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.
A regulation mandated by the 2010 Dodd-Frank financial reform legislation and adopted by the Securities and Exchange Commission in 2015 requires public companies to publish the ratio between the compensation of the CEO and the median annual compensation of every other employee in their proxy statements, starting with the 2017 fiscal year. The regulation was left in place by the Trump administration, although the SEC has made it slightly easier for companies to comply.
Not surprisingly, as companies have started to share this information, much attention has been paid to how much CEOs earn. The net result of this information coming out is the rather unsurprising insight that most CEOs make a lot of money. Companies have rightly been more worried about reporting the median employee salary, which some business groups have said is difficult to calculate and to communicate.
The intent of the rule was that by publishing this information, companies would have an incentive to raise the average wage of their employees to lower their CEO-median employee ratio in comparison to their peers. After all, as the denominator grows bigger, the ratio gets smaller. While there is certainly some truth to this effect, a much more interesting effect is emerging as companies release information about the median wage of their employees. Some of these disclosures are eye-popping; Facebook, for instance, reported a median employee salary of over $240,000, according to the Wall Street Journal, but of course this doesn’t count all the subcontracted workers it uses for services like security, cleaning, and food service at its facilities.
One of the observations we have made about the reporting of the median employee pay data is that, by definition, half of employees are paid below average. While some employees realize that they are paid below average, and are accepting of it, for a significant number of employees this certainly comes as alarming news. But now that more companies are reporting this information, we get to see how median employee compensation compares across companies. Deb Lifshey, Managing Director at Pearl Meyer & Partners, LLC, discussed these comparisons in a recent post at the Harvard Law School Forum on Corporate Governance and Financial Regulation:
In our recent pay equity research at CEB, now Gartner, one of our key findings was that employees tend to perceive pay inequities based on gender or race as larger than they really are. These perceptions have a direct and significant negative effect on retention and morale, creating a bottom-line reason for organizations to communicate more openly with their employees about pay gaps that exist within their workforce, what they mean, and what the organization is doing to address them. Our Total Rewards team has produced the above video to help employers better understand the importance of pay equity perceptions.
Our own Ania Krasniewska also highlighted this subject in her recent overview of the five things most companies don’t realize about pay equity:
[T]he 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.
Chris Martin, Director of Research at PayScale, showcases the findings of a recent study his company conducted based on survey responses from more than 500,000 US employees. The study sought to gauge the impact of various criteria on employee engagement and intent to stay in their current jobs:
Two variables stood out from the pack for both outcomes: whether an employee feels appreciated at work, and whether they feel their organization has a bright future. Employees who feel unappreciated or who think their organization isn’t going anywhere are less likely to feel satisfied at work and more likely to plan on seeking a new job in the next six months.
Although they don’t align precisely, PayScale’s findings here underline a key insight from our Global Talent Monitor at CEB, now Gartner. This quarterly report provides workforce insights on global and country-level changes about what attracts, engages, and retains employees, based on data from more than 22,000 employees in over 40 countries. (CEB Corporate Leadership Council members can peruse the full set of insights from Global Talent Monitor.)
What our latest global data show is that while compensation is the most common driver of talent attraction both worldwide and in the US, other factors are nearly as important to employees in deciding whether to take a job, including stability (related to the future prospects of the organization) and respect. Indeed, respect has been growing in importance as a talent attraction driver over time, especially in the US, Southeast Asia, and India. When it comes to drivers of attrition (what compels employees to quit), compensation is outranked both globally and in the US by future career opportunity, while people management problems and a lack of opportunities for development are also common factors in employee attrition.
The other interesting finding Martin highlights from PayScale’s study concerns employees’ perceptions of pay practices: