Pub. 10 2020-2021 Issue 6


Establishing and Maintaining Pay Equity

In a previous article written by L&A in 2018, the growing concern of gender pay gaps and how they impact attraction and retention issues in corporate America was addressed. Through this process, it was discovered that the pay equity gap was not as serious as previously thought — at least to the extent as portrayed in political circles and media outlets. The incorrect messaging generates doubt and forces the questioning of historical practice and future application of compensation programs. As compensation professionals, should we not concern ourselves with ensuring equitable pay programs across our organizations? Is there a need to continually monitor pay programs to ensure a gap is not unknowingly created? The answer is yes, but how do we ensure pay equity is properly established?

While studies have shown that most companies have done a good job of properly aligning pay, independent of race, age or gender, there remains a need to establish and maintain equitable programs based on these factors. Of course, organizations must also be careful not to take this approach too far, disallowing adjustments for more “justifiable discrepancies,” such as tenure, experience, education level and performance. These are the true drivers of competitive programs, and if improperly managed to ensure personal bias is excluded from the process, the effectiveness of compensation programs is compromised.

Strict adherence to pay equity without considering distinctions across employees with similar duties can be detrimental to your employees’ morale and commitment and the integrity of compensation-setting best practices. Compensation programs should take into consideration pay equity of similar positions but should not dictate how those plans reward the employees who distinguish themselves. Knowing when pay discrimination is justifiable and how to mitigate potential litigation in the future is critical to your organization’s success. Below are some methods to consider for establishing the foundation for justification:

  • Developing comprehensive job descriptions that clearly define the differences in responsibility between jobs and each job’s levels.
  • Establishing guidelines for flexible compensation offers, such as starting salary, raises, and promotions when planning incoming prospective employees’ recruitment. This also includes pay negotiations that either an incoming prospective employee, current employee or even the organization may initiate.
  • Keeping detailed records of the reasons for each compensation decision made for each employee.

Consistency in applying these methods for all employees and not deviating without good reason is an absolute necessity. If not, these methods can no longer be considered defensible or justifiable. Additionally, employers can limit liability for potential risk. In particular, by promoting transparency, employers proactively diligently evaluate their compensation practices (i.e., inconsistent or outdated pay policies), which could later be used in audits if cited as a pay equity claim.

The goal then should be to conduct regular pay audits to mitigate the risks. Planning for this endeavor is critical. The initial action of a successful pay audit is to identify the goals and objectives of the audit. It could be that your company is attempting to mitigate legal risk and take advantage of regulatory safe harbors. In other instances, an audit’s purpose is in response to shareholder demands for proof that a pay gap does not exist. It might be that your company desires assurances that employees are equitably compensated. The audit’s purpose ultimately dictates the process and methodology.

The process and methodology approach should be robust and all-inclusive, following these general steps:

  1. Establish the team. This should typically include HR, internal legal, outside counsel and compensation consultants.
  2. Conclude which employees are performing similar or comparable work. This should not be confused with equal work, as comparable is a more broad definition. This stage is where the importance of proper job titling and job descriptions is realized.
  3. Analyzing data based on the job groups identified in step 2. The focus of most companies over the past few years has been on gender inequality. While this is certainly an area of focus, ensuring all protected employee classes are similarly assessed is important. This is a simplified analysis, reviewing one person’s salaries versus the next based on gender, race and age alone.
  4. The next step is applying unique individual factors that impact compensation levels, e.g., experience, tenure, education and performance. This process is more complicated and requires specialized scoring methodologies to rank employees within each job group.
  5.  Identifying and assessing pay discrepancies relative to federal and state laws to ensure they are justifiable. Although other reasons exist, most cases justify pay differential if it can be demonstrated that the variance is attributed to i) a seniority-based system, ii) a merit-based system or iii) a method that quantifies earnings or quantity or quality of production. These allowances also apply to Colorado’s new Equal Pay for Equal Work Act, which went into effect in January of this year. By now, Colorado employers should be familiar with the provisions under the act and be aware of the unique requirements not found in any other state law. Specifically — companies must make efforts to make known all opportunities for promotion to all their current employees on the same calendar day. They must disclose the salary or hourly pay rate or range of every job opening and describe all other benefits offered. The law intends to enforce equitable pay practices and transparency, new notice and record-keeping requirements, and encourage employers to periodically self-audit their compensation practices.
    6) The last step is documentation and taking corrective action where necessary. Discrepancies will probably be identified. These will likely be minimal and the impact marginal, but adjustments will likely need to occur.

There is a need to establish and maintain pay equity across all industries, but specifically, in the Banking sector, research shows the gender pay gap is wider. There is much work to be done; however, the industry is starting to take action to close the gap with key approaches centered around recruitment, retention and career advancement. Additionally, as diversity issues continue to take center stage, companies should consider implementing gender diversity policies to attract, retain and advance female talent.

Although not the systemic problem portrayed by radical media and politicians looking to sway the vote, pay equity is an issue that needs constant monitoring. Given the regulatory and business ethics issues surrounding pay equity, compensation professionals would be remiss to ignore the issue and hope for the best.