How Companies Committed to Inclusion Should be Measuring Pay

On this #EqualPayDay,** research shows we’re *still* making negligible progress on closing the gender pay gap.

At a time when progress has stalled on achieving pay parity, the recent news that Google spent $10 million to correct for an apparent pay gap that disadvantaged men understandably drew mixed responses. I was among the many voices critiquing Google’s approach—I pointed out the irony that the largest correction for a gender pay gap I’ve ever seen was deployed to benefit a group that is dramatically overrepresented in engineering, and faces fewer barriers to access and opportunity in the field.

It’s fair to ask why people like me would be skeptical: shouldn’t anyone interested in pay equality be supportive of adjustments that promote that outcome, regardless of which way those adjustments go?

In theory … sure. But in practice—in both the Google case, and with the dozens of companies I’ve worked with on compensation policies and processes—it’s far more complicated.

What nearly every company struggles with when it comes to pay is understanding the difference between equality—which asks only whether people with the exact same job title are paid the same salary—and equity—which asks whether people are paid fairly, considering the various drivers of pay, as well as the factors that affect entry into and growth within organizations.

It’s also fair to ask: “What’s wrong with equality? Isn’t that a good thing?” Theoretically, yes. If everyone were starting from the same position, and confronted with similar barriers and opportunities, then measuring only whether outcomes are equal might make sense. The problem, of course, is that starting points are not equal. In the context of compensation, a focus on equality of outcomes doesn’t account for why pay gaps exist and the structural and systemic barriers that differentially affect people from historically marginalized or underrepresented groups.

So, how can companies that are working hard to close pay gaps do so in a way that promotes equity?

Measure Beyond Gender

While White women still make 80% of what White men make on average, statistics show that’s not the biggest pay gap between demographic groups. Compared to White mens’ earnings, Black men earn 70%, Black women earn 63%, and Hispanic/Latina women earn 54%.

There’s also research that points to pay gaps related to disability, sexual orientation and gender identity, and age.

If a company is already doing the hard work of measuring pay by demographics, it should look at more than just gender.

Think Beyond Just Salary

An employee’s base salary, often dictated by a “band” for their level and role, is only part of total compensation. Bonuses, merit increases, and stock options add significant value and are often more discretionary.

When you’re quantifying pay, look at the whole package, not just base salary. For a variety of reasons, differences in equity will often manifest in other forms of compensation—just look at #Angels research on the #GapTable.

Evaluate the Holistic Process

Even companies that have worked hard to establish progressive pay practices—by establishing pay bands for roles, discontinuing the practice of basing offers on past salaries, reducing or eliminating the role of negotiation in establishing pay, boosting pay transparency, and conducting annual compensation reviews—often have an incomplete process for measuring pay equity.

Why? Because their methods of evaluation ask only the most basic question of whether people in identical roles are paid similarly, without examining the range of factors that influence pay outcomes. Pay gaps are often a byproduct of ingrained, sometimes invisible systemic barriers to equity—things like bias and stereotype threat.

Even when companies do some secondary analyses to understand a potential pay gap, they will ignore key questions that might be critically important to understanding what’s going on in the organization, underlying barriers to equity, and which groups tend to be most impacted by such barriers. While it can be difficult to quantify these systemic barriers, it’s not impossible.

Let’s look at a few examples of pay gaps and related questions a company should ask itself:

• A company identifies a pay gap wherein one group is being paid less than another—let’s say on average, women are earn 80% of what men earn. The company might then control for role and level and find that men and women in the same role and level are actually paid similarly. Women are only paid less company-wide because they are in lower-paying roles, or they’re more heavily concentrated in lower levels of the organization. While pay outcomes in this case might appear “equal” there’s something else going on.

The question: Why are women in this company only being hired into lower-paying roles or levels? This company might not have an immediate pay gap to correct, but it does have a significant problem to solve if it wants to build an inclusive and equitable organization.

• A company finds Latinx employees are paid less than White employees, even when controlling for role and level. When the company takes a look at what might be driving these differences, it finds that Latinx employees are, on average, receiving lower performance ratings than White employees. In this pay-for-performance company, that leads to differences in compensation. The company could stop there. It has identified what, on its face, appears to be a rational justification for the identified disparity.

The question: Why are Latinx employees receiving lower performance reviews? Is there potential bias coming into play in the performance process? Are there cultural norms that make it easier for people from some backgrounds to be successful, while posing unique barriers to other groups?

• A company discovers that women are being paid more than men in entry-level engineering roles. The company controls for level and tenure, and determines that the “equal” thing to do is to raise men’s pay to ensure it is on par with women. That might make sense. But, it might not. Let’s imagine data show that women actually needed to have twice as many years of experience as men to be hired into these same roles. Thus, the women earning higher salaries were actually twice as experienced. It might then make sense that their compensation would be higher.

The question: Why are women facing a higher barrier to entry than men? What’s going on in the hiring process?

Ultimately, companies should be conducting more robust analyses in all cases, regardless of which direction a pay gap goes. But in determining what questions to ask and which analyses to run, companies have a responsibility to take into account the wealth of social science and organizational research that indicates people from underrepresented groups are most likely to experience unfair outcomes in pay.

By going beyond gender and salary, and using pay gaps as a starting point to evaluate overall equity within an organization, companies can more effectively begin addressing biases in their people processes and close persistent wage gaps, not only promoting greater equity for their own employees, but contributing to more equitable communities and industries.

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If you’re interested in more information on Paradigm’s approach to Pay Equity Analysis, reach out at contact@paradigmiq.com.

April 2, 2019

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