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6 strategies to help HR and companies close the pay gap

How your company can close the pay gap (and where to start)
6 strategies to help HR and companies close the pay gap
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Amy Spurling is the Founder and CEO of Compt, an HR software enabling employee perks. As a former three-time CFO and two-time COO managing HR and Finance at early and growth-stage companies, she believes that companies and employees can achieve more when employees are fully supported.

Want to understand why HR and company leadership struggle to close the pay gap? Check out Spurling’s piece, Why it’s so hard for your company to close the pay gap

Over the last few years, companies have navigated the pandemic, the hunt for essential workers, the battle for retention in the great resignation, and a transition to hybrid and fully remote work. We’ve talked about all of it at nauseam, but not enough change has happened. As a result, employees across industries and internal departments are overburdened and barreling toward burnout, if they aren’t already.

Employees want true appreciation and support in their jobs beyond the standard benefits package. They’re looking for quality health insurance, meaningful perks, work-life balance, and fair pay—which they’ve hoped for decades.

The Equal Pay Act was passed in 1963, making it illegal for employers to pay women lower wages than men for jobs requiring the same skill and responsibility. This law encompasses all forms of pay for men and women doing jobs that are equal—salary, overtime, bonuses, benefits, etc. So how, and why, are companies still struggling?

6 strategies to close the pay gap

Transparency goes a long way, and new laws requiring employers to publish salary ranges are helping keep companies honest. However, it also takes a societal shift in our reluctance to discuss compensation. In a study on why salary is taboo, the National Bureau of Economic Research discovered that 89% of respondents feel uncomfortable asking colleagues what they earn, and 38% said they wouldn’t share their own salary information either.

🎧 For more intel on pay equity, listen to the Work Reconsidered podcast episode on salary transparency. Or subscribe via: Apple Podcasts | Spotify | Google | Stitcher.

While pay equity is a trending topic right now, it’s at risk of becoming noise if we don’t take actionable steps to close the gap. It won’t be easy, as HR teams face moving targets, messy data, and budget gatekeepers, but it’s going to take more than talk to make an impact far greater than the marginal change we’ve accomplished in the last nearly 50 years. So we’re sharing six of our best strategies to combat pay disparity in your company (and dare we dream—entirely?):

Set annual market rate goals. As a company increases its market pay, it should set annual market rate goals and increase transparent communication about its compensation philosophy. For example, one common strategy might be to pay at the 50% market rate for overall compensation. This requires buy-in from every department to be effective, however. Moreover, shifting compensation in silos only leaves room for inequity because, more often than not, some departments receive 75% or 100% of their target market compensation. Still, other departments may receive 25-50% of the target market compensation.

The companies that attempt this and fail will find persisting disparity among individuals with the same experience, education, seniority, team size, and overarching responsibilities but who are paid differently. For example, we often see this happen among teams primarily of women and employees of color; the teams that receive the higher target compensation are mainly comprised of men.

Be realistic about constraints on funds and get leadership buy-in. The partnership between HR and finance is crucial, though it may be challenging. Even when significant pay gaps are identified, it’s often challenging for companies to budget, even for cost of living increases, without challenges to the bottom line. Finance typically budgets for a specific number of new employees or a percentage increase to salaries (marginally). Major adjustments, those required to close the pay gap, aren’t accounted for in the budget.

When a company adds an employee, or “headcount,” in HR speak, it’s with the intent that that role will drive business goals in specific ways. (At least ideally). But, it’s challenging to assign additional output or revenue growth goals for existing employees in a pay gap, especially in companies that lead with OKR tunnel vision. Moreover, in companies required to answer to public markets and external shareholders, a significant cost increase without a rapid return on the investment likely won’t receive the support needed.

If these behaviors require a significant change in behavior for your company, getting employee and leadership buy-in early on is critical. One way to gain this support is to demonstrate to the finance team that the cost of employee attrition is higher than the adjustments to compensation. Visuals and graphics help show how wide your organization’s pay gap is and how it is skewed within job roles and demographics. Explaining the methodology and the process of these changes helps engage key stakeholders. Alternatively, many HR teams have found success in gaining high-level leadership support (the c-suite). When senior leadership publicly decrees that this is a priority, the financial budgeting aspects take a back seat.

Conduct a pay equity audit. In 2022, women in the US earn $0.83 for every $1.00 a man earns, with black women making only $0.64. These numbers have been stalled for 15 years. According to the National Women’s Law Center, the average woman misses out on $400,000 over the course of her career.

To start, companies should conduct a pay equity audit (PEA), although few are doing it. A 2020 survey of the 922 largest public US companies found only 22% reported performing a PEA between 2016 and 2020. While PEAs can be tedious, the more significant problem is that they’re still reactive. Equity starts at the first touchpoint in hiring and negotiating conversations. Despite unconscious bias training, hiring managers can fall into the trap of favoring and rewarding candidates who look, sound, and think like them. It’s how some companies end up comprised of mostly 40-something white men who all went to insert-Ivy-league-school-here. To help leaders, it’s best to define clear and consistent hiring criteria that can help reduce bias in the interview process. Additionally, consistently paying fair market value eliminates the need for negotiations that often result in the candidate being under-compensated.

Pay attention to promotions. Next, companies should review their promotion practices. Women, especially women of color, lose ground at every stage in the career pipeline. According to McKinsey & Company’s 2021 Women in the Workplace report, women of color account for only 4%of c-suite leadership. And for every 100 men promoted to leadership, only 86 women are promoted. Yet, statistically, women and employees of color ask for promotions and raises as often as men. They’re just promoted less frequently and paid less. Instead of piling on a disproportionate amount of invisible work (taking notes, coordinating office parties, etc.), companies should ensure women have equal access to people and opportunities in the workplace that lead to measurable career advancement.

Understand variable compensation. Taking a hard look at other components of total compensation, specifically variable compensation like bonuses, is a step in the right direction. Sometimes this means the complete elimination of bonuses and an increase in base salary (not widely favored by traditional sales folk). Separating compensation from goals and performance also helps reduce the likelihood of subjectivity and bias.

The ADP Gender Pay Discrimination Study details how incentive pay bias starts from the moment of hire and creates an increasing earnings gap over a career. In addition, a gender gap in base pay exacerbates this incentive gap and results in a lower base wage and a lower bonus.

Create a healthy culture. Do whatever it takes to hire more women and more people of color and then pay them fair market value. Beyond attracting people with equitable compensation, create a workplace where everyone feels like they belong, have visibility at various levels from entry through senior leadership, and present equal opportunities. The impact of equal pay is far-reaching. Not only are employees more engaged when they feel they’re being rewarded fairly, but they’re also more productive and committed to their organization’s mission and goals. We also know that diverse teams perform better and achieve more; we’re overdue to hire and pay everyone fairly.