Human resource executives should be aware that 95 percent of companies surveyed by The Josh Bersin Co. have not developed an advanced pay equity practice, even though such practices can effectively close unfair pay gaps among workers who have similar education levels, experience and performance ratings and do similar work.
That's according to the human capital advisory firm's recently released report, The Definitive Guide to Pay Equity, which is based on a study of 448 global companies and 24 of their management and HR practices. The study also found that while 71 percent of CEOs identify pay equity as a critical factor in their people and business strategy, only 14 percent dedicate sufficient funding to address pay equity issues.
The findings come as the shortage of skilled workers, inflationary pressures and higher interest rates have convinced many employers that there's an advantage in offering higher pay packages to new employees while keeping existing workers at the same pay.
"It's sort of a new factor in the way CEOs and chief financial officers think about rewards and pay and culture, which is that if they hire the really, really best person, they can just pay them a ton of money and everybody else can get a lot less because this new superstar is going to be a hundred times more productive than everybody else," said Josh Bersin, global industry analyst and CEO of The Josh Bersin Co.
"This research is proving the opposite to be true, which is [that] for a reasonably good-size company, that type of pay model blows up in your face," Bersin added.
Unequal pay practices also pose costly legal risks, he noted, citing a 2022 class-action lawsuit and settlement in which Google agreed to pay $118 million after being accused of systematically underpaying women.
Companies that shun pay equity efforts are harmed in other ways as well.
According to Bersin, when whole groups of people are underpaid and they know it, they carry a sense of unfairness with them that curbs their enthusiasm, making them less likely to perform at a high level when they collaborate with team members. Additionally, the company is more prone to suffer reputational damage and quiet quitting by employees.
The pandemic has helped drive the pay equity discussion. Remote and hybrid work have become lasting features of the global health crisis and are complicating employers' decisions about employee promotions, said Beverly Tarulli, clinical assistant professor and lead faculty for the Human Capital Analytics and Technology program at New York University's School of Professional Studies.
"If you see employees frequently at the office versus employees you don't see regularly, it could have an impact on performance ratings and promotions," Tarulli said. "To the degree that performance ratings feed into an employee's pay, which if you are a pay-for-performance organization they certainly would, then that could absolutely have an impact on pay equity over time."
For the 5 percent of companies in the Bersin report that have achieved pay equity excellence, including Microsoft, SAP, Nestle and Heineken, the report notes that pay equity is a significant factor in these companies being 2.1 times more likely to attract needed talent, 1.3 times more likely to create a sense of belonging and 1.5 times more likely to engage and retain employees.
As companies decide how to develop pay equity programs, Tarulli said CEOs should get ahead of the issue, especially since new college graduates say they want to work at organizations they perceive to be fair.
"Fairness is a huge concept, particularly for younger employees. If your company is able to talk about pay equity, it can be a very powerful part of your company brand and your value proposition to new hires," she said.
Brian Levine, partner and pay equity leader at Merit Analytics Group LLC, a New York City-based people analytics company, said he worked with 50 companies last year as they conducted proactive analysis to discover inequities in compensation. Many of them have since disclosed details about their pay equity activity and results.
These companies have also taken action, such as increasing pay for workers identified as underpaid.
"Companies now not only disclose what they are doing in terms of their process, but they also disclose results, and they do that for a couple of reasons," Levine said. "One is that there is increased pressure on them to disclose and share information, but the other is that they know that in doing that, it helps their employment brand."
For those companies that need guidance, the Bersin report outlines 12 essential pay equity practices. The top three are:
- Enable leaders to understand and communicate the importance of pay equity.
- Prepare managers to communicate pay equity adjustments.
- Approach pay equity as something that goes well beyond a legal or compliance issue.
The report also recommends several actions for HR and business leaders as their pay equity programs begin and mature:
- Start a pay equity project in a specific area to solve a pressing business problem.
- Identify a strong leader who can develop needed organizational capabilities.
- Bring in a consulting partner to add needed expertise to the project.
- Incorporate considerations for skills, capabilities and performance levels when reviewing "equal work."
- Transparently communicate pay equity work internally and externally, and train managers so they can adequately communicate with their team members.
- Embed equity considerations into all business decisions.
The report also outlines the pivotal role the CHRO should play in building pay equity programs.
"The CHRO plays an active leadership role, bringing together the CEO, C-suite, finance, IT, operations, DEI [diversity, equity and inclusion], sales and marketing, legal, and communications to define the new reality together—a reality in which every person has crystal-clear work goals, understands required skills and experiences, and understands why they are paid what they are paid," the report says.
To ensure success, Levine added that C-suite leaders should embrace or sponsor pay equity initiatives and support funding to rectify pay inequities when they are discovered.
Executives "should be engaged enough in the process to ensure they can stand behind the findings," he said.
"If the budget for adjustments is not clearly established and assumed to be 'carved out' across the different layers of the business, perhaps those adjustments won't ultimately be made. That commitment at the top really does matter, both the stated commitment and the actual availability of the dollars to make the necessary pay changes."
Nicole Lewis is a freelance journalist based in Miami.