The Right Process to Identify Pay Inequality and Fix It

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The Right Process to Identify Pay Inequality and Fix It- Navneet Mukund
Data confirms that even in a developed nation like US only 62 % of wage gaps are due to differences in occupations, experience, education, race, region, and unionization.

Pay inequality is real and statistically established. It has always been there, in all societies and nations, industries all and sundry, regulated or unregulated. Legislations to combat unfair pay has had some effect over the past couple of centuries but there is a long way to go still before we can eliminate this evil from our labor market systems.

Data confirms that even in a developed nation like US only 62 % of wage gaps are due to differences in occupations, experience, education, race, region, and unionization. 38% can be attributed to discrimination and unconscious bias affecting women’s wages.

Diagnosis

It is important that organizations dedicate adequate focus and resources to detect, analyse and address such pay inequality promptly and consistently. Pay inequality can be of several types, and the easiest ones to detect are the ones based on gender, race, and national origin, latter two being more relevant in developed markets like US, EU, UK, ANZ while gender is relevant worldwide.

During Hiring

We need to ensure that our hiring managers do not consciously or unconsciously discriminate base salary based on such parameters. Ideally, pay should be based on established pay ranges for every job or group of jobs. A robust job evaluation framework, thus, forms the base and is of utmost importance in ensuring that each job is evaluated for its relative worth and pay range established based on “compensable” factors using data from established sources.

Companies should have recruiter fixing the salaries based on a set of parameters and any deviation approved by the appropriate authority who should NOT be provided details about the candidate other than “need to know” like experience, skills, maturity level in performing the job (newcomer, expert, thought leader), expectations, salary range, an internal median of incumbents doing the same job, and any premium expected due to demand-supply situation in the labor market. 

Existing Employees

Biases can creep up over time engendering pay gaps in organizations. HCM databases and HR analytics dashboards should have sections and commentary to cull out any inequity due to factors of gender, national origin, and race. There should be deep dive to look beyond just org-wide analytics and rule out inequity in cross-sections of country, job functions, sub-functions, horizontal, BU verticals, projects. Often, larger samples may hide these deviations giving us incorrect reassurances. Similarly, very small samples also need to be analyzed and biases need to be confirmed or ruled out.

Prognosis

It makes economic sense to address any known gaps proactively and not only when obligated to. Organizations may need to cough up penalties many times over if they face and lose any class action suits for inequality in pay. However, one should be confident that data is pointing to definite bias before taking any corrective actions.

The thumb rule is that people doing the same job should be paid similarly. Paying similarly does not mean paying same. Ideally, all incumbents in a job should be within the same range. Total reward managers should ensure that the width of ranges is not too wide and informed from careful comparison with similar jobs in the peer group of companies that their organization competes with.

There should be an internal mechanism to capture the comments if the recruiter and hiring manager need to recommend pay beyond the range following a multi-level review and approval escalation matrix. Sometimes such reviews may seem too cumbersome and hence not adhered to, but such artifacts may hold the company in good stead while defending itself against unequal pay litigations. 

Equitable Pay Structure

If companies do the job evaluation well, and follow a scientific unbiased selection process to hire the right people into the right role and pay them right, as per an established structure and within acceptable guidelines, with deviations, allowed only based on prevalence of niche skills necessitated by the demand-supply situation, they would easily come out stronger in case of litigation. 

While inequality is typically found only in base pay, but as we got higher up, variable pay (both short-term and long-term incentives) form a significant portion of senior executives’ pay. The hiring manager (such as CEO and CXOs and their HRBPs) should take care not to let their biases influence pay decisions. Ideally, the comp committee should advise having a compensation structure where variable pay and ESOP are fixed by the management level and not discretionary. 

Being able to demonstrate that there are mechanisms internally to prevent and weed out inequality is important. Even if inequality is established, it could be attributable to a lone manager whose bases were not timely detected despite the company’s best efforts, in which case the penalty may not be severe. 

Companies can choose to also show the commitment to pay equality by including illustrations and commentary showcasing the work done in this area in their management discussion and analysis section of annual reports.

Note- Views expressed in this article are independently and solely of the writer as a seasoned professional of human resources discipline and in no way should be construed as views of his past or present employers. 

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