Why pay equity is good for everyone

Everyone accepts that pay drives financial performance, efficiency, and productivity. It helps attract and retain the best talent. And having a diverse talent pool can significantly improve financial performance.

So, it stands to reason that any inequalities in pay inequality are not helpful.

Not only does it mean you might not be complying with relevant laws and regulations, a lack of pay equity can have other negative effects too. Olaf H. Szangolies thinks

Employees who discover they are underpaid in a peer-to peer scenario feel less valued and are thus less motivated and productive.

When employee morale takes a hit, creating a positive work environment becomes an uphill battle. On the flip side, when pay fairness is the norm, companies tend to hold onto their employees for longer, saving on the costs of constantly hiring and training new staff.

Germany’s performance on pay equity

Unfortunately, when researchers looked at one measure of equity, they estimated that in 2022 women in Germany earned 18% less on average compared with their male counterparts.

Men made an average of €24.36 gross per hour across all sectors, while women earned €20.05 per hour before taxes.

Examining various sectors, they discovered that while the female employment rate has increased in recent decades, many areas of the economy still maintain a predominantly male presence. Mr. Szangolies says that

Any pay gap can differ depending on how you measure it.

Take into account factors such as education, work experience, company size and sector, and the gender pay gap in Germany drops down to a much smaller 8%. This "adjusted gender pay gap" puts Germany second best in the EU.

Equal pay for equal work

What is important about the adjusted pay gap that it measures if the organization offers women and men equal pay for equal work/substantially similar work.

We can be even more precise and only compare women and men with the same level of education, the same level of experience, and who work in the same position in the same industry. Unfortunately, women still get paid less, by 6%.

According to Dr. Yvonne Lott of the Hans Böckler Foundation, "This 6% is really just due to the fact that employers when looking at employees say that women get less because they are women and men get more because they are men."

This is incorrect both from an ethical standpoint and in terms of sound business practices. Moreover, we have yet to delve into the disparities in pay related to race and other protected attributes.

What is the best way for company leaders and boards to ensure their organization is paying employees fairly?  

Commence with a pay equity audit (PEA). A PEA involves comparing the compensation of employees engaged in comparable roles within the organization, while also considering reasonable differentiators such as work experience, qualifications, and job performance. Subsequently, the PEA conducts a comprehensive examination to uncover the underlying causes of any pay discrepancies that lack justification.

An HR professional might lead the audit for smaller organizations (50+ employees), while larger firms could opt to hire a specialist in compensation and rewards.

The right data is the basis for the right change

Undoubtedly, possessing accurate and fitting data is crucial for effectively addressing pay inequality within the organization.

When armed with accurate data, the auditors' analysis will encompass any legitimate factors contributing to pay discrepancies, such as experience, education, and training. This enables the identification of unjust influences on individuals' pay, such as gender, race, and age.

The next step is remediating any inequalities, by increasing the salaries of those affected.

This process doesn't necessitate a simultaneous company-wide implementation. If there's uncertainty about the starting point, a subset of job classifications can be used as a pilot test. The C-suite and relevant departments, including HR, can analyze the results and plan the subsequent actions.

Inequalities in areas like pay happen for a reason

Ensuring a comprehensive audit is only part of the equation; equally vital is understanding the origins of these issues. What were the operational gaps that initially gave rise to the salary disparities?

Continuous evaluation of your hiring, promotion, and compensation procedures is essential. A lack of pay equity could serve as an indicator that there's an underlying issue within the system.

In a recent report quoted by HBR, America’s National Association of Corporate Directors recommends regular review of compensation plans and identifying “any aspect of those programs that could be problematic” or “damaging to the culture.”

Building a strong and diverse workplace culture

Our aim is always to help clients make more informed choices to enable a more diverse workplace culture at all levels. This might mean helping them remove ingrained practices and thinking from role descriptions and associated pay in order to deliver a more diverse pool of talented candidates.

For example, we know that the territory for addressing this challenge lies within the shortlisting process, where unconscious bias is seen most acutely. By tackling this crucial step head-on, organizations can unlock the full spectrum of human talent, fostering both fairness and transformative growth.

At Odgers Berndtson, our research shows that training hiring managers in the principles of inclusive recruitment directly influences inclusive recruitment processes. This leads to broader and more diverse shortlists and ultimately impacts the range of talent available to organizations.

To discuss your current talent plans, including pay equity audits and remediation strategies, or your individual career trajectory and ambitions, please don’t hesitate to get in touch. We’ll be keen to hear from you.