Hurrah for Pay Transparency laws, right? No more issues for employers or employees around compensation anymore, right? It's all out in the open, right?
NOT
SO
FAST.....
While employers and employees overall seem relieved to have the transparency around pay these days, it has been creating a ripple effect as it relates to pay compression and pay equity issues inside some companies.
Below are suggestions on how to navigate pay compression and pay equity issues at your organizations.
Pay Compression
Pay compression occurs when the pay of one or more employees is very close to the pay of more-experienced employees in the same job, or even those in higher-level jobs. This often happens when employers hire new employees, and the market or inflation dictates a higher salary for them as some of your longer tenured employees.
Pay compression can also happen when a company gives raises to more junior employees to comply with a minimum wage mandates but then they do not adjust salaries of mid-level or senior employees as well. Over time, the salaries become too close together and there is only a slight differentiation between junior and senior level employees, or the line disappears altogether.
Over time, the pay difference between newer and senior level employees becomes compressed. In talent shortages in some industries, you can even have cases of salary inversion where newer or less seasoned employees’ salaries end up higher than their senior colleagues or managers which can create a real mess.
In my experience, most employers are unaware they have a pay compression issue until their HR team audits salaries and honestly were not trying to do anything disingenuous. It is how employers react once they realize they have issues that matters.
Below are some suggested ideas to help rectify pay compression issues:
1. Do a salary audit. What are the ranges of your new positions compared to the ranges of your existing staff? Are your new hires being offered the same or more than your current employees with similar titles and responsibilities?
2. Look at comp ratios. Comp ratios are a compensation metric that compares your existing salaries to the mid-point of your company’s salary ranges. Are your newer staff at a higher comp-ratio that your existing employees? If so, consider adjusting your more senior employees comp ratios to ones that open up the spread within the range to better pace any salary adjustments that occur annually.
3. Think beyond compression. If you discover you have a compression issue, try to dive in and look at exactly what has caused the issue. Do you need to tweak the ranges for new hires? Is the issue in one department or systemic throughout the whole company? Is it just one type of position? All of these questions will help you as the employer to try and rectify any compression issues that arise from your audit.
Pay Equity
Pay equity is an broad term that includes issues related to the fairness of compensation paid by employers to their employees for performing comparable work, without regard to gender or race/ethnicity or other categories protected by law.
Pay equity is also connected with the “social” element of environmental, social, and governance (ESG) criteria. Investors, Boards of Directors, employees, and other key stakeholders are often assessing organizations’ commitments to advance these criteria. For organizations who say they are focusing on DEI initiatives, pay equity is a way for organizations to prove their commitment to any DEI initiative.
Pay equity does not mean that all employees are paid the same. Let me repeat that....pay equity does not mean that all employees are paid the same.
Generally, pay equity focuses on ensuring employees performing comparable work are receiving comparable compensation and that any differences in pay can be explained by legitimate job-related factors and it is important to distinguish those differences.
Below are suggestions on how to address pay equity issues in your workplace:
1. Create a Compensation Philosophy Statement. I have yet to work with a client where I have not suggested helping them to design a compensation philosophy statement. A compensation philosophy statement is a written statement that is transparent to everyone at the company that formally outlines the company’s position about how employee compensation is determined. It explains the “why” behind a company’s position around how pay is set and creates a framework for consistency and for everyone to refer to as needed when having conversations around pay.
2. Conduct a benchmarking analysis annually. Invest in a proprietary industry-specific benchmark tool that allows your company to stay on top of market rates. Run an annual analysis of each position in the company to ensure the salaries are aligned with the market.
3. Allow for Remediation. Rarely do you find companies who can immediately correct all the inequities they uncover in their analysis. Often times my clients will tell me they do not have the budget to rectify pay equity issues that are uncovered in an audit. Work with your finance and executive team to come up with a plan to rectify the issues over time and communicate your full commitment to your employees affected so they know their employer is working hard to do the right thing.
4. Approach Pay Equity as a marathon, not a sprint. Remember that the equity issues you have uncovered have happened over time and rectifying them will also take time as these inequities have happened over the long term. As long as you are being transparent with your employees and communicating that you are working on a proactive plan to correct any inequities, your employees will trust and respect the organization.
Summary
Pay transparency is here to stay. In addition to the eight (8) states implementing pay transparency laws, a total of 21 states have passed salary history bans. If these laws have not hit in a state you are an employer in, I guarantee you there is more than likely legislation on the table to be passed soon.
It is important that employers proactively take a look at the salary of their employees, conduct an audit, determine if compression and equity issues exist, and work to create a plan to break the cycle of any pay compression and/or pay equity issues before they proliferate.
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