By Drs. David Lamoreaux and Wayne Strayer
Achieving and maintaining diversity in the workplace are viewed as important goals by more and more employers across a wide range of markets and industries. Unsurprisingly, a critical component to achieving diversity goals – attracting, developing, and retaining a qualified and diverse workforce – is compensation equity. We are seeing more and more employers choosing to review their compensation practices and to address pay differences before pay equity issues erode employee morale and lead to a loss of important team members, aside from the legal risks that could arise. Effective pay equity studies involve a number of important considerations.
It will surprise no one to hear that compensation differs from employee to employee, and there are productivity-related reasons why pay differences exist. Companies pay for factors, including employee knowledge, skills, and abilities, that are important to achieving market success. The skills and abilities that a firm values vary from employee to employee and, consequently, employee compensation varies. An important part of a pay equity study is identifying and accounting for the employee skills and abilities that explain pay differences. Specifically, these include:
- Employee’s level of responsibility
- Labor market for the particular type of work done by an employee
- Employee work experience
- Local labor market conditions
- Education and training
A pay equity study might reveal that even after accounting for differences in these factors, differences in pay between groups of employees remain. If this is the case, there are options available to a company. Some companies choose to conduct additional research into specific cases of salary differences in order to determine whether there are other productivity-related explanations for remaining pay differences. This typically means involvement by managers who know the employees in areas What if pay differences between groups of employees remain even after accounting for all measurable explanations? Some companies choose to make adjustments to the compensation of select employees. Companies that take this approach find it important to implement rules for adjustments that take into account the skills and abilities of employees and that conform to the company’s compensation philosophy. They pay close attention to where each salary is relative to the compensation grade ranges, and most companies will implement rules that prevent employees with poor performance ratings from receiving pay adjustments.
Any proposed adjustments are carefully reviewed by those within the company who are familiar with company compensation policies and the pay and performance of employees being considered for adjustment—typically the HR and legal teams. For smaller companies, this is a more straightforward task and, in some cases, each adjustment is based on individual review. For large companies, the task is more time-consuming unless the process is limited to very specific parts of the company. Regardless of how any adjustments are determined, all companies pay close attention to how adjustments are implemented and how the adjustments are communicated to employees.
Once a company has invested resources in reviewing and possibly adjusting employee compensation, maintaining pay equity can be done by monitoring pay decisions going forward, including pay at hire for new employees and merit and promotional increases for all employees.
There is much for a company to consider, but the importance of attracting, developing and retaining a qualified and diverse workforce makes staying on top of compensation issues an important, ongoing endeavor.
Dr. David Lamoreaux is an expert in the area of employment discrimination and co-heads the Labor & Employment Practice at global consulting firm Charles River Associates.
Dr. Wayne Strayer is a member of the Labor & Employment Practice at Charles River Associates where his areas of experience include labor and employment litigation, commercial litigation, and evaluation of economic losses.