As businesses and employees become increasingly transparent about compensation, here are 5 important tips for setting up systems that enable fairer pay structures.
This following is a guest post from Conrad Lee and Stefan Gaertner of Aon.
As many business and HR leaders have learned the hard way, it’s no longer taboo for employees to discuss their compensation at work.
This new reality is driven by several factors, including recent pay equity laws, technological advances (like crowdsourced online compensation data), and changing social norms.
At Aon, we believe making compensation decisions and pay-setting processes more transparent for employees is a good thing — but these changes come with risks and other important considerations private market investors, HR professionals, managers and other business leaders need to be aware of.
How transparency has evolved & where businesses stand today
About 5 years ago, we began to see leading technology companies publish their salary ranges in an effort to be more transparent, both internally to their employees and externally in job postings and on corporate websites. A few leading businesses took the next step by disclosing their gender pay gaps — because what’s really at the heart of the pay transparency movement is solving for unexplained pay gaps that create unfair pay.
In a new era of enhanced transparency, companies have a real opportunity to get out in front of the issue of pay equity and talk to stakeholders about what they are doing to address it.
We’ve met with several talent partners at venture capital firms that are concerned about pay equity gaps in their portfolio companies. During these conversations, it’s clear that VCs want to be aware of outliers, or companies that are way off the tracks when it comes to pay equity.
Knowing about the outliers helps investors ask the right questions or point their companies to third parties who can help conduct an unbiased pay equity analysis. Often, pay gaps are much smaller than anticipated once you dig into legitimate business factors that explain why the disparity exists.
While it may be easy to dismiss the importance of pay equity if you’re managing a small startup, it’s never too early to establish a culture of pay fairness and transparency. In fact, the earlier in your company’s lifecycle you do this, the easier it will be to maintain these systems.
Below are a few of the lessons we’ve learned from working with companies to establish systems that enable fairer pay outcomes.
Tip #1: Create a robust job architecture
In our experience, companies with a comprehensive job architecture that meets the needs of their organization tend to have smaller gender pay gaps. Putting the work in to develop a clear, transparent job architecture is an important first step to ensuring pay equity, as is tightening guidelines and limiting hiring manager discretion when setting starting pay.
Tip #2: Communicate with employees
When employees start comparing pay with one another, they may create their own definitions of fair pay based on what they’ve heard from colleagues or based on their own fairness perceptions. Communicate your rewards strategy with a clear and factual understanding of what it is you are paying your employees for. Experience? Performance? Supervisory responsibility?
It may be necessary to grant supplemental merit increases and make sure that pay reality meets up with your pay story for everyone.
Tip #3: Use research and data
There are tools available to help determine where and why pay gaps exist. At Aon, we have conducted multiple regression-based internal pay equity analyses for more than 100 organizations in the past 2 years. This information can then be used to build a structure that works for both employers and the employees.
Revisit your analysis periodically as your business grows and new headcount and job levels and functions are added.
Tip #4: Learn from your findings
Use your data analysis to uncover truths about how well your compensation philosophy is being followed and make adjustments that align pay with your culture. Separate fact (what performance outcomes you are actually paying for) from fiction (what you think you’re paying for). Is there a big gap between perception and reality?
One big issue for private companies is considering how bonus and equity refresh grants are applied across the organization (i.e., who gets them, when, how much, and based on what criteria).
Tip #5: Perform ongoing maintenance and take advantage of new technology
The same technology that creates a culture of pay transparency also gives employers better measurement data and tools. For both internal and external pay equity assessments, there are processes and tools available that help estimate pay levels while considering multiple characteristics of an organization, such as location, skills or job requirements.
Conrad Lee is a director in the firm’s rewards practice, where he specializes in supporting private companies. Stefan Gaertner is a partner in the firm’s people analytics practice. They can be reached at firstname.lastname@example.org and email@example.com.
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