At a time when people have easily accessible information at their fingertips, employers need to be able to explain their pay decisions now more than ever before. In 2009, President Obama signed the Lilly Ledbetter Fair Pay Act, increasing the liability of employers to ensure equitable pay practices. Since then, numerous high-profile lawsuits related to gender-based pay discrimination have been filed, in industries spanning from the arts to tech – and everything in between.
Editor’s note: This piece was updated in July 2018.
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?
WHAT IS INTERNAL EQUITY?
Internal equity is defined as the fairness of pay in a work environment. This means that employees who do the same jobs and provide the same value should receive the same pay. Internal equity helps promote equality and balance in an organization.
INTERNAL VS EXTERNAL EQUITY
While internal equity focuses on the fairness of payment within an organization, external equity refers to a company’s pay compared to what other employers in the market pay. This is achieved when employees within a company feel as though their pay is fair compared to other workers who are in similar roles in the industry. External equity is important in staying competitive with other businesses in the market.
Why Is Internal Pay Equity Important?
Besides minimizing threat of litigation, there are many other reasons why internal pay equity pays off.
First of all, when employees can trust that they are treated with equal respect, and there is transparency around company pay practices, employee morale is boosted, and loyalty improves.
Secondly, internal pay equity makes good business sense. Being known as a responsible, considerate employer not only improves retention of your current top performers, but it also increases your chances at hiring the top talent in your industry. At the end of the day, being known for paying all employees fairly helps you establish a desirable pay brand.
How Do I Know If My Organization Has an Issue with Internal Pay Equity?
There are ways to find out whether you 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.
You might be uncertain as to whether your company has internal pay equity. Or 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.
If, after reading the list above, you worry that your company may be at risk of pay inequity, avoid panic. Rather, take this as an opportunity to take action and implement a system for effective pay equity. Start by reviewing the following steps to help ensure your pay practices are balanced.
Step 1 – Become an Expert on the Jobs Within Your Organization
It’s important to gain a solid understanding of the types of jobs your employees are doing in all areas of your business. You should identify 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 – 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.
Step 3 – 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.
Keep in mind, however, that even if you have internal pay equity, if your pay is too low compared to the external market, you’re going to have trouble hiring and keeping talent. It is important for employees to feel they are well compensated. Research shows that employees who feel they are paid below market and/or below their peers are flight risks.
Making Things Right
Some companies, such as Salesforce, have built strong employer brands around fair pay. Since 2015 they have spent more than $8 million to address the wage gaps pertaining to race and gender. With 30,000 employees and $10 billion in annual revenue, it is no small feat, and yet, they have successfully built a brand to prove their commitment to achieving internal pay equity.
However, even smaller organizations can make a huge difference. In 2018, PayScale launched the Hero Awards, recognizing the best orgs for fair pay. After examining employee profiles from more than 57,000 distinct U.S. employers, we determined which companies had at least 40 percent of employees reporting high pay fairness.
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? Share your thoughts and comments below.