Why Market-Rate Pay Systems Are Unfair, and What HR Can Do About It

As AI-led automation continues to disrupt the workforce and reshape the value of work, HR has an unprecedented opportunity to reverse historically undervalued human-centered skills that can’t be easily replicated by artificial intelligence, according to Nicole Armstrong, founder and CEO of Ellequate. These durable or power skills, such as creative thinking and resilience, will be critical in the new AI age.

However, “the skills that are harder for AI to replace — for example, judgment and relationship building— are systematically absent from the surveys we have relied on to set pay,” said Armstrong at SHRM26 in Orlando. There hasn’t been a good methodology to price them, and they have traditionally been seen as less valuable than technical expertise.

According to Ellequate’s research, this omission has resulted in decades of purely market-driven, unfair compensation practices where these skills are disproportionately tied to outcomes — such as K-12 public school teachers, social workers, and caregivers — female-dominated professions that are among the lowest paid.

AI demand for durable skills has not reversed this practice, even as technical white-collar jobs rapidly become automated and employers shift to skills-first hiring.

“Technical AI skills commanded a 56% wage premium last year, almost double the year before,” said Armstrong. “But critical durable skills still aren’t part of that build out. The danger is that we will continue to replicate those same patterns,” she said, which are encoded in compensation systems.

Credential: AI + HI

Armstrong presented an alternative research-backed model to reverse this trajectory of unfair pay. It is based on four, not one, lenses through which to view compensation: market rate, internal value, skills, and sustainability.

The Problems with Market-Rate Pay

Salary surveys have been intentionally designed to capture standardized technical skills, such as software proficiency, project management certification, or clinical credentials, which are the easiest to benchmark across industries. However, numerous examples illustrate the problems with this approach and show why market data is not neutral.

Salary benchmarks replicate roles across industries but fail to account for the changing internal value of roles within organizations. For example, the responsibilities of a program manager at a small nonprofit organization will differ substantially from those of a program manager at a large corporation. 

Most organizations also have roles that stretch across functions and wear multiple hats. One size does not fit all. Salary surveys price titles — sometimes differentiating by sector, geography, and size — but it is HR’s job to price the context — the internal value of the position and its required skills.

Resource: SHRM Compensation Data Center

Benchmarks also can’t define which roles are load bearing. These are the jobs where your company’s business would likely grind to a halt without them. For example, how many days could a hotel operate without housekeepers? Or restaurants without servers?

Finally, universal benchmarks cannot account for the gender pay gap, which has actually widened; one report noted that it would take 134 years to reach gender parity. Today, the highest paid professions, such as finance and technology, remain male-dominated, while the lowest paid professions continue to be female-dominated.

Managing Pay Equity: A Strategic Toolkit for HR Professionals

The Four-Lens Framework as a Formula for Fair Pay

The four-lens model intentionally defines value inside the organization and uses the market rate as a starting point, not the end point, to define fair pay.

Armstrong’s basic definition of fair pay is compensation that accurately reflects the role’s value. The base pay formula for that value as seen through the four lenses is:

• The market reality.
• The internal value of the role to the company.
• The required skills to do the job.
• A sustainable, living wage.

Individual attributes, such as certifications, tenure, shift differentials, work conditions, and performance (only if bias mitigation measures are in place), are then added on to the base formula.

Arriving at fair pay then requires asking more than, “Are we at market?” For example:

• Instead of “Are we at market?” ask “Are we aligned with our strategy?”
• Instead of “What does this role typically pay?” ask “What is the real value of this work to us?”
• Instead of “Is our pay defensible?” ask “Is our pay fair and defensible?”

If you can’t determine the value of the role without thinking about the person in it, you don’t have a compensation system, you have a series of individual deals, Armstrong explained.

How the lenses are weighted depends on what organization defines to be the most critical to its success and achieving its mission. Ellequate offers a free Fair Pay Index tool to help organizations assess where they stand.

Seminar: Foundations of Compensation

How to Get Started: A Four-Step HR Action Plan

Think of a role that sticks out, one that you suspect needs adjusting. Then use a multilayered approach to develop your action plan by following the four D’s:

• Define your strategy.
• Diagnose the problem.
• Design your solution.
• Build a data-driven business case.

Define and Communicate the Compensation Strategy

Review, revise, or develop your organization’s compensation philosophy. It should articulate in one page or less what your compensation strategy seeks to achieve, how it supports the mission, and how it aligns with the business and operating goals. It must also reflect the current competitive outlook and connect with the total rewards strategy.

Develop talking points for managers to ensure they understand the philosophy and can explain to employees how and why pay decisions are made.

Building a Compensation Philosophy: Key Elements for HR Leaders

Audit Current Compensation Data to Diagnose the Problem

Before conducting your audit, make sure job descriptions are up-to-date. Almost half of HR professionals conduct internal wage audits on a regular basis, according to a SHRM survey of 1,000 HR professionals. More than half of those who do, 53%, seek to improve employee trust and transparency.

“We know that about 68% of employees believe their pay is unfair. When it comes to pay, most organizations have a trust problem,” Armstrong said. “And trust is significantly harder to rebuild than a pay range.”

Look for roles that indicate:

• Wage compression. One of the most corrosive forms of pay disparity is when current employees discover that their newly hired counterparts are being paid more.
• Misalignment. A common problem is when the market value of a role falls short of its internal value to the organization.
• Higher-than-average turnover. Employees don’t stay where they don’t feel they are being rewarded for their contributions.
• Inadequate market value. This often occurs when roles evolve, or combine to become hybrid positions, without updated job descriptions or pay increases.

“You can be fully market compliant and still have a pay system that is deeply unfair and strategically misaligned,” said Armstrong. “Two people could be doing substantially similar work with equivalent skills and experience and be paid 20% differently because of when they were hired, what title they came in with, how aggressively they negotiated, or which manager made the call,” she added.

The Bureau of Labor Statistics Wage Data Center contains free annual and hourly compensation reports for more than 800 jobs across the nation, regions, states, and many metro areas.

Resource: Compa-Ratio Calculator

Apply the Framework to Design a Solution

Prioritize two to three roles to build your case for fairer pay, considering those that are critical to the mission but may be undervalued (for example, roles with highly durable skills or those with high operational impact). To apply the four-lens framework:

• Run a skills assessment.
• Map the technical and durable skills to complete a skills taxonomy.
• Evaluate the importance of the skills to both the role and the organization’s strategic priorities.
• Model scenarios to build data-driven recommendations for pay adjustments.
• Define key performance indicators (for example, retention improvement, reduced turnover, pay consistency, and improved survey scores) by which to measure your success.

Build a Competitive Case for Fair Pay

Citing the high cost of turnover coupled with retaining the employees that are the most valuable to the organization is one way to effectively present your case to leadership. For example, you might say: “I think we have some misalignment in how our budget is allocating funds for our people. I suggest we close this gap so that we’re better managing funds and retaining our top employees,” using data to back up your points.  

Ellequate research across 2,000 organizations in 125 countries found that skills-first employers are 7% less likely to lose their high performing employees. Fair pay is not just about fairness; it is an economic argument for organizational success through competitive advantage.