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Equal Pay – Another Reason to Focus on Compensation Management

We’ve all heard it – equal pay seems to be difficult.

However, pay equity simply means that those in the same role with the same responsibilities and level of performance and competence should receive similar levels of compensation, regardless of age, race, gender, sexual orientation or natural origin.

It always makes me wonder how companies still have not been able to get this. Truly, it isn’t that hard.

A recent WorldatWork study reveals that 60 percent of companies surveyed are monitoring their processes for pay equity, but one in five don’t have any formal programs or practices in place. Really? 60 percent? One in five? Equity analyses should be an integral part of compensation management in any company.

David Smith, Ph.D., CEO and president of EASI•Consult®, pointed out in his article, “ Google’s Equal Pay Lawsuit: One More Tech Firm Challenge,” in the October issue of our newsletter, Perspectives, that the “mismanagement of compensation” has plagued major IT organizations in recent years. He noted a disturbing pattern of discrimination against women and minorities in what should be “enlightened” and modern organizations.

Why is compensation often poorly managed?

Most companies just don’t know how to manage it well.

The most common mistakes are:

  • They live by exception
  • They make uninformed budget decisions
  • They assume they pay equitably and competitively and don’t want to waste money and time on market studies, analyses or expert advice
  • They think that pay equity means everyone should be paid the same
  • They don’t have the expertise and they don’t train their managers

The WorldatWork study concludes that “the biggest barriers to establishing pay equity are the costs required to fix inequities and getting leadership to buy-in to the idea that pay equity is worth the investment of time and resources.”

First of all, inequities can be avoided, and fixing them does not have to be done all at once, as long as there is a reasonable plan in place. Secondly, it’s about protecting your investment.

For most companies, compensation is the biggest line item on their income statement, often accounting for 60 to 70 percent of their operating expenses. Moreover, employees are mostly an “appreciating asset” – the longer we stay, the more productive and knowledgeable we get.

We hire and develop employees to be more competitive and get better results. Hence, compensation is not merely your biggest expense item; it’s also speaks to the fact that you view each employee as an asset. Managing compensation is managing your investment in people.

Compensation skills are often overlooked.

We spend lots of money on developing managers and leaders, but how often are they taught compensation skills? Little importance is given to equipping them with the tools to make the right employment decisions and have effective conversations. How many HR professionals are truly skilled in the field of compensation? If not competent, how then do they guide, consult and support managers?

The study also shows that only 20 percent of companies require managers to explain all pay decisions. Either they just trust managers’ decisions, or it comes back to avoidance and basic human psychology, as compensation discussions are often difficult and emotional, resulting in mistakes, distrust and misconceptions. However, as the numerous court cases show us, the time has passed for ignorance and arrogance.

It all comes back to managing your investment properly….

This means conducting analyses and market studies, putting in place processes, and ensuring that all involved have the skills and information to make informed decisions and communicate effectively.

A proper compensation process should include the following:

  1. The establishment of organizational alignment to determine strategic investments
  2. Knowledge of the competitive labor market
  3. An assessment of the internal worth of jobs to determine their importance unique to the company
  4. A commitment to conducting internal equity analyses based on level of autonomy, authority, complexity, competence, scope and accountability
  5. Determining individual pay based on market pay, the job’s internal worth to the company, affordability, business performance, employee performance, and internal equity
  6. The creation of a review committee

Based on this process, pay decisions are defendable and objective. Candidates’ salary histories are irrelevant, since you pay them for the work they will perform in your company. And determining internal worth to your company allows you to defend why you may pay at either a discount or a premium, especially when jobs are occupied by a proportionally lower number of females.

Nevertheless, only 54 percent of companies conduct regular analyses to identify possible gender biases and only three percent created an internal review committee. Obviously, the process seems to be very broken.

…And good communication.

Then it comes down to how the message is communicated and by whom. We all want to be treated fairly, but perception is psychological.  People need to understand the context – knowing there is a robust process in place to make informed and equitable compensation decisions, and understanding the motivation behind them. Open communication, with empathy, will dissipate a lot of misconceptions and distrust.

Simply put, ensuring pay equity is about treating compensation as a strategic investment: doing the homework, putting in place the right processes and people, and communicating effectively.

Really, it’s not that hard.

Caroline Gibson is a senior consultant at EASI•Consult®. EASI•Consult works with Fortune 500 companies, government   agencies, and mid-sized corporations to provide customized Talent Management solutions. EASI•Consult’s specialties include leadership assessment, online pre-employment testing, survey research, competency modeling, leadership development, executive coaching, 360-degree feedback, online structured interviews, and EEO hiring compliance. The company is a leader in the field of providing accurate information about people through professional assessment. To learn more about EASI•Consult, visit www.easiconsult.com, email ContactUs@easiconsult.com or call 800.922.EASI.

 

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