What Is Pay Equity?
Pay equity is the practice of equalizing employee compensation, regardless of gender or ethnicity. It's a proactive approach to addressing the wage gap and ensures that all employees receive equal pay for the same or similar work.
Here’s an example of how pay equity could solve gender pay gaps in the tech industry.
Jane and Joe work as junior software developers—their employer hired them the same week. Jane started on a base salary of $90,000. But Joe negotiated a higher base salary of $110,000 even though he's in the same role as Jane. They will train together and work on the same team, performing the same job duties.
Clearly, this isn't fair. If they worked for a company committed to pay equity, Jane and Joe would receive the same salary for their work, so there's no disparity. Companies may approach this by paying both employees the higher rate of $110,000. And if budgets are tight? Other companies may split the difference and pay each new joiner $100,000 with the risk that Joe might take a job elsewhere.
What Is Pay Transparency?
Pay transparency is a core component of pay equity frameworks, but these are not two interchangeable terms. Pay transparency refers to the practice of openly discussing salary ranges to ensure everyone is aware of the money they can expect to make. It’s an effective strategy—this research paper illustrates how a transparency bill in Denmark reduced the gender pay gap by 13%.
To determine how open and honest you're willing to be about compensation, consider pay transparency as a spectrum and decide where your company sits on it. You might choose:
- Salary Band Transparency: Every employee is aware of the specific salary band of another employee but may not know precisely where an individual employee lies within the band unless they disclose that information.
- Job Category Transparency: Every employee understands the salary bands for jobs within their category but may not know where a particular job fits.
- Benchmark Transparency: Industry standard wages for every job are available for employees, but they may not know the exact wage or percentile the company pays.
- Job Applicant Transparency: Anyone applying for a role may receive detailed salary information before completing or progressing their application.
- External Transparency: Salary information may be publicly available in ads posted on a job board or on social media. Buffer does a great job at this type of transparency.
It takes careful consideration to decide where you sit on the spectrum. If you publicly reveal your salary bands, you could be at a competitive disadvantage if industry rivals can beat your pay package.
But if you choose an internal transparency approach, you must decide whether to retain some salary flexibility to top up employee pay in exceptional circumstances or to reward outstanding job performance.
How Different Regions Of The World Handle Pay
Depending on your location, your approach to pay equity and transparency may be governed by law. Check out how different states, countries, and regions compare:
An NYC Salary Transparency Law was enacted in November 2022, requiring employers with 4+ employees to publish pay ranges in job ads. Flouting the law carries penalties of up to $250,000. Other areas of the state, including Ithaca and Westchester County, have also adopted their own salary transparency laws.
California has similar legislation requiring employers with 15+ employees to disclose salary band information in job postings. The state prevents employers from asking about previous wages during the hiring process. Similar laws exist in Colorado, Connecticut, Maryland, Massachusetts, Montana, Nevada, Rhode Island, Ohio, and Washington.
In 2018, Iceland introduced the first policy in the world requiring employers of 25+ employees to prove they pay men and women the same compensation for a job of equal value. Companies must use the Equal Wage Management Standard system to gain mandatory certification. Companies without certification receive a daily penalty fee.
The current gender pay gap in the EU is 14%, but progress in closing this has been slow. Therefore, the EU Commission has submitted proposals to increase pay transparency and strengthen the application of pay equity. The proposals outline that member country employers with 50+ employees must conduct a pay assessment audit if a gender pay gap of 2.5% exists. They must also disclose details allowing employees to compare salaries and expose inequalities.
Salary transparency isn't yet part of UK law, but talent platform Liberty Hive is determined to change this. They've launched "The Great Salary Reset" campaign to stop companies from asking for a candidate's salary history or expectations and making it a legal requirement to list salary details in job ads.
Australia has introduced a Fair Work Legislation Amendment to combat pay secrecy clauses that prevent workers from discussing their pay.
New Zealand has passed the Equal Pay Amendment Bill that requires employers to pay women and men equally for work that's different but has equal value. This is an enhancement from the previous law that paid men and women equally for the same work.
Japan uses a Framework Policies plan to require companies to list gender wage gaps on their company websites and within annual securities reports. These laws apply to employers with 301+ employees.
Why Is Pay Equity Important?
Steve Boese, Co-Chair of the HR Technology Conference with H3 HR Advisors Inc., breaks down the reality of why gender pay gaps are so damaging. “According to the most recent compensation data, women must work 14.5 months to earn what men earned in 12 months. This disparity has endured for far too long. And most organizations have access to far better data and technology to ensure pay equity and fairness in their workforce.”
Beyond the unfairness to female workers, there are clear organizational benefits for companies that focus on ending wage discrimination.
Improve Workplace Retention
5% of US employees would quit if they found out they were making less than their coworkers. What better reason to pay fairly and retain your top talent? And the great news is that you don’t necessarily need to offer the highest salaries in your field—they just need to be equitable.
Nectar's recent employee recognition survey of 800 US employees found that a whopping 93.5% of employees would stay at a company for five years if they were paid fairly and the culture was great. Significantly, the responses showed no variations based on age.
Employees aged 20, 30, or even 50 all align in their attitudes about sticking with an employer if they feel their skills and efforts are valued equally. In fact, 39.4% of employees rank fair pay as the top reason they would choose to stay at an organization.
Matthew Ramirez, CEO of Rephrasely, explains, “Paying people equitably is important for the culture of the workplace, and it’s also important from a business standpoint. Businesses that have a pay equity culture see better retention and less turnover, which is a huge cost for any business.”
Improve Productivity And Morale
When employees feel they work for a fair and equitable employer, it's easier to feel connected to the company and its mission. A sense of integrity and trust ripples throughout the organization, improving employee productivity, collaboration, and morale.
Kevin Huang, CEO of Ambient Home, reveals how pay parity goes beyond individual morale to impact the entire team positively. “Employee happiness and retention levels increase when you practice pay equity. Employees feel valued and know they are treated fairly and not taken advantage of. Pay equity also creates better teams as members become more willing to work with each other as no resentment is generated, which is more likely to happen when there are wage gaps.”
But productivity dips can arise from a mismatch between how employees and employers view pay equity. Gartner research reveals that only 32% of employees believe they receive fair compensation, and 34% consider their pay equitable. This is in stark contrast with the 72% of senior leaders who regard pay equity as a high or very high priority. It also jars with the 84% of total rewards leaders who claim to conduct an annual pay equity analysis.
Investing further into pay equity frameworks and, crucially, communicating how these work will bridge the gap to ensure employee morale and productivity remains high.
Avoid Reputational Damage
When the public becomes aware of a gender pay gap, it can cause reputational damage to employers.
Take the case of Google, which settled a gender discrimination claim in 2022 after three female employees launched a class-action lawsuit accusing the tech giant of systemically underpaying female employees. The outcome? Google agreed to pay $118 million to reward 15,500 female employees in 236 job titles dating back to September 2013. The employer also promised to invite an independent third-party expert to analyze company pay equity and leveling-at-hire compensation practices.
12 Beginner Tips For Providing Pay Equity
Pay equity isn’t something you’ll achieve overnight, but it is something you should begin focusing on today, regardless of your business size.
Larger companies face the challenge of transforming legacy processes, while startups on a limited budget benefit from introducing the right systems from day one. Here are some tips to get started:
1. Conduct A Salary Review
Established businesses can begin by drilling down into their existing salary figures to understand where any discrepancies lie. Review salaries across departments, genders, and job roles to identify any areas of concern. Next, you can begin benchmarking—the process of evaluating internal wages based on the external value in the current marketplace.
Sam Tabak, Co-Founder of Rabbi Meir Baal Haness Charities, frames how this works. “Choose a market-based compensation structure to keep your offer fair and competitive. Determine what you should pay by analyzing market data based on other companies' salaries for the same job roles. Get wage variety by looking at sources that offer raw and unbiased data, like the Bureau of Labor Statistics and Glassdoor. The information you gather can be the basis for deciding your employees' base salary and salary limits.”
2. Understand What You Can Offer
Companies may support offering pay equity in principle. But in practice, this can leave a hefty imprint on the balance sheet.
Salary bands are often recognized as the superhero in pay equity discussions. But even this approach has financial repercussions—a Resume Builder survey finds that 70% of employees would demand the top of a salary band range if disclosed to them.
The bottom line? To avoid burning cash at an alarming rate, use external benchmark figures from your industry and understand the percentile you can afford to pay at. Then, roll out salaries at this level across your organization.
You're hitting the market average if you pay at the 50th percentile. Paying lower than this could protect your cash flow but may present a retention problem—your employees may find higher-paying work elsewhere. On the flip side, paying at the 100th percentile could eat heavily into your profits even though you'll be enormously competitive in the market and attract the best talent in your field.
Rather than risking bankruptcy, don’t worry if you can’t afford more than the benchmarking average. You may still achieve pay equity if you consider:
- Scrapping bonuses
- Evaluating your overtime eligibility requirements
- Overhauling your employee benefits programs after assessing take-up
Nectar Tip: A truly equitable pay structure is fair across all types of compensation, from base salary and regular bonuses to overtime and benefits.
3. Create Pay Equity From The Start
It's common for startups and early-stage companies to make pay and titling decisions on an individual basis as headcount increases one by one.
While these decisions may seem reasonable, pay equity issues compound over time. Even if you're a small company, it's worth putting guidelines in place from the beginning, including:
- Hiring employees at the same pay level, regardless of gender or experience.
- Defining job roles and pay structures at the outset.
- Researching and benchmarking salary figures across job titles before making offers.
The best startups will remain committed to fair compensation, even if it’s a work in progress.
4. Incorporate Pay Equity Into Talent Acquisition
Craft pay equity into your recruitment strategy by taking the following measures:
- Disclosing the pay range for a job in your publicized ads.
- Not asking your candidates for their salary history.
- Not asking your candidates to reveal their salary expectations for the role.
As we've seen, some of these are already part of pay equity law, depending on your company location. But even in non-regulated areas, take a stance against discrimination by embracing the spirit of the legislation to eliminate the wage gap.
5. Create Competency Frameworks For Each Role
Competency frameworks clarify expectations for each position and serve as the basis for pay decisions. They're also an essential L&D tool used in performance reviews to encourage employees to own their impact and further their professional growth.
The idea is that everyone across an organization can see the salary band a role fits into and the skills and competencies associated with that role. Any employee hoping to move to a new position with a higher salary band must demonstrate they possess the required skills and competencies, regardless of their seniority or years in the job.
In this way, your framework provides a solid foundation to justify all salary-based decisions from the recruitment stage onwards.
6. Communicate Your Compensation Strategy
Myths and rumors about pay can disrupt workplace harmony. If you don't communicate exactly how you're making compensation fair, then your employees will assume you're hiding something.
Knowledge is critical here. Unfortunately, Gartner finds that 62% of employees don't understand how their employer calculates their pay. Overcome this by providing compensation philosophy training and sharing all key information on a company wiki to ensure employees trust your approach.
Above all else, communicate the precise triggers for a salary change. In an equitable pay organization, these could include:
- Updating a salary band due to benchmarking.
- A promotion from one salary band to another due to a role change.
- Performance-related improvement within a salary band in recognition of employee development.
Finally, state how regularly you plan to review your compensation philosophy to ensure it remains relevant and continues to align with company goals.
7. Align Decision-Makers
Consider who influences pay in your organization. From managers and HR leaders involved in performance reviews to interview teams, everyone must be trained to follow the same approach to achieve parity. Some steps you can take include:
- Calibrating compensation decisions to ensure everyone follows the same framework, even when awarding pay raises within salary bands.
- Conducting regular pay equity audits to highlight outlier salaries and promote consistency.
- Completing an anchoring process to offer fair compensation for new joiners. You'll compare the skills and competencies of joiners with in-seat employees. Ask pertinent questions during the interview process, and conduct skills-based assessments to better understand the most appropriate salary starting points.
8. Scrap Salary Negotiations
Salary negotiations have long been a part of business. But they’re not a fair determiner of pay, tending to reward people who shout the loudest over those who are the most skilled at their job.
Think of it this way: If you're hiring for a graphic design role, why would you pay someone more for negotiating well in a salary discussion over someone who presents a rich, impressive portfolio and experience in various graphics programs?
Collen Clark, Lawyer and Founder of Schmidt & Clark LLP, asserts:
“Salary negotiations don't equally benefit other groups because they create or widen pay gaps among workers. Instead of salary negotiations, start relying on salary bands. When an HR representative presents an offer to a candidate, explain the reason why this particular amount of salary is assigned to them and what the person can do to earn more in the company.”
Communicate with your employees that you’ll no longer entertain salary negotiations. Instead, your teams can plunge their energy into upskilling to ensure they progress throughout your organization in line with your compensation philosophy.
9. Ensure Consistency For Remote Workers
The rise of remote and flexible jobs has made it increasingly challenging to provide pay equity. There's an ongoing debate about paying equal salaries to people based in different locations due to variations in the cost of living.
Is it reasonable to demand pay equity when Employee A lives in San Francisco, where housing costs are 238% more expensive than the national average? But Employee B lives in Mississippi, which is 15.6% below the national average. Would Employee A consider it fair that their wage barely covers their rent? Or would Employee B struggle with the idea you'd slash their pay for choosing to live somewhere more affordable? All these points are up for discussion.
Additionally, there's a significant difference between gross and net pay calculations across regions. Once you take tax and social security deductions into account, it's unlikely that Employees A and B will receive the same net pay even if they receive the same gross pay.
With this in mind, set up systems to define what equal pay for equal work means for you as a remote employer. Some options include:
- Paying local market rates depending on the home location of your remote employee (be aware this becomes complicated if your employee relocates.)
- Paying a global median rate across all locations where employees are based.
- Basing salary standards on the location of your company headquarters.
Nectar Tip: Develop a consistent approach whether you're a remote-first company or just want to hire a few remote workers to join your team. Your strategy will also come into play when hiring independent contractors from different locations.
10. Become A Leader In The Pay Equity Movement
All employers have an ethical responsibility to battle against wage discrimination, so there’s no need to wait for equity legislation to force change in your state or region.
Even if you're new to pay equity, take positive action to stand out against rivals and reap the rewards of retention, morale, and employer branding.
Document your compensation policies and share them loud and proud with thought leaders in your field. Post on social media, create a blog series, and reach out to industry influencers. Become a role model for other businesses in the fight for pay equity.
11. Understand Pay Equity Isn’t A One-And-Done Process
Pay equity isn't something you'll solve in a one-off pay audit or after a single benchmarking project. Fully commit to becoming a fair-pay employer by:
- Regularly reviewing the market and making market adjustments to your salaries.
- Persisting with transparent talent acquisition processes, such as publicizing salary information in job descriptions, even if it's not required by local legislation.
- Maintaining job descriptions and the skills required for each to ensure the salary reflects the work requirements.
Pay equity requires a consistent approach, with at least an annual audit and extra consideration during promotions and pay raises.
12. Create A Well-Rounded Employee Experience
As essential as pay equity is to an inclusive workplace, it can be challenging for small to midsize organizations to achieve parity quickly, especially in an economic downturn.
The great news is that fair pay is one of many ways to tenure happy, engaged employees. Our recent Nectar survey reveals that well-rounded companies lean into other essential elements to add strength and depth to their organizations. These include:
- Consistent Recognition: 81.9% of employees agree that recognition for their contributions improves their engagement and 83.6% feel recognition affects their motivation to succeed.
- Connection With Colleagues: Peer recognition is a fantastic way for colleagues to offer praise and support to each other. But sadly, only 52.6% of employees surveyed have recognition programs in place at their companies.
- Passion About Company Mission: Our survey results point to this variable having the least impact on tenure, but it was still a priority for more than 1 in 10 employees.
- Opportunities For Career Growth: This critical variable most impacted employees aged 25 to 44. Employees want to grow with your company, so ensure you provide rich internal career paths and show them how to progress.
- Great Company Culture: This variable has the third highest impact on employee tenure. And as the saying goes, "Culture eats strategy for breakfast.”
As you can see, there are multiple reasons an employee will remain loyal to your company, including fair pay. Take a holistic approach to the employee experience, and you'll have a team that feels valued and ready to perform!
Create A Rewarding Employee Experience With Nectar
It's time to take a hard look at your compensation philosophy and overall employee experience and consider whether there's work to be done. (Hint: There's almost always room for improvement.)
While you're working on achieving pay equity, remember to continuously develop other aspects of your culture, from career development to employee recognition and everything in-between.
Book a demo with our team, and we'll show you how to reward outstanding work without breaking the bank.