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Pay Equity

The Ultimate Guide

What It Is, Why It Matters, And How To Achieve It

elements-32Pay equity is top of mind at many organizations—as it should be. Unfair compensation practices have existed for far too long and it’s time to take action. 

If you’re ready to learn more about pay equity, why it matters, and how to improve it at your organization, this article is for you. We will discuss:
  1. What is pay equity?
  2. The importance of pay equity
  3. The state of pay equity
  4. Pay equity laws
  5. How to measure pay equity
  6. When to make pay equity adjustments
  7. Best practices to ensure pay equity

Two-thirds of compensation professionals say pay equity is “very important” or “somewhat important” at their organizations, yet only 21 percent of workers feel they are paid fairly. There’s clearly a disconnect, and it’s evident there’s still a lot of work to be done in this area. So what do you need to know to get started?

What is pay equity?

elements-15Pay equity is the discipline of eliminating pay disparities based on gender, race, and other criteria. This goes beyond pay equality, or equal pay for equal work, to also address occupational segregation and opportunity gaps.

For example, only 3 percent of web developers are Black, while 79 percent are White. Similarly, 73 percent of office and administrative support professionals are women, while only 29 percent of chief executives are women.

Higher-level positions and in-demand skills naturally pay more, but people from marginalized groups tend to be left out of those roles. We can’t achieve true pay equity until we provide equal opportunities to people from underrepresented groups.

The importance of pay equity

Quite simply, pay equity is the right thing to do. It’s good for your people, and it’s good for your business. Focusing on pay equity can:

  • Retain employees. Forty-three percent of workers say they would leave their current position if they discovered they were paid less than a colleague of a different race or gender doing the same job. When the cost of turnover is estimated to be between 90 and 200 percent of the employee’s base pay, that’s an expensive problem to have—arguably more so than closing your pay gaps.elements-18
  • Support recruitment. Job seekers are 75 percent more likely to apply for a job if a company has a reputation for paying fairly. Conversely, if a company received negative attention for having a gender wage gap, 97 percent of women and 82 percent of men said it would, or might, impact their interest in working for that organization. Instead, make your commitment to pay equity known—and follow through.
  • Close the wealth gap. The pay gap widens the wealth gap, or a marginalized group’s net worth. For example, Black women and Latinas experience lifetime earnings losses of up to $1 million or more over a 40-year career. As a result, their net worth is less than 1 percent of the average White man’s. Pay equity can close that gap, drastically improving the lives of people from marginalized groups. 

  • Improve morale. Pay equity shows your employees that you value them, regardless of their gender, race, age, or other demographic status. This can improve team morale and employee engagement, and result in higher overall job satisfaction. In fact, 82 percent of workers feel more engaged and fulfilled by their work when they are paid fairly, and 81 percent say they are more productive and loyal to their employers.

  • Protect your top line. Negative attention related to pay gaps can affect revenue, too. Nearly two-thirds (63 percent) of consumers refuse to buy products and services from companies they do not trust, impacting your top line.elements-04

  • Maintain compliance. Wage discrimination is illegal in the United States, as well as other places throughout the world. The United States Equal Opportunity Employment Commission mandated that organizations pay $20.7 million in monetary relief for victims of pay discrimination in 2019 alone. Following pay equity best practices can help you stay in compliance with the law.

  • Avoid litigation. Lawsuits can be costly, and damage your company reputation. Staying on top of pay equity can help your company follow fair pay practices, and avoid litigation.

The state of pay equity

While we’ve made progress on pay equity throughout the years, we still have a long way to go. People from marginalized groups still experience significant wage gaps.

Women earn 82 cents for every dollar men earn

elements-09In 2021, women earn 18 percent less than men, resulting in an average loss of $10,122 over the course of a year. This can vary by occupation or industry; women in the legal profession earn just 64 cents for every dollar earned by men.

The gender wage gap also varies widely by race:

  • Asian women earn 87 cents for every dollar White men earn, translating to an annual median loss of $8,401. Certain groups face a much wider pay gap. For example, Burmese women earn 52 cents for every dollar White men earn.
  • Black women earn 63 cents for every dollar White men earn. This results in a median loss of $24,110 every year of their careers.
  • Native women earn 60 cents for every dollar White men earn, resulting in a median loss of $24,656 every year.
  • Latinas earn 55 cents for every dollar White men earn, and 70 cents for every dollar White women earn, equating to a median loss of $29,098 every year.

These pay gaps add up to around one million dollars in lost income over a 40 year career for Black, Native, and elements-07Latina women. This varies by state; a Latina in California would lose $1,787,640 over a 40-year career.

These numbers represent the uncontrolled pay gap, which is not adjusted for things like job title, years of experience, industry, location, or other factors. The controlled wage gap is two percent, which indicates that women tend to occupy lower paying roles than men, an additional troubling factor when considering how to close the wage gap.

The racial wage gap extends to men, too

Men aren’t immune to the wage gap either, though the pay disparities are less pronounced than they are for women. Data shows that:

  • Latinos earn 91 cents for every dollar earned by White men.
  • Native American men earn 91 cents for every dollar earned by White men. 
  • Black men earn 87 cents for every dollar earned by White men. 

elements-14Asian men earn $1.15 for every dollar earned by White men—but that doesn’t mean they don’t face significant challenges. Similar to Latinos and Black men, Asian men have higher rates of holding individual contributor jobs than white men, and lower representation in leadership roles (sometimes referred to as the “bamboo ceiling”). In many cases, this caps their lifetime earning potential.

Stock grants further widen the pay gap

Pay equity means more than salary, and data shows the pay gap widens further in companies that offer stock grants to employees. Women own just 47 cents in equity for every dollar men own. And, while women represent 35 percent of equity holders, they only own 23 percent of the equity. Black and Latinx employees make up a very small proportion of employee stakeholders, and hold a disproportionately low percentage of total equity wealth.

Other factors that influence compensation—but shouldn’t

  • Gender identity and sexual orientation: Lesbian, gay, bisexual, trans, and queer (LGBTQ+) women in tech earn 90 cents, and LGBTQ+ men earn 96 cents, for every dollar non-LGBTQ+ men earn. elements-05That equates to a median salary of $38,000 for women in same-sex couples, compared to $47,000 for men in same-sex couples and $48,000 for men in different-sex couples.
  • Disability: Full-time, year-round workers with disabilities earn 87 cents for every dollar earned by those without disabilities. However, people with disabilities are less likely to work full-time, year round, in nearly every occupation. This widens the pay gap further, wherein people with disabilities earn 66 cents to every dollar those with no disability earn.

Pay equity laws

In the United States, it’s illegal to pay people differently on the basis of gender, race, color, religion, sex, national origin, age, or disability—and it has been for decades. elements-10Still, the wage gap clearly persists within these protected groups. 

This is a multi-faceted problem that requires a multi-faceted solution. Salary history bans, increased transparency, and accountability are all playing a role in closing the gap. As these solutions continue to show promise, pay equity laws will continue to evolve so we can continue to work toward pay equity.

 

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The Equal Pay Act

The Equal Pay Act (EPA) requires that men and women in the same establishment be given equal pay for substantially equal work. That is, when their jobs require substantially equal skill, effort, and responsibility under similar working conditions.

This extends to all forms of pay, including salary, overtime pay, bonuses, stock options, profit sharing and bonus plans, life insurance, and vacation and holiday pay. Equal wages must be paid in the same form.

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The 1964 Civil Rights Act

Title VII of the 1964 Civil Right Act protects workers from employment discrimination—which includes compensation—on the basis of race, color, religion, sex, and national origin. Unlike the EPA, Title VII does not require that the claimant's job be substantially equal to that of a higher paid person outside the claimant's protected class. It also does not require the claimant to work in the same establishment as a comparator.

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The Age Discrimination in Employment Act

The Age Discrimination in Employment Act (ADEA) protects applicants and employees who are 40 or older from employment discrimination based on age. This includes compensation, benefits, and promotions. Employers may, however, favor older workers based on age, even when a younger worker or is 40 or older would be adversely affected.

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The Americans with Disabilities Act

The Americans with Disabilities Act (ADA) protects qualified individuals with disabilities from employment discrimination. The law also protects people from discrimination based on their relationship with a person with a disability. This extends to every aspect of employment, including compensation, benefits, and promotions.

The ADA also requires employers to provide reasonable accommodations, unless it would cause undue hardship. However, employers may not reduce compensation to make up for the cost of those accommodations.

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The Lilly Ledbetter Fair Pay Act of 2007

The Lilly Ledbetter Fair Pay Act allows workers to file wage discrimination lawsuits within 180 days of their last discriminatory paycheck. This legislation nullified a Supreme Court decision that action could only be taken within 180 days of the first unequal paycheck.

This extends employer liability and underscores the importance of considering pay equity with every compensation decision. 

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State and local pay equity laws

Federal pay equity laws have been around for decades, but pay discrimination still exists today. Many state and local governments are enacting their own compensation laws to address some of the root issues leading to pay inequities.

For example, Colorado’s Equal Pay for Equal Work Act requires employers to disclose salary ranges in job postings, announce opportunities for promotion to all employees, and keep records of job descriptions and salary information. It also includes a salary history ban, and encourages regular pay audits.

Pennsylvania, California, and Maryland have similar pay equity laws. Pennsylvania prohibits asking a candidate for salary history, and requires job postings to disclose the pay scale. California and Maryland have also implemented salary history bans, but only require employers to furnish salary bands upon the request of an applicant.

State and local pay equity laws are enacted and amended frequently, so it’s important to stay on top of these in each state in which you operate or have remote employees.

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How to measure pay equity

The first step toward true pay equity is to be honest about where your company stands. Analyze pay equity once or twice a year to get a thorough understanding.

There are a few ways this might be accomplished:

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  • Pay equity audit: Partner with an employment law firm to conduct a pay equity audit for legal purposes. These can be time-consuming and resource-intensive, but may show you acted in good faith under some pay equity laws. 
  • Compensation management software: Utilize compensation management software, like Compaas, to quickly analyze pay equity for business purposes. A continuous pay equity discipline can help you make fair pay decisions for job offers and compensation cycles
  • Track metrics manually: Export data from your HR systems to manually track pay equity metrics like compa ratio and average salary. 

When measuring pay equity, it’s important to keep a few things in mind:

  1. Intersectionality matters. It’s not enough to only look at the gender wage gap or the racial wage gap—you should also be comparing pay by intersectionality. elements-08For instance, compare the company overall compa ratio to that of women, White women, Black women, Black men, and so on. Look at each intersectional group to uncover disparities you might otherwise overlook. 
  2. Consider salary, bonus, and stock. Total Compensation can differ drastically from salary alone. Look at all three together to gain a more complete picture of pay equity.
  3. Consider employee impact and internal mobility: Rather than justifying discrepancies by seniority, experience, and education, consider the responsibilities and impact each employee has and whether their compensation and job title reflect that. Give promotions where they are due to ensure employees fall into the correct pay range for their contributions.

When to make pay equity adjustments

When you spot pay inequities, it’s important to address them as soon as you’re able. The most common approach is to run pay equity analyses during compensation cycles. elements-18Make strategic adjustments first, then layer on merit-based adjustments and cost-of-living increases, as applicable.

A typical organization makes pay equity adjustments for between one percent and five percent of their employees, and the average increase is 5 percent. If you find yourself short on budget, you may choose to make adjustments over the course of multiple cycles.

If your company has adopted long-term remote work and has a location-based pay policy, you may also choose to adjust for pay equity during remote workforce transitions. Below-band employees moving to areas with a lower cost-of-market may move in-band without requiring any additional cash. And above-band employees moving to areas with a lower cost-of-market could free up budget to make pay equity adjustments elsewhere.

Best practices to ensure pay equity

Every organization has a responsibility to do their part to close the pay gap. This will require dedication and follow through in every aspect of your business, but it’s important to note that each change can lead to progress. 

Never ask for a candidate’s salary history

Using a candidate’s salary history in compensation decisions can perpetuate an existing wage gap. Even knowing it can influence decisions—so it’s best not to ask. In fact, it’s prohibited in many states and localities for this very reason.elements-15

Following salary history bans, employers increased pay for job changers by about five percent. Women, however, saw an eight percent increase in pay, and Black employees saw a 13 percent increase. This is a strong indication that salary history bans have been successful in helping to close the wage gap.

Reconsider asking for salary expectations, too

Rather than asking salary history, many employers will instead ask for a job candidate’s salary expectations to ensure both parties are on the same page. This practice can also lead to unfair wage gaps.

Women ask for lower salaries than men 65 percent of the time, which could translateelements-27 to a wage gap. For example, Black women in the technology industry expect 88 cents for every dollar White men expect for the same role, at the same company. The expectation gap is mirrored almost directly in the eventual wages paid to these groups—Black women in tech earn 89 cents for every dollar their White, male counterparts earn.

If you do ask for a candidate’s compensation requirements, remember that in some jurisdictions it’s illegal to use this information to determine the pay you offer for a role. Even if it isn’t against the law where you are, it’s a better practice to hold to the pay rate for a position as opposed to lowering it when a candidate signals willingness to accept a lower salary.

Build job grades and salary bands

Take a more proactive approach to setting compensation targets by building salary bands and job grades. This will help you make more fair, strategic compensation decisions during hiring, review cycles, and promotions. Some states even require employers to share salary ranges with candidates during the recruitment process.

Communicate, communicate, communicate

Communicate to company leaders and team members that pay equity is a priority for your organization. Share the steps you’re taking to self-audit, as well as your plan for addressing any pay disparities. elements-40When you make adjustments, let employees know that you’re doing so, and when they will see the changes in their paychecks. Finally, encourage all team members to come forward if they have questions around their compensation or pay equity. This level of transparency will help you build an organizational culture that people want to be a part of—ensuring your organization’s long-term success. 

Mind the opportunity gap

People from marginalized groups are underrepresented in every level of company management. For example, women hold nearly half of entry-level roles, but only 38 percent of manager roles, and 21 percent of C-suite roles. Their representation drops at each job level. We see a similar trend for men of color, who hold 18 percent of entry level and manager roles, and 12 percent of C-suite roles. White men, on the other hand, have increased representation at each job level. They hold 35 percent of entry level roles, 44 percent of manager roles, and 66 percent of C-suite roles.

This opportunity gap is undoubtedly a major contributor to the uncontrolled pay gap. elements-46Stay on top of this by tracking your representation by job level to ensure you’re hiring and promoting people from underrepresented groups into leadership positions. If not, dig into your data to understand why. Is there a lack of internal mobility for people from underrepresented groups? Are they leaving your organization at a faster rate than the general population? Is your recruitment process disproportionately screening them out? Once you identify potential issues, address them through programs like mentoring, sponsorship, and voluntary interview training.

 

Limit salary negotiations

Around 70 percent of men and women negotiate their initial salary offers, but 7 percent more men are successful. Women of color are 19 percent less likely than a white man to receive a raise when they ask for one, and men of color are 25 percent less likely. And when workers bring knowledge of a gender wage gap to their managers, men are more likely to get a pay increase (57 percent of men get a pay increase versus 50 percent of women). Women are more likely to receive improved job title, benefits, bonus, and stock options (7 percent of men and 10 percent of women).

Try to limit salary negotiations. Instead, use your salary bands to set fair, competitive offers and award appropriate raises during your regular compensation cycles. elements-45When you present an offer or a raise, explain why you’ve assigned that particular salary, and what they can do to earn more in the future.

And if you find that negotiations are truly necessary to close candidates and retain team members, that’s a sign you need to revisit your salary bands. Then, adjust compensation for all eligible team members.

Regularly measure pay equity

Even with the best intentions, pay equity can get off track. Measure pay equity once or twice a year to find and address discrepancies, rather than allowing them to perpetuate. Include cash, bonus, and stock to ensure you’re looking at the whole picture.elements-41

Slice your data in different ways to look for pay gaps by gender, race, and intersectionality. You may also drill down by zone, function, or department to see how pay equity measures up among team members who work closely together.

Final thoughts on pay equity

Achieving pay equity requires an intentional, ongoing commitment to equal opportunity and fair compensation. We’re making slow progress, but there’s still much work to be done. It’s time to prioritize pay equity and close the pay gaps once and for all.

Let us crunch the numbers, so you don’t have to

safari-pinned-tabGetting started with pay equity can seem like a daunting task, but it doesn’t have to be. Compaas makes it easy to manage employee compensation equitably.

With Compaas, you can:

  • Get instant insights into current pay equity metrics.
  • See the effects of future salary changes on pay equity.
  • Explore opportunities to improve pay equity.

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