Communicating clearly about pay equity is nearly 13 times as important for employee retention and engagement as talking about “high levels of pay and benefits,” according to a March 14 report from The Josh Bersin Co., a human capital advisory firm.
Although equal pay for equal work may appear straightforward, most companies still struggle to meet the goal. About 71% of executives say pay equity is a critical component of their business and people strategy, yet 95% of companies are failing to achieve pay equity maturity, and only 14% have allocated budget and staff to address the challenge, according to the report.
“While most companies know they must increase pay during times of inflation, they do not understand the problems they create when people feel the system is unfair,” Josh Bersin, global industry analyst and CEO of The Josh Bersin Co., said in a statement.
“Most employees know that they are paid for performance, but when they perceive unfair practices (due to bias, racism, sexism, or simple politics), they lose confidence in the company and their sense of trust is damaged,” he said. “The result is more politics, turnover, and low levels of engagement.”
Bersin and colleagues examined 448 companies internationally to better understand pay equity and its effects. They found that pay equity touches all areas of the employee life cycle — including hiring, development, performance management, promotion, succession management, and leadership development. It also requires active communication and change management.
Among the 5% of companies with effective pay equity policies, several outcomes were noticeable. They were 1.6 times more likely to meet or exceed financial targets, 2.1 times more likely to attract the talent they need, and 1.7 times more likely to innovate effectively.
However, the other 95% have recurring issues with pay equity and employee experience. These companies tend to overlook the issue until a legal, compliance or reputational risk arises, or they approach pay equity in a piecemeal way with sporadic projects, according to the report.
Importantly, the report found, only 21% of companies appear to listen to employee feedback around pay equity. In addition, only 15% are willing to communicate the required information to address the pay equity issue.
Beyond that, new technologies that can help identify pay inequities aren’t utilized well. About 15% of companies said they were actively using data and equity platforms to find problems.
“The problem goes beyond bias,” Bersin said. “Companies have to discuss what ‘equity’ really means and what criteria will be used for bonuses, rewards and raises.”
The U.S. has aimed for pay equity since the passage of the 1963 Equal Pay Act, which banned overt policies and practices that paid women and men different amounts for equal work. Since then, additional federal legislation has expanded the focus to encompass race, national origin and other protected groups. All 50 states have passed or enhanced their own policies as well, the report noted.
In recent years, more executives have focused on the issue of pay equity due to increasing legal pressures and major lawsuits, such as Google’s $118 million settlement, The Josh Bersin Co. noted. Companies such as Patagonia, Microsoft, and Adidas have shifted from a focus on performance-related pay and emphasized equity across organizational decision-making.
Other recent research has found that more organizations are addressing pay equity issues, including the racial pay gap between White and non-White workers.
A key component of that requires pay transparency, as well as making pay equity a core responsibility of compensation.