based in Beaverton, Ore., said the changes would affect about 10 percent of its 74,000 employees worldwide. … Nike also announced changes in how it will calculate employee bonuses, which were based on a combination of corporate, team and individual performance. They will now be determined mainly by the company’s results.
Nike reviews pay every year, the memo noted, but conducted what it called a “deeper analysis” this year as part of its investigation into alleged problems that were driving many women to quit. Addressing the discrepancies found in this audit will be expensive for Nike, but one thing most companies don’t realize about pay equity is that this cost of closing pay gaps increases each year, so it will never be cheaper for Nike (or any company) to correct this problem than it is today. Pay gaps don’t have a “one-and-done” solution, however, so it’s important for organizations to continue scrutinizing pay practices from year to year to spot the re-emergence of these gaps and take proactive steps to ensure that their pay practices remain equitable. (CEB Total Rewards Leadership Council members can read our entire landmark 2017 study on pay equity here.)
The change Nike is making to its bonus calculations is also notable, as it reflects the growing understanding of how variable compensation such as bonuses contributes to pay gaps. This “bonus gap” occurs when more men than women (or more white than non-white employees) are promoted to the high-level positions that make them eligible for bonuses, or when unconscious bias affects the performance judgments managers make in awarding them. The significance of the bonus gap was illustrated in the gender pay gap reports UK employers were required to publish earlier this year: Financial firms in particular found that their bonus gaps, in some cases amounting to over 60 percent, were bigger factors in their overall gender pay gaps than differences in base pay.
A new survey released last week by Willis Towers Watson illustrates the key factors driving US companies to reassess and change their compensation practices. In explaining why they were making these changes, employers cited cost, manager feedback, changes in the marketplace, and employee feedback as the most common motivations. WTW’s Getting Compensation Right Survey, conducted in April 2018, surveyed 1,949 employers worldwide, including 374 US employers whose total workforce comprises more than 5.2 million employees.
Among the US employers, nearly half said they were considering or planning on redesigning their annual incentive plans, while more than a third said they were changing criteria for salary increases. This highlights a trend we’ve been seeing over the past few years, in which employers are rethinking the traditional annual raise and opting for more targeted and differentiated increases or bonuses to reward and incentivize performance. Many employers also told WTW that they were refocusing performance management to include future potential and possession of skills needed to drive the business in the future, as well as introducing recognition programs to provide on-the-spot rewards.
One move many companies are making is toward greater pay transparency, with 53 percent of respondents saying they were planning on or considering increasing the level of transparency around pay decisions. Our latest research at CEB, now Gartner, also finds that transparency is a growing concern among rewards functions. One driver of this trend is the increasing amount of information available to employees and candidates about what other people are earning in their roles, both within their organization and at other organizations, through external sources like Glassdoor or LinkedIn.
In our employee survey, we found that 42 percent of employees who had consulted one of these online sources for pay information had thought about leaving their current employer as a result. These external forms of transparency are making it increasingly important for employers to be more forthcoming about their pay practices and take control of the narrative around compensation at their organization to get ahead of employees who might find (potentially inaccurate) information elsewhere and draw their own conclusions.
Vermont Governor Phil Scott signed legislation on May 11 that will bar employers from asking job candidates about their salary histories during the recruiting process, Littler Mendelson attorney Joseph A. Lazazzero reports at Lexology:
The new law, H. 294, effective July 1, 2018, prohibits asking a prospective, current, or former employee about or seeking information regarding his or her compensation history. For these purposes, compensation includes base compensation, bonuses, benefits, fringe benefits, and equity-based compensation. Under the new law, employers are also prohibited from requiring that a prospective employee’s current or past compensation satisfy minimum or maximum criteria for employment. If an employer discovers a prospective employee’s salary history, the employer may not determine whether to interview the prospective employee based on this information.
Like similar prohibitions in other states, Vermont’s new law still allows employers to confirm a candidate’s past pay if the candidate discloses it voluntarily, as well as to ask about candidates’ salary expectations. When the bill was introduced in the state legislature in January, its sponsors told Vermont Public Radio that it would help close the state’s gender pay gap, which stands at around 16 percent for full-time workers. The original bill also instructed the Vermont Department of Labor to collect new data on gender pay disparities in the state, VPR reported at the time, but this provision does not appear in the final bill signed by Scott last week.
Organizations today are increasingly compelled to pursue pay equity for a variety of ethical, reputational, and business reasons, and HR is the most essential contributor to that effort, though it is not the only one. In a recent article at Talent Economy, Zenefits Chief People Officer Beth Steinberg outlined some key steps HR leaders and professionals can take to commit their organization to closing pay gaps based on gender or race. Her first piece of advice? “Get the leadership team on board”:
Establishing and promoting pay equity starts with leadership. That doesn’t mean that HR is powerless, but HR is handicapped without support from senior leadership. If leadership isn’t already on board, HR needs to make the case for pay equity and show why it’s important to the bottom line. Fairness, especially fair pay, is a huge factor in employee engagement and motivation. When there is a lack of fairness, people become disengaged.
The takeaway? The CEO and leadership team need to understand the importance of paying employees equally. Cultural tenets and values of a company are no longer intangible benefits that reside in a handbook; people want to work for companies that walk the walk, which necessarily includes, but is not limited to, ensuring fair compensation.
Steinberg’s other key action items for HR are to “do the due diligence” and “create a pay structure that employees understand … rooted in research and solid methodology,” and to be prepared for tougher questions about pay equity from more savvy and better-informed employees: “Around compensation, most people can handle a decision that they don’t agree with as long as they understand that the decision was done in a way that’s fair,” she notes. “And the new generation of employees is going to be more vocal in asking about these things.”
Much of her advice here resonates with the actions our Total Rewards team at CEB, now Gartner, recommends that organizations take based on the findings of our major 2017 study of pay equity.