Pay Equity: All You Need to Know

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Delivering fair pay and complying with pay equity legislation are two crucial deliverables for HR leaders. These goals are never easy to achieve! In this article, we look at what exactly pay equity is, why you should prioritize it, and how to address it at your organization.

Contents
What is pay equity? What is pay fairness?
The meaning of “work of equal value”
Being legally compliant: Pay equity
Pay fairness: Going beyond the legislated requirements of pay equity
The most important step in ensuring pay equity and pay fairness

What is pay equity? What is pay fairness?

The core idea of pay equity is that employees should be paid the same if they are doing work of equal value. That means that the different roles are equal in terms of effort and skill. For example, if a company employs male warehouse operatives and female clerical assistants, then both should be paid the same–unless there is a good reason for a difference. Good reasons for differences in pay could include ability, tenure, qualifications, etc.

However, it’s essential to make a distinction upfront between pay equity as a value your organization pursues and pay equity as defined by law in the jurisdiction in which you operate. To help keep track of the two, we refer to pay equity as what is legally required and pay fairness as your organization’s core value.

The table below illustrates where the pay equity and pay fairness may differ.

Fairness vs. equity in pay

  Pay fairness = What your organization chooses to pursue Pay equity = What is required by law
Which groups are analyzed to check for fair pay Typically organizations want fair pay right down to each individual’s level; however, there will be certain groups that get special attention to ensure pay is fair. Which groups are covered will be mentioned explicitly in the law. There is no legal requirement to provide equity for other groups.
How work of equal value is defined Typically organizations have some system of pay grade levels. Usually, jobs in the same pay grade are considered of equal value. The legislation will define how to determine if jobs should be considered of equal value.
Valid reasons for pay differentials between two people in jobs of equal value Organizations will have their own list of reasons for pay differences such as performance, qualifications, tenure, and location. The legislation will define what constitutes a valid reason for pay differences.
Types of analysis to check for pay fairness Organizations will run all kinds of checks to ensure their pay system is fair and effective. The legislation will define the specific analysis required.

You may feel that pay equity legislation goes too far in some places, while in other places, it does not go far enough. Your starting point is always to comply with the legislation. Then you can do any additional work you feel is appropriate to have a fair and effective compensation system in your organization.

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Business leaders expect HR to understand the law in each jurisdiction in which they operate, keep up to date on changes in the law, and ensure the company complies with the law.

The pay equity movement started with a focus on how women are paid, and that is still the most common concern. However, in many jurisdictions there is legislation that covers other kinds of pay discrimination. You need to understand and comply with all the relevant legislation. Furthermore, organizations care about pay fairness in all its forms, not just what is covered by legislation. Pay equity for women is a great place for organizations to start their work on pay fairness, however, it’s only the start.

HR should create systems that pay each individual reasonably fairly; however, while this is important, it doesn’t have the urgency of legal compliance.

The meaning of “work of equal value”

The concept of work of equal value generally means equivalent skill, effort, and responsibility, along with considering working conditions. Jobs of different nature, e.g. manual vs administrative, can be considered of equal value.

This concept is important especially because professions are often dominated by one gender. For example, historically, you might have a profession like mining dominated by men and a profession like nursing dominated by women. However, if nurses were paid less than mine workers, and if an analysis showed mining and nursing jobs were of equal value, that would be considered unfair.

To determine work of equal value across your organization, consider your criteria for job classification.

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Criteria for Job Classification
Iceland Customs set out to achieve gender equality through equal pay. Pre-defined criteria for job classification helped them categorize and compare the jobs to determine work of equal value.

Is pay equity important?

No one doubts that pay equity and pay fairness are important. That’s why asking why these initiatives are important is the wrong question. There are thousands of things that are important, and making the case that there is yet another important thing doesn’t help. We need to ask the question, “What would make this matter a priority?”

What would make compliance with pay equity legislation a priority?

Failing to comply with pay equity legislation can lead to lawsuits and other legal action. Furthermore, facing legal action on a pay equity issue can hurt the organization’s reputation both with customers and its own employees. The reputational damage could potentially be more costly than any fines or settlements.

Compliance is not a black and white issue. You can implement a quick program whereby you ensure there are no grievous violations. This reduces the risk of an expensive lawsuit. You can also implement a more extensive program where you dig deeply to try to ensure your compliance is air-tight and the risk of losing a lawsuit is minimal.

The steps HR needs to take are:

  1. Do a quick analysis of pay based on protected group status (as defined by law). This will help you estimate how good or bad the current pay situation is. 
  2. Discuss with legal counsel the likelihood of facing a lawsuit and the potential cost of a lawsuit.
  3. Consider the impact of a lawsuit on the company brand and the employment brand.
  4. Devote sufficient resources to pay equity compliance to bring the risk down to manageable levels. This will likely require more detailed compensation analysis, corrections to pay, improvement of reward processes, and improved communication.

If steps 1 to 3 paint a dire picture, the CEO would probably agree to spend a large sum to fix the problem right away. One could also easily imagine steps 1 to 3 showing that the organization has complied with the legislation. In that case, the risks are minimal, and HR does not need to do anything to change reward practices.

What HR needs to show is that it has examined the risks, gathered data, and made a prudent decision on the urgency and scale of a pay equity project.

Organizations cannot always avoid lawsuits. However, if HR fails to show diligence in managing the risk, then that will be seen as a major black mark.

Learning about and keeping up to date on the legal aspects of pay equity

HR absolutely has to ensure the company complies with pay equity legislation. The first step for an HR leader is to determine what legislation applies to them. There are several ways of learning about and keeping up-to-date on legislation:

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  • Contact a local HR association
  • Get in touch with your legal counsel
  • Contact a consultant who specializes in reward
  • Subscribe to an information service the provides regular updates on employment law
  • Look at government websites for information
  • Contact knowledgeable peers in other companies

Most HR leaders use many, if not all, of these methods to stay up-to-date. While the laws are meant to be straightforward, it’s helpful to get several points of view so that you have a comprehensive understanding of what is required of your organization.

Let’s look at the kind of things required by legislation in some jurisdictions. That will give you a sense of what types of legal requirements there are. Remember, these are just two examples of pay equity laws from two countries; you may be subject to different rules.

An example of pay equity legislation: the US Equal Pay Act of 1963 (EPA)

The core idea of the Equal Pay Act is that organizations must pay equal wages for equal work. 

Which organizations must comply?

Virtually all organizations in the US are required to comply with the EPA. 

For other related US legislation, such as the Americans with Disabilities Act, very small firms are exempt. As an HR leader, you need to check if the legislation covers your firm before you embark on a pay compliance exercise.

What is equal work?

The EPA defines the concept of “equal work” as: 

  • Performed under similar working conditions.
  • On jobs that require equal skill, effort, and responsibility.

The first point simply means that you can pay people more for jobs that have uncomfortable working conditions. If one shipping clerk works in an office while another works on a cold loading dock, the one in the loading dock can be paid more.

The second point about equal skill, effort, and responsibility implies the need for a job evaluation method that analyzes these factors. Each organization can choose its own method of job evaluation. However, it needs to be confident that, if challenged in court, it can prove that the method does indeed assess skill, effort, and responsibility in a reasonable way; and that it does not contain gender bias. In practice, this means it’s sensible to use a well-recognized job evaluation system such as those offered by the major HR consultancies.

What are valid reasons for unequal pay?

Some exceptions provide a valid reason for a pay difference, such as a seniority system, a merit system, or a system that measures earnings by quantity or quality of production. You may need a legal opinion of whether some criterion you use to justify a pay difference will be considered valid under the EPA.

How to do the analysis

The essence of the analysis is to look at pay for each job grade (i.e., jobs of equal value) and look at cases where people are paid below the average. If a valid reason can justify those differences, then the pay can be left unchanged. If the differences are not justified, you need to correct the pay.

Can you do the analysis yourself?

While it’s easy to describe the principles of how you do a pay equity analysis, the devil can be in the details. It’s advisable to have a consultant or seasoned professional assist you with the analysis or at least check your work.

There is a second reason why you may want to use a consultant rather than do the analysis yourself. Pay equity is a sensitive issue, and using a respected consultant can add credibility.

What happens after you finished the analysis and made any necessary pay corrections?

With the US EPA, nothing happens unless someone files a lawsuit claiming discrimination. If this happens, it will be up to your legal counsel to handle the issue. Of course, they will be relying heavily on HR to prove that the organization followed all aspects of the Equal Pay Act.

The case may not be at all clear-cut. A woman may feel she was discriminated against because she took maternity leave, the company can argue that pay differences resulted from her performance. It is up to the legal teams to battle this out and the judge to decide.

Pre-empting lawsuits

What should immediately pop to your mind as an HR professional is, “Can we deal with complaints before they get to the stage of a lawsuit?” The answer is yes, and so this becomes an essential tool in your pay equity toolkit. Suppose you have good employee relations, where HR and managers proactively keep an eye open for problems and are good at listening to employee concerns. In that case, there is every reason to expect that you can resolve the vast majority of complaints before the employee ever calls a lawyer.

The takeaway from this is that the legislation is reasonably straightforward while being complicated and nuanced enough that you need to know what you are doing. If you have done a pay equity analysis before, you might feel comfortable doing it again. If you haven’t done it, then you will want to use a reputable consultant. Even if you are confident in your ability to do the work, the CEO may prefer that you use a consultant as it gives more credibility to the process.

Another example of pay equity legislation: the Pay Equity Act of Ontario 

Perhaps the most telling thing about Pay Equity legislation in Ontario and elsewhere is that even the simple mini-guide is 34 pages. There is no substitute for carefully working through all the details.

What is most interesting about this particular Act is that employers need to categorize their jobs as:

  1. Female-job class (if 70% of employees are female)
  2. Male-job class (if 60% of employees are male)
  3. Gender-neutral (if the number of employees is about the same)

The analysis then compares female-job classes to male-job classes of equal value. For example, if “trainer” is a female job-class and “driver” is a male-job class of equal value, then the pay rates for those two jobs need to be aligned.

Note that this particular act does not look at pay equity within a job. A different set of regulations covers that.

The takeaway is that there are many different pay equity laws in different jurisdictions and the requirements go into quite a lot of detail. In the case of the Ontario Pay Equity Act, the analysis itself is not that onerous or technically complex. However, you do need to work through each requirement step-by-step.

Pay fairness: Going beyond the legislated requirements of pay equity

Once you have handled the essential work of compliance, you will want to address the broader issue of 

  • The real fairness of your compensation program 
  • The perceived fairness of your compensation program

What would make pay fairness a priority?

If employees feel pay is blatantly unfair, then it corrodes morale. This can lead to lower performance, higher turnover, absenteeism, uncooperativeness, or worse. Pay fairness is also often an organizational value. Even if an organization did not suffer from the potential adverse side effects of fair pay, it should pay fairly purely because it understands that it is the right thing to do.

The steps HR needs to take are:

  1. Do a quick assessment (e.g., a survey) to estimate employee perceptions on the fairness of the pay
  2. Do a quick analysis to estimate the actual fairness of pay–the compensation and benefits team probably can make a pretty good estimate on their own
  3. Based on the assessments, devote sufficient resources to communicating and/or improving pay practices so that both perception of fairness and reality of fairness are at acceptable levels.

Again, it’s easy to imagine steps 1 to 3 indicating a serious problem that the CEO will want HR to address right away. However, if steps 1 to 3 show that pay fairness appears to be “good,” further initiatives on this would not be a priority.

Pay fairness analysis

The primary goal of pay fairness analysis is straightforward. You want to see if there are any individuals or groups whose pay is lower than comparable individuals or groups. When you find a differential, you want to see if there is a valid reason for it. If there isn’t, you want to correct the pay and ensure that this error does not occur in the future.

The actual work of pay fairness analysis is complicated, and there is no end to the analysis you could do. You will likely start with the basics of seeing if pay is fair based on gender and ethnicity, but that is just the start. For example, Google was concerned that employees in highly visible customer-facing roles had an unfair advantage in being promoted to higher-paying jobs. Their pay fairness analysis had to test for this; luckily, they found it was not the case. 

In practice, your compensation and benefits team probably has a pretty good sense of where unfairness may exist in pay. You should check out the areas of most concern.

Managing perceived fairness of pay

Once you are convinced that pay is reasonably fair, you want to consider whether it is perceived as fair. It’s relatively easy to gather data on this by including questions on pay fairness in an employee survey. You can analyze this data by department, level, gender, location, and so on to see exactly where perceived fairness is a problem.

To change perceptions, you should:

  • Demonstrate by your actions that you take pay decisions seriously. For example, you should conduct pay reviews in a consistent way and on time.
  • Communicate that you have careful pay processes. For example, if you have calibration sessions to check that managers are giving fair performance appraisals, let employees know that this process exists.

There is a catch to communicating about pay fairness. The more people think about pay, the more likely it is that some people will conclude it is unfair. In general, it might be a good idea to de-emphasizing pay in communications with employees. Tell them just enough that they are aware that there is a careful formal system for pay decisions, and that managers follow that formal system.

A theory proposed by John Stacey Adams, the Equity Theory, asserts that if employees feel that their inputs at work are greater than their outputs, they lose their motivation, become less productive, or even disgruntled. That’s why it is crucial to maintain a high level of perceived pay fairness at your organization.

Adams' Equity Theory
Perceived pay fairness impacts how your employees feel about their jobs and your organization, and how they approach work.

The most important step in ensuring pay equity and pay fairness

Pay equity and pay fairness analysis seek to determine if there are problems with pay, and if so, fix them. Far better is to avoid having problems in the first place. It’s true that the whole set of compensation practices is meant to be fair. However, one key area makes all the difference: pay level when people are hired or promoted. The big decisions about pay and the starting pay when a person is first hired, and the increment when they receive a substantial promotion. This is where problems are most likely to occur. 

Set up a system of oversight on these pay decisions that explicitly considers whether these decisions are fair or suffering from some kind of bias.

Over to you

Ensuring pay equity at your organization means not only compliance with local laws but also providing fair compensation to all your employees and attracting and retaining the right talent.

The concept is straightforward, but the devil is in the details. Proceed carefully and ensure you consult with internal or external experts as you move forward with your pay equity initiative.

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