Pay Equity and Pay Parity are not the same as compensation compliance
With #metoo, the EEOC, and former President Barack Obama shining a bright light on pay disparity by race and gender in the United States, more than 100 companies signed a pledge to reach full pay parity in 2010. Companies who choose this project may be doing so to be on the forefront of progressive issues, because they feel the pressure to please their customers who demand fairness, or they may be doing compensation analysis for the purposes of government compliance. Regardless of why companies are doing so, many are hopping on-board the pay fairness train.
There are a multitude of ways a company can claim to reach full pay parity. Each process comes with many decisions that take time to implement. A pay parity plan typically takes three-to-five years to prepare, develop, and implement. Depending on the maturity of HR departments and processes, parity may also require a multitude of steps and side projects to prepare the organization for the long-term success of such a large compensation journey. Instead of spending time talking about all of the “wrong” ways that companies could choose to do a pay parity process, I’ll outline best practices. While reading this document, if you find you are questioning yourself or others about whether you’ve done these best practices, just know it doesn’t mean anything WILL go wrong with your pay parity efforts. It just means you might find yourself doing more work later to maintain your compensation system than those who do more on the front end.
Before attempting to implement this decision, the organization must ask itself “How strong is our HR department?” Does HR have a seat at the table? Where is that seat? Who is preparing the food? For large organizational change to occur, HR must drive this process but the mandate must come from the Board of Directors or CEO. There are going to be seemingly insurmountable internal and external human roadblocks that won’t understand the business reasons for pay parity. Excuses sound like this: “It’s not the organization’s fault that some people don’t negotiate well.” “It’s not the organization’s fault that people don’t do market research about what they are worth before applying.” There are countless ways to say the same thing: “If someone’s willing to take less than what the job is worth, why wouldn’t I take advantage of it to save the company money?” I understand it, but that’s not what this is about. Parity is all about paying people what they are worth to the company, regardless of any internal or external influence. So…Step 1 is making sure HR has a strong enough mandate from the CEO or Board of Directors to silence any negative beliefs engendered by fairness.
After securing the HR footprint on this project, the next step is to ensure the project is kept at the highest level of confidence. There should be a limited amount of internal individuals working on it. You don’t need the rumor mill to stir. Sign up an external organization to do the heavy lifting and use external legal counsel to funnel information between the organization and your stakeholders. If not, you’ll enter a situation where conversations percolate like, “Hey…wait…I saw that we are doing a pay parity study and my raise was bigger this year than normal…so does this mean that you’ve been paying me unfairly for all 10 years that I’ve worked here?” Let’s just avoid these conversations. You’ve chosen to do the right thing. Now it’s time to plan, design and implement it without triggering too many red flags.
Mandate in place? Check. Proper protection put in place to ensure the success of this project? Check. Great, now we are ready for Step 3. We need to identify what your goals are. Are you an organization that is under the guise of the OFCCP and EEOC? Are we doing this project to help make sure you have no compliance issues moving forward or are we doing this because you want 100 percent full pay parity. For the purposes of this paper, we are going to assume that you want 100 percent full pay parity; however, there are many other goals that we can meet together as well, especially if you are a “cornerstone” organization that finds itself getting audited often by the OFCCP. Step 3 complete – you want 100 percent full pay parity. That’s the easiest step.
Step 4: This is the game changer. Every one of your HR processes and systems were set up without compensation or pay parity in mind. Usually processes are way too subjective and give individual managers too much wiggle room to create disparity based upon their own negotiation tactics, personal belief about the “worth” of a job, and/or personal struggles related to hiring and retention. The more standard and objective processes can be, the greater the chance you won’t be wasting your time on this project. Imagine spending thousands of man hours and potentially millions of dollars to reach the point of the press release that states “XYZ Corporation completed our compensation study and we are pleased to announce that we have 100 percent full pay parity which exemplifies the respect and admiration we hold for each one of our thousands of teammates across the country.” And then two years later, you’re told by someone like me you’re falling into inequity again because the starting salaries offered by your managers are creating problems. For Step 4, depending on the size of the organization, this could take 2-to-3 years to identify, design, and implement new objective HR processes to support the maintenance of a pay parity system. Below is a short discussion of a representative sample of topics that should be discussed and redesigned during a parity process engagement:
• Starting pay processes and procedures: Do you ask for past compensation? You shouldn’t. Do you ask the person what they think they should be paid? You shouldn’t. There are objective ways to ensure the offer you give each candidate is fair and based on the experience they bring to the table. You have to ensure, that experience is verified and it means they are operating from Day 1 as a person with X number of years of experience. If they need to get trained just like anyone else…then they’ll be overpaid just like everyone else.
• Performance Management: How objective is your performance review process? Is it a traditional process done annually in secret? Do you utilize a monthly check-in process and allow employees to have objective say in their reviews and ratings? Level-setting? Validated competency models? Next level development? After number of years of experience, this is where most companies like to attribute variability in employee pay differences. Unfortunately, since most performance review processes are overly subjective, it cannot be taken into account.
• How do you determine who receives opportunities? If your organization is based upon “providing opportunities for people and waiting for them to speak up” it creates another situation where people who are less likely to negotiate, are meeker, or just in general distrust authority figures, will not volunteer or show interest. And this affects racial minorities and females more than men. This process needs to be reviewed to provide a fairer way to offer opportunities to employees.
• Pay Grades: Pay parity is based upon the worth of employees to an organization. The best way to determine worth is to develop compensable factors for each job, determine the complexity of those factors and then assign a value to each of those factors. Add those up, and then compare it to the market value. Then you can merge similarly valued jobs together into a pay band or pay grade. Not doing this? You should.
Step 5: After reviewing all of your HR processes, Step 5 is to frame the implementation of any agreed upon change or process improvement. Communication to employees must be specific and transparent, related to how these changes benefit the success of each individual and the organization as a whole. Once implemented and evaluated, we are now free to begin doing what we started this process to do…look at compensation.
Steps 7-9: Evaluate compensation to determine fairness. Using as many objective measures as possible, we would do a multiple regression and ANCOVA by pay grade to determine a baseline before making adjustments. Based on your yearly budget that you put forth for these adjustments, we would suggest incremental individual changes for every impacted employee over a 2-to-3 year period and re-evaluate the regression models each year during the changes (especially after performance management pay increases) to ensure we are staying on target.
Step 10: Over this period of time and after the process is completed, there are going to be business decisions that impact pay. Mergers, acquisitions, downsizing, market shifts, etc…are all going to require that you continue to monitor the impacts of these business decisions on your pay parity model. It’s not just a commitment to reach pay parity, but a commitment to maintain it.
CEOs of companies like Starbucks, SalesForce, Bank of America, and others will tell you this wasn’t an easy decision, and it also wasn’t an easy process. An organization and its members need to be vulnerable and ready for process improvement. At the end of the day, the organization will be stronger and more capable.