If you’re confused about how new state laws governing pay equity impact your business, you’re not alone. Even organizations committed to creating equitable compensation packages are struggling to navigate new legislation, which requires employers to pay people equally for “substantially similar” work, rather than for “equal” work.
It’s important to recognize that, while not perfect, the laws are working to move things in the right direction. They are enacting change through transparency and awareness. By requiring employers to make compensation information public, the laws force organizations to look more closely at their pay practices, including salary, benefits, and other rewards programs. Here are five things to consider when looking at yours.
Create a Consistent Process and Set of Criteria for Pay Decisions
Historically, companies have spent a lot of time and money on compensation reviews, but very little on creating consistent processes and criteria with which to make pay decisions companywide.
“Often employers will pay what people ask for, so if a minority asks for the low end of the salary band, that’s what they get, and if a non-minority asks for the high end, that’s what they get,” says Lyssa Hansard, the founder and CEO of Cura HR, a boutique HR consulting firm that works with growing companies. “This creates a pay gap that will compound if there is no process to look at things like merit, years of experience, and potential. When you look at the entire body of the organization consistently, vs. small silos or teams, you’re more likely to ensure that great performers, and those meeting similar criteria, are getting paid well, regardless of if they are in a protected class or not.”
Start by getting clear on how pay decisions are made and implementing practices that ensure a consistent and equitable review of compensation. If you want to take this seriously, hire a third party to define your Similarly Situated Employee Groups (SSEG) using tested and proven practices, conduct statistical analysis, and be prepared to tackle your real wage gaps.
Stay Ahead of the Pay-Equity Curve
Pay-equity legislation differs widely from state to state and is changing often. Employers need to keep their fingers on the pulse and do their research to stay in compliance, especially when they have employees or are recruiting in multiple states. It is important to also keep a pulse on trends among candidates. For instance, job seekers are now expecting employers to post salary and benefits information, even in states where it is not mandated.
“It’s become a national trend for organizations to proactively take more accountability for pay equity analysis,” says Hansard. “If a state has not passed legislation yet, they may soon. States are also talking about how to audit compliance, so organizations want to get ahead of it.”
Companies that do the work now to look at their internal pay structure and create consistent company-wide pay bands will have a much easier time and face fewer challenges if and when their state requires pay transparency and compliance.
Increase Your Pay Budget
Base pay is the number one barrier to entry. A job must meet an employee’s financial needs first before the rest of the package is considered. The market rate for base pay is driven by supply and demand. Right now, there are not enough people to fill jobs across every career level and industry.
With employees in such demand, employers need to increase their pay budget to attract new hires and avoid pay compression internally with current employees. Organizations usually spend 5-7% a year on increased pay levels to cover merit, turnover, and promotions. Today, budgets seem to be normalizing between 10-15%.
“It may seem untenable to do this because you don’t have the margins, but I’d argue that you may not have an option in this tight market,” says Peggy Shell, the founder and CEO of Creative Alignments, the leading Time-Based Recruiting company. “In the long run, the costs of losing employees to higher paying jobs, attracting new employees, and missing out on productivity due to an empty seat are just too high. As a business owner myself, I suggest getting creative with increasing gross revenue and/or cutting other expenses to free up funds for pay increases.”
Tell the Whole Story to Attract Top Talent
Take the time to find the right talent for your organization. Settling for mediocre talent or rushing things is likely to cost you more time and money long run. Proactively market open roles to your ideal candidates, rather than just waiting for applicants to come to you. Remember, you are marketing your company to potential employees, not just customers. This takes telling the whole story of what you offer.
Clarify your value proposition as an employer. Why does someone want to come to work for you instead of your competitor? Do you have a great people-focused company culture? Are you launching a unique product or service that would be interesting to work on – and be a great addition to someone’s resume? Build your employment brand and tell your story.
“When candidates are sold on the whole package — job, comp, culture and company — they are more likely to accept certain financial constraints, as long as it is sustainable for them,” says Shell. “You have to have a competitive pay package that meets their needs, but it’s not just about the money. Consider what more you can build onto the monetary offer. Flexibility, purpose, community and fulfillment have become more important to employees over the past couple of years.”
Leverage the Small Businesses Advantage
When it comes to compensation, large companies traditionally had access to more data and been more transparent. This led to pay packages that were attractive to employees. Small companies could not even compete. Pay-equity laws have changed this by making compensation information available to everyone, so smaller companies can offer more competitive employment options, and candidates can see they are worth applying to.
“Small companies have good stories,” says Hansard. “Candidates used to assume that small companies could not pay them as much, but now, with transparency, they see that small companies could be a great option for them.”
As with any sea change, there will be bumps and struggles as we move away from engrained inequities that lead to women earning three-quarters less than men, and Black and Brown people earning a quarter less than that. In the act of airing and re-evaluating stale business practices, we are able to replace them with new norms that help create inclusive and equitable workplaces.