Fair pay is just about market data, right?
“Not really. Maybe. It’s classified.”
President Barack Obama
Market data is vital, for sure, but when it comes to fair pay, it’s only half of the equation. Yes, you need to make sure your salaries are competitive with other companies, but what about fairness within your organization? Two employees with similar experience, doing the same job, should be paid fairly in relation to one another. And that, my dear readers, is where internal equity comes in.
But, we’re not just talking about internal equity today. We’re doubling-down and adding in pay transparency. How much should employees know about compensation structures and how their pay is determined? Some organizations are completely opaque, providing next to no information as to how salaries are determined, or what the pay structures look like. On the other end of the spectrum (and it is a spectrum) there are organizations that provide everything about pay. Employees know how much they make, how much their coworkers make, how much their boss makes. They. Know. It. All.
Most organizations fall somewhere between those two extremes. Finding the right level of transparency for your organization can build trust, reduce turnover, and create a more engaged workforce.
In 📺 Video #3 of our Compensation Analysis series, we break down both internal equity and pay transparency, covering why they matter and how HR professionals can apply them effectively.
First up: Internal Equity
Before we go any further, it is important to make one thing absolutely clear: Pay equity is not pay equality.
Pay equality means that everyone doing the same job gets paid the same amount. Pay equity, on the other hand, means that everyone is paid fairly in relation to one another within the company. Employees in similar roles should earn comparable salaries, but should take into account experience, performance, and contributions to the company.
For example, assume you have two employees, Alice and Bethany, both of whom are Marketing Specialists with the same responsibilities. Despite Alice and Bethany having the same responsibilities, Bethany makes 20% less than Alice. Is this an internal equity issue? It’s possible, but you should do a little more investigation before jumping to that conclusion.
When you look at the employees in relation to each other, you find:
- Alice has 15 years of experience as a Marketing Specialist, compared to Bethany’s 5.
- Alice has been a high performer, earning substantial merit increases every year, while Bethany, while solid, has simply been meeting expectations, and therefore receiving a smaller merit increase.
Does that justify a 20% difference between the two? Likely not. That is a pretty large pay gap. However, it does justify some difference in pay, and is also a very likely indicator that Alice may need to be considered for a promotion.
On the other hand, if Alice and Bethany’s performance indicators and experience are more closely aligned, then it is definitely an internal equity issue, which could, and very likely would lead to dissatisfaction and turnover.
Why does internal equity matter?
- It builds trust between employees and leaders.
- It reduces pay gaps, promotes fairness, and increases employee satisfaction and engagement.
- It increases employee retention by reducing the likelihood of turnover as a result of pay differences.
- It protects against legal risks related to pay discrimination.
Without internal equity, even employees who are paid above market could feel undervalued if (and when) they discover that one of their coworkers is earning significantly more for performing the same work.
How to Assess and Improve Internal Equity
Achieving internal equity requires regular audits and structured pay policies. Here’s how HR professionals can assess and maintain fairness:
- Conduct a Pay Equity Audit
- Compare salaries across similar roles to identify inconsistencies.
- Look for patterns related to gender, tenure, location, and performance.
- Before you do this, consult with Legal any time you are working with data regarding protected classes1.
- Establish Clear Compensation Guidelines
- Use job levels, salary bands, and standardized pay criteria to create a clear framework for pay decisions.
- Help employees understand what factors influence their salaries and how they can expect to progress through the framework.
- Adjust Salaries When Necessary
- If (and likely when) you find discrepancies, consider how and how quickly you can bring salaries into alignment
- Depending on your financial capabilities, this could be done immediately through adjustments, or spread out over time through structured raises.
- Communicate these changes, and timelines clearly to employees to reinforce your commitment to fairness.
- If (and likely when) you find discrepancies, consider how and how quickly you can bring salaries into alignment
Next: Pay Transparency
Pay transparency refers to how much information a company shares about its compensation practices. As mentioned before, it’s a spectrum, and organizations should determine where they want to fall on that spectrum, or what legal minimums they must follow.
- Limited: Employees know generally how pay is structured, but not specific salaries outside of their own.
- Moderate: Salary ranges are made available for roles, but individual employee pay is not made public.
- Full: Everyone knows everything about how pay structured, and how much everyone makes.
“Ok,” you say, “but why would I want to do anything other than the minimum?” Glad you asked!
Similar to the benefits of evaluating equity, how transparent or opaque you choose to be in regards to your pay practices can have significant impacts on your employees:
- Increases trust between employees and leaders.
- Reduces pay gaps by exposing and addressing inequities.
- Enhances employee engagement by providing a clear, visual understanding of compensation policies.
Regardless of how you decide to handle pay transparency, remember that it must be handled carefully to prevent unintended consequences, such as salary disputes or unrealistic expectations.
How does HR approach Pay Transparency?
This isn’t a switch you just flip without doing some serious reflection and discussion with key stakeholders, including employees!
- Decide on a transparency level
- Choose a model that fits the company culture, industry norms, and legal requirements.
- Clearly communicate your compensation philosophy (more on this in a later article)
- With the exception of government jobs (where salaries are often made public), it’s rarely necessary for employees to have access to everyone’s salary. Pay rates, in my professional opinion, are PII2, and should only be disclosed to those who need the information for legitimate business purposes, or by the employee themselves. Keep in mind that the right of employees to discuss their own wages is very likely protected by law3.
- Train Managers on Compensation Discussions
- Equip leaders with appropriate tools and language to explain pay practices with employees in ways that reduce friction and employee dissatisfaction.
Final Thoughts: Balancing Fairness and Strategy
Internal equity and pay transparency play vital, and intertwined roles when it comes to employee satisfaction and retention. Leaders should determine where on the spectrum of transparency the organization should fall, and how they will approach inequities when they arise. Knowing the necessary level of transparency, and having policies and strategies in place when inequities are found fosters trust and engagement.
Footnotes
- EEOC: Who is protected from employment discrimination? ↩︎
- Personally Identifiable Information ↩︎
- NRLB: Your Right to Discuss Wages ↩︎
