Do Variable Pay Practices Contribute to Gender Pay Discrimination?

Do Variable Pay Practices Contribute to Gender Pay Discrimination?

Here are answers to some FAQs regarding the importance of pay equity and potential strategies to achieve it.

Within the past few years, federal and state agencies have zeroed in on race and gender pay discrimination through new laws and regulations. A key development in the analysis of pay disparities has been the shift in focus from base pay to a more comprehensive analysis of total compensation. But to what extent do pay disparities occur for discretionary pay versus base pay? Are patterns of pay inequity random or additive across the different components of total compensation?

At a Workplace Spotlight webinar, we discussed critical insights on groundbreaking new research to help answer these questions. The study suggests that lower incentive pay may create a hidden bias against the promotion of qualified women versus their more highly compensated male peers, because the promotion might reveal a substantial disparity in total compensation occurring over a period of several years. In other words, lower negotiated incentive pay at time of hire may become a limiting factor that prevents career advancement years down the road.

These gender-related pay gaps have become a top-of-mind issue for workers and government alike. Here are answers to some of the most frequently asked questions regarding the importance of pay equity and potential strategies you can use to meet your goal of pay equity.

Q. What are the implications of the ADP Gender Pay Discrimination Study for talent management practices?

A. The ADP study demonstrated that potential bias in incentive pay occurred at the moment of hire and but subsequently created a cumulative gap in total career earnings over time. Worse, if there was gender gap in base pay, the incentive gap had a multiplier effect. In other words, a lower base wage multiplied by a lower bonus percentage simply expanded the wage gap between men and women.

The underlying implication is that pay bias needs to be addressed at each step of an employer's talent management lifecycle, from the moment of hire, through performance reviews and promotions. It also suggests that current employer approaches to gender pay equity; e.g., taking a snapshot of pay at a moment in time won't be very effective in mitigating the underlying causes of pay equity.

Rather employers need to be thinking about how they transform talent management policies and process flows to ensure the elimination of gender bias at the point in time when it occurs. This means, among other things, introducing statistical tests and dashboards that are tracked on an on-going basis instead of a one-off audit. It also means that employers may have to provide new guidelines for negotiating the incentive pay of new hires. Hiring managers may bristle at the idea of not being able to negotiate incentive pay to get the best deal. The flipside, however, is that supervisor discretion around negotiating incentive pay is more likely to have an adverse impact on female job candidates.

Q: Why should employers transform their commitment to pay equity into an action policy?

A: Women now constitute 48% of the total U.S. workforce. Gender bias prevents employers from fully engaging and leveraging female employees, or accurately measuring the contributions of employees. While perceptions matter, results matter even more.

That said, most employers want to do the right thing by their employees and are eager to create a fair and vibrant workplace. But it is easy for pay equity issues to get lost in day-to-day activities. Each year, companies recruit, promote, transfer, and terminate millions of jobs throughout the country. Without proper attention, the sheer volume of staffing activity alone will rapidly break down even the most robust pay structures. Mergers and divestitures multiply the effect. Amidst this perfectly normal chaos, many things can happen, and then somebody asks, "Why is Fred making more than Mary?"

This type of question should be viewed as the norm, not the exception. It is a natural human tendency for associates to observe and compare their relative contributions and rewards against those of their peers. The way an employer responds when these questions arise, both in style and substance, will essentially define their organization. Beyond the potential legal and compliance risks of a pay equity lawsuit, the employer is also providing insight into the fundamental characteristics of their organization. Is this an employer with a clear alignment between people and strategic outcomes? Is associate performance accurately measured and appropriately rewarded? These are questions that any potential new employee or investor might be interested to know. Smart companies already have a commitment to pay equity, leveraging data proactively to spot and fix issues. At that point, the commitment to pay equity crosses the threshold to become an actionable policy.

Q: How can implementing an equal pay for equal work policy help elevate an organization as an employer of choice?

A: Proactive analysis may show where potential pay equity disparities may occur, but it won't automatically transform the workplace to become more equitable. Employers with problematic EEO-1 or compensation audit results can do one of two things. They can adopt a purely defensive strategy to ensure compliance, or they can take additional steps to identify and address the organizational issues that may underlie poor audit results. Organizations that take positive corrective action to fix gaps are far more likely to be perceived as an employer of choice. Successful companies share a common trait. They always strive to do better.

Q: Who are the stakeholders that employers need to communicate with regarding pay equity? How can a company increase pay equity awareness?

A: Employers have multiple stakeholders to consider for pay equity communications. Obviously, government agencies – federal, state, and even local – are important recipients for compliance reporting and follow-up. More broadly, however, there are major competitive advantages for any employer who is publicly recognized as having fair and inclusive pay practices.

Customers and partners want to know that they are doing business with an ethical company that treats employees fairly. Potential new recruits want to know that they are joining a fair enterprise with engaged employees. Fair is not an abstract issue. Customer satisfaction is often closely linked to employee satisfaction. Employees who are paid fairly, treated with respect, and valued typically extend these same courtesies to the customers and communities they serve. Conversely, perceptions of pay inequity can rapidly erode morale, teamwork, and service levels in any organization.

Ultimately, pay equity is a leadership issue. The best way to increase pay equity awareness is through well-executed, consistent, transparent pay practices delivered on a daily basis and reinforced by management behavior.

Q: What are some effective strategies for employers to communicate their pay equity commitment to their employees?

A: Pay equity is not something that you achieve through a clever press release or the declaration of a senior executive. Actions speak louder than words. To be recognized as a fair and inclusive employer, you must conduct consistent, transparent, and actionable pay practices every day. It starts with the small details around determining and communicating individual pay decisions. It includes hands-on training for supervisors and hiring managers to help ensure they manage disciplined, objective pay practices despite having conflicting business priorities. Most employees can accept the differences in pay that occur through well-communicated standard procedures and objective criteria.

Modern research in behavioral economics reinforces this notion with the concept of "inequity aversion." Employees are not only concerned with their absolute incomes, but also how their income compares with their co-workers.

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To hear more about this groundbreaking new research, replay this webinar anytime: Workplace Spotlight: Do Variable Pay Practices Contribute to Gender Pay Discrimination?