What It Takes to Be a Fair-Pay Workplace

Today’s employees, consumers, investors, and legislators have reached a resounding consensus: Diversity, equity, and inclusion (DEI) in the workplace matters.

And not only does it matter, it should be at the top of employers’ to-do lists in an increasingly competitive labor market. Now more than ever, employers must assess how they can better serve their employees, and in turn, their communities. Number one on the list? Pay equity — ensuring that employees who perform similar work are paid fairly, regardless of their gender, race/ethnicity, or other protected class factors. In other words, equal pay for equal work.

“[E]quitable and fair pay is among the greatest drivers of employee satisfaction,” human resources research analyst and author Josh Bersin said in his HR Predictions for 2022 report. “[I]f you want to win the war for talent in 2022, fair pay may be one of your biggest techniques.”

But pay equity is more than just a competitive tool in a red-hot labor market. It’s an opportunity to foster innovation, drive employee engagement, minimize turnover, maintain (or improve) brand reputation, and attract investors.

In fact, a study conducted by job recruiting site Indeed finds that 81% of workers are more productive and engaged when they perceive themselves as paid fairly. Moreover, that same report says 75% of employees are more likely to apply for a job when the company is known for pay transparency.

With so much to gain from making pay equity a priority, employers who merely pay lip service or treat it as a one-off do so at their own risk. Employers that fail to effectively address pay inequity open themselves to public backlash and legal action, all at the peril of the bottom line. This is especially true with more and more pay equity-related laws being enacted across the U.S. and abroad.

No matter where your organization is on its pay equity journey, a diligent, forward-looking vision is key. Fortunately, there are concrete steps employers can take to demonstrate genuine commitment to fair pay.

The Pay-Equity Maturity Model

In my role spearheading pay equity audit practices for Trusaic, a purpose-driven technology company, I assisted in developing the pay equity maturity model to help employers understand where they are regarding pay equity. It’s a three-level framework that allows organizations to evaluate their current pay practices, progress, and long-term goals.

To start, leaders should ask themselves some basic questions. Do you have pay equity-related policies or initiatives? If so, are they documented and are they being measured? How do you involve your employees? Do you actively communicate progress to all of your stakeholders, including employees, investors, the public, and/or your local community? Have you established your pay equity goals? How are you tracking your progress towards those goals? Is there accountability?

Your answers to these questions will be key to identifying where your organization falls in the model. As you evaluate your pay equity efforts and ultimately determine your position, let these questions guide your progress. With some regularity, revisit them and see if you’ve advanced to the next level of the model.

Below we outline the three levels, discuss the key factors distinguishing each level, and identify how businesses can ascend the model to become a true fair-pay workplace.

Foundational

The first stage of the model includes employers with an entry-level understanding of compensation equity. These types of workplaces typically lack strong DEI policies or representation, haven’t established concrete pay equity or DEI measurement systems, and ultimately have low employee engagement.

Employers at this level usually experience challenges in complying with various local, state, and federal equal pay-related requirements because they don’t have the resources to do so, or they simply aren’t making pay equity a priority. As a result, these employers carry gender and or race/ethnicity wage disparities, whether they know it or not.

This year, two companies in particular demonstrated the risks of not making pay equity a priority.

The first is gaming company Riot Games, which recently settled a $100 million gender discrimination lawsuit that included claims of unequal pay, discrimination, sexual harassment, and retaliation with California’s Civil Rights Department.

In addition to a lump-sum payment to affected workers, the settlement requires the company to establish a reserve for making pay adjustments and funding DEI programs, as well as conduct routine pay-equity audits to proactively identify potential instances of gender and race/ethnicity wage discrimination and remedy them once found.

The second example is entertainment company Activision Blizzard, which reached an agreement with the federal U.S. Equal Employment Opportunity Commission for similar claims. On top of paying $18 million for gender discrimination and sexual harassment charges, the company must enhance its pay-equity policies and DEI practices, as well as hire an internal equal employment opportunity coordinator, among other actions.

These organizations’ agreements with various state and federal governments forced them to incorporate elements of the pay equity maturity model into their overall organizational strategy. Once these organizations implement the requested changes, they will exhibit characteristics of level two of the pay-equity maturity model: programmatic.

How to advance to the next level:

• Establish a measurement system for employee baseline pay.

• Define your pay-equity goals.

• Continuously monitor your baseline pay to track progress towards those goals.

• Communicate commitment and progress to relevant stakeholders.

Programmatic

Employers at the programmatic level of the model have fair-pay initiatives underway, measurement systems in place, and job structures and a pay philosophy documented. They’re compliant with pay-equity laws and are working to improve representation. They communicate goals, progress, and achievement with various stakeholders.

Employers should note that the programmatic level, while significantly further along than the foundational level, is not necessarily a safe zone.

For example, despite making proactive pay-equity efforts, LinkedIn recently paid almost $2 million in back pay to 700 female workers in its California-based engineering, marketing, and product departments who were paid less than their male counterparts. While the company was able to demonstrate that it was making a conscious, proactive effort to foster fair-pay practices, the results of its internal analysis contrasted with an analysis by the Department of Labor. LinkedIn denies allegations of discrimination, but entered into the multi-million-dollar settlement agreement. Since the settlement, LinkedIn has also signed the California Equal Pay Pledge, which among other items, demonstrates a commitment to ensure equitable pay practices across its workforce.

This situation highlights the importance of data quality when conducting pay-equity audits. If you’re making compensation decisions based on faulty data, it can be costly and ultimately create more pay inequity issues. Working with pay-equity experts can help ensure reliable data are powering your pay equity audits. Software too plays an important role, since it can monitor pay equity continuously and validate data.

So, while conducting a pay equity audit is critical for becoming a fair pay workplace, employers looking to advance to the highest level of the pay equity maturity model must take additional action.

How to advance to the next level:

• Validate data to ensure pay equity initiatives are accurate.

• Routinely act on pay equity and representation findings to achieve fair pay.

• Identify root causes and align initiatives to eliminate them.

• Execute planned initiatives to address pay issues, eliminate pay disparities, and improve representation, employee sentiment, promotion, hiring, and retention.

• Achieve or surpass pay equity/DEI standards/industry benchmarks.

• Regularly communicate progress to stakeholders.

• Tie leadership bonus compensation to achieving DEI global standards.

• Obtain third-party certification demonstrating achievement and commitment to fair pay.

Strategic

Employers who have reached this level have worked their fair-pay goals and initiatives into their business philosophy, and they continuously work towards promoting pay equity and DEI. They have reliable data, routinely perform pay-equity audits, and subsequently take action to correct the root causes of pay disparities, if identified. Moreover, employers at this stage of the model solicit employee feedback and use it to drive their pay equity initiatives.

L’Oreal and GM are two examples of companies at the top of the model. GM has regular ESG and CSR reporting in place, demonstrating workplace transparency and an ongoing commitment to sustaining pay equity. GM has publicly shared that it has no overall gender pay gap and reported in 2019 that women made up 55% of its board of directors.

Last year L’Oreal became EDGE certified, which means their pay equity and DEI achievements were reviewed and verified by an independent third-party auditor. Actions like receiving third-party certification prove to employees, investors, and other key stakeholders that the organization’s stance on pay equity is documented and confirmed.

Pay Equity Is Ongoing

Employers making pay equity a priority this year, and going forward, should identify where they stand in the pay-equity maturity model and what it will take to get to the next level. And, if you haven’t started on your pay equity journey, don’t wait any longer.

As the rapidly evolving work environment continues, one thing is clear: achieving fair pay is an ongoing effort that requires long-term commitment. Those eager to compete in the war for talent will pursue it like any other business function. As the saying goes, what gets measured, gets managed.

Copyright 2022 Harvard Business School Publishing Corporation. Distributed by The New York Times Syndicate.

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