How Salary Disparity Happens and What to Do About It
Even unintentional pay gaps can chip away at trust, dampen morale and send talented people searching for opportunities elsewhere.
Paychecks are personal, and when employees discover big differences in what colleagues earn, the ripple effects can be immediate.
Sometimes, those gaps exist for good reasons, like specialized skills, higher responsibility or market demand. But often, salary disparity creeps in unintentionally via inconsistent pay practices, differing negotiation styles or legacy policies that HR leaders haven't revisited in a while.
Even when unintentional, those gaps can chip away at trust, dampen morale and send talented people searching for opportunities elsewhere. How can business owners and HR leaders balance fair pay with the realities of budgets, market shifts and individual performance?
The good news is salary disparity doesn't have to be a hidden risk. With the right strategies, you can shine a light on how disparities happen and take steps to address them in ways that strengthen culture and retain top talent.
How salary disparity happens
"Unintended salary gaps typically emerge where process variability meets human judgment," says Katerina Rodriguez, AHRP, director, future of work strategy, global enterprise solutions at ADP.
Some common root causes include:
- Legacy pay histories. Anchoring offers to a candidate's prior salary rather than market ranges can create disparities that compound over time.
- Inconsistent job leveling. When organizations misclassify roles or apply pay bands unevenly across departments or offices, employees doing similar work may end up paid differently.
- Performance evaluation differences. Subjective criteria and inconsistent calibration across managers can result in inequitable pay adjustments.
- Negotiation differences. Employees who negotiate aggressively may secure higher starting salaries, while others in similar roles are left behind.
- Organizational changes. Mergers, acquisitions or pay freezes can lock in differences between colleagues, even if the disparities weren't intentional.
External market dynamics also play a role. For example, an employee hired during a talent shortage might receive a premium salary, while a long-tenured peer in the same role may lag behind despite equal performance.
Salary disparities erode trust and engagement.
Katerina Rodriguez, AHRP, Director, Future of work strategy, ADP
When pay disparity is necessary
Not all pay differences are problematic. Some imbalances reflect legitimate, job-related factors.
For example, disparities may be appropriate when tied to:
- The scope and impact of the role
- Specialized or scarce skills
- Demonstrated performance and achievements
- Relevant credentials or certifications
- Geographic cost-of-living differences
"The key is being able to demonstrate that the variance is consistent with the organization's compensation philosophy, falls within an established range, and is applied consistently across comparable roles," Rodriguez says.
Employers should be able to document how and why compensation decisions align with their philosophy, market benchmarks and internal ranges. Without that clarity, even justified differences can be perceived as unfair.
Challenges of salary disparity
Pay differences that lack clear explanations can quickly become a flash point inside your organization. Today, employees have access to pay ranges in job postings, salary data on crowdsourced websites and peer conversations in professional networks. If your internal practices aren't consistent, employees may question whether their compensation is fair.
This perception matters.
"Salary disparities erode trust and engagement," Rodriguez says. "When employees suspect or discover unexplained gaps, discretionary effort drops, intent to stay declines, and the narrative shifts from performance to perceived favoritism, especially in low transparency environments. Real or perceived inequities undermine culture, retention and your employer brand."
The data backs this up. According to research from Harvard Business School, organizations with unexplained pay disparity are less likely to appear in Fortune's "100 Best Places to Work" list and average a 1.8% drop in return on net operating assets, much of which is linked to higher employee turnover.
Your organization may also face reputational or legal exposure. Many states have passed pay transparency laws that require employers to report pay data to government agencies, disclose salary ranges for open positions, or prohibit retaliating against employees who discuss pay with coworkers.
"Organizations without robust analytics and documentation will face scrutiny from candidates, employees, investors and regulators," Rodriguez cautions. "Proactive remediation and transparent processes aren't just 'good HR,' they're essential risk management strategies."
Tools and strategies to address pay disparity
Closing gaps and preventing new ones requires data and discipline. Here are several steps your organization can take to spot pay disparities early, address existing gaps and put safeguards in place to keep compensation practices fair and consistent over time:
- Conduct pay equity audits. Regular audits help identify unexplained differences by analyzing base pay, variable compensation, job level, performance ratings and tenure. Involve legal and compensation experts in these audits to ensure compliance.
- Standardize job architecture and leveling. Clear job families and pay ranges reduce the risk of inconsistent application across teams or geographies.
- Codify compensation philosophy. Document how you set pay ranges (e.g., market benchmarks, internal equity, etc.) and how performance influences progression. This helps managers and employees understand the "why" behind decisions.
- Train managers. Equip managers with the tools and training to clearly explain pay practices and ranges to employees. This consistency builds trust, so explain the principles guiding compensation decisions, share progress on addressing disparities and commit to periodic updates.
- Remediate legacy disparities. Create a staged plan to adjust statistically significant, unexplained gaps. Even small corrections, when communicated transparently, demonstrate a commitment to fairness.
"The biggest challenge organizations face is sustainment," Rodriguez explains. "Track outcomes over time to validate that gaps are closing and staying closed."
Turning challenges into opportunities
While salary disparity poses risks, it also presents an opportunity. Organizations that proactively implement pay transparency best practices can differentiate themselves in a competitive talent market.
By integrating pay equity audits into your regular talent practices and communicating clearly with employees, leaders can foster stronger cultures, improve retention and demonstrate accountability to stakeholders.
Pay will always reflect a mix of market realities and individual contributions. But when employees trust that differences are fair, consistent and well-governed, compensation isn't a source of frustration; it reinforces organizational values.
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