The Importance of Internal Pay Equity: How to Ensure Fair Pay
Now more than ever, employers need to be able to explain their pay decisions. Besides living in culture where online salary information is free and abundant, the Lilly Ledbetter Fair Pay Act signed into law by President Obama has increased the liability to employers to ensure that you have equitable pay practices. It is easier now for your employees to win an expensive and embarrassing lawsuit.
How certain are you that all of your employees are paid fairly for their work based on the education, experience and skills they bring to the table? If your company’s internal pay practices were spotlighted, would you be able to effectively explain pay differences between employees in the same job?
Why Is Internal Pay Equity Important?
Besides just the fear of a lawsuit, there are other reasons why internal pay equity pays off.
First, when there is transparency around company pay practices and employees trust that they are treated with equal respect, it boosts employee morale and improves loyalty. Second, internal pay equity makes good business sense because being known as a responsible, considerate employer not only improves retention of your current top performers, but also increases your chances at hiring the top talent in your industry.
How Do I Know If My Organization Has an Issue with Internal Pay Equity?
As you read this information, you may realize that you’re not sure if your company has internal pay equity. Perhaps you know what people are paid but haven’t taken the time to compare their skills, education and experience to that of their peers.
There are ways to notice if you might have an internal pay equity issue at your company. The clues come from not only your employees’ grumblings, but also by taking a close look at your company’s HR policies.
Indicators of Possible Pay Inequity
- Employees give negative feedback in regard to salaries and promotions.
- An audit reveals pay discrepancies among demographics, such as different ethic groups or genders.
- The company lacks a formal system for evaluating and setting salaries, as well as for forecasting promotional ranges.
If, after reading the list above, you worry that your company may be at risk of pay inequity, avoid panic. Rather, make a decision to take action and implement a system for effective pay equity. Start today by reviewing these smart steps that can help get your company’s internal pay practices into balance.
Step 1 – Become an Expert on the Jobs Within Your Organization
It is important to get a solid understanding of the types of jobs your employees are doing in all areas of your business and the skills, education and experience needed to do them. This information will not only inform your internal pay decisions but give you the documentation needed to back them up.
- Get the facts. Evaluate the knowledge, skills and ability (KSA) required of each job or job category. Gathering detailed job information at this point will pay off in the future if you are asked to provide documentation supporting a compensation decision.
- Look for similarities. Create a grouping system for jobs that are similar. This will help you avoid giving different job titles to two employees who have the same job.
- Be fair. Ensure that your grouping system evaluates each employee’s role and contribution by the same criteria. You can then set these groups with similar responsibilities or KSA’s into a common pay grade.
Step 2 – Compare Your Positions with the External Market Value
Conducting an analysis of the external job market will help you know where your salaries stand compared to other companies in your industry. Plus, an external compensation analysis will add more information that can eventually help you justify pay practices.
- Look outside. Use a reliable source when collecting external market pay information to understand how your internal pay ranges for certain positions compare with those of your competitors.
- Get the details. Be sure that jobs reviewed in your external market analysis match as closely as possible – experience level, education, certifications, job location – to your current positions.
- Convince the leadership. As you complete your external market review, keep in mind that the information you’re gathering will be needed to justify pay decisions to the leadership in your organization.
Step 3 – Conduct an Internal Analysis of Your Pay Practices
Now is the time to turn the focus on your current compensation system and search hard for any possible problem areas, such as internal pay differences you can’t explain.
- Let technology help. Take advantage of the many types of reports available though your HRIS or an online salary information site, such as PayScale. These reports can help you quickly glance through your entire company and drill down to possible problem areas, such as a low or high individual compa-ratio.
- Prepare to explain yourself. Once you are aware of any internal pay discrepancies that you feel are justified, you can act create documentation supporting your decision.
- Correct errors. If you do discover pay discrepancies that cannot be justified, take steps to correct them by either freezing certain salaries or boosting others.
Making Things Right
More than anything, taking the time to review your company’s internal pay equity sends the message that you are a company that wants to last a long time and be well-respected within your industry. If you can demonstrate that you have integrity, this solid reputation will attract the clients and employees you need to succeed.
Do you have any questions about maintaining internal pay equity or success stories from efforts to create it? Please write them in a comment below.
Director of Customer Service and Education at PayScale.com
Are you paying your best employees enough to retain them after the economy picks back up? Get up-to-date and make sure your external salary market data is specific enough to the education, skills set and experience of employees you want to keep. Give a PayScale demo a try.