Employers face growing expectations regarding pay equity and transparency in pay practices. Recently, a group of Willis Towers Watson experts explored why and how these issues are gaining traction globally. They also discussed how to promote greater pay equity and build a culture of pay transparency as well as their outlook for the future in this area.
Luss. In discussing fair pay and pay transparency, many people use the terms “pay equity” and “equal pay” interchangeably. How does pay equity differ from equal pay?
Bakshi. Our latest research shows that employees are looking to work for organizations that offer fair and competitive base pay, which remains the leading driver of attraction and retention globally.* Pay equity involves paying people fairly based on the value of their contribution to the organization. In a scenario where employees make the same contribution, then pay equity would result in those employees receiving equal pay. At the other end of the spectrum, you have scenarios where some employees get by without making much of a contribution while others make significantly greater contributions, and yet everyone gets paid equally. In that scenario, we would have equal pay but not pay equity. Such situations can appear to be unfair to employees and make it difficult to motivate employees to go the extra mile, potentially jeopardizing a company’s ability to compete.
Luss. How has pay legislation in some U.S. states influenced the push for pay equity and transparency?
Romanyshyn. In the U.S., pay equity issues have focused more on gender and ethnicity. Certain states have taken the lead with guidance from the federal government to establish additional pay legislation. Currently, New York, California, Maryland and Massachusetts are putting the burden of proof for ensuring programs are truly equitable on employers. In addition, in Massachusetts, an employer is not allowed to ask a prospective employee about their salary history.
Employers want to ensure that they are compliant in each state in which they operate. And these companies also want to be able to defend their programs and pay decisions. It comes down to being able to justify pay differences from both a risk mitigation point of view and an employee engagement perspective.
Luss. What’s happening in the U.K. and Europe with regard to pay equity legislation?
Wonders. In the U.K., the Equal Pay Act, which has been in place since 1970, has slowly helped to close the pay gap. More recent legislation will require organizations with more than 250 employees to report on six statistics covering both base pay and incentives.
In countries such as France, with strong collective bargaining agreements, there are often different requirements regarding pay equity. In EMEA, we also have the EU directive on equal pay, which national governments and employers have been implementing largely at their own pace since 1975. There’s growing pressure to tackle this issue more aggressively, as the soft approach to addressing pay equity issues has not been very successful.
Luss. What’s the status of pay equity legislation in Asia Pacific?
Bakshi. Pay equity is simply not yet a major issue in this part of the world, especially in countries where the government is often the largest employer. And these governments are fairly transparent about pay issues.
Luss. What are we seeing in Latin America in terms of pay equity and pay transparency legislation?
Prado. In many Latin American countries, labor legislation mandates that employees performing the same function and delivering equal value should be paid equally. With regard to pay transparency regulations, public companies have fewer disclosure requirements. In addition, there are laws in some countries (e.g., Brazil) protecting the confidentiality of individual information such as pay.
Luss. Apart from legislation, what other factors are driving the focus on pay equity and transparency in each of your regions?
Wonders. Employee expectations regarding pay transparency are changing in EMEA. Generational preferences and readily available comparative data are contributing to these heightened expectations.
Bakshi. In Asia, there’s a code that drives hierarchy in the workplace. This hierarchy can be based on age, tenure, experience or qualifications. The code is the basis for how organizations make pay decisions and influences the perception of pay equity. Based on this code, pay in the Asia Pacific region is more likely to be perceived as equitable compared with pay in other regions.
Prado. There’s a growing social awareness of the importance of pay equity in Latin America. While workers do have expectations of transparency, they are more inclined to expect transparency in areas such as compensation design, pay differentiation and career opportunities rather than in areas such as actual pay levels and individual pay.
Romanyshyn. In North America, increased hiring and turnover as well as changing employee expectations are challenging traditional notions of pay transparency. These expectations can vary by industry. For example, greater transparency is especially valued by employees in high tech.
Luss. How are employers responding to the various forces driving change in the areas of pay equity and transparency in EMEA?
Wonders. The pace of change in some EMEA markets has been quite startling, making it challenging for some organizations to adapt to these new expectations. We also need to consider that, historically, pay policies and practices in Europe have been shrouded in mystery. Our research suggests that transparency around incentives in particular may be an issue for employers in the EMEA region, where only 48% of employees say they understand how their bonus is determined, versus 54% who hold this view globally.
Luss. How are employers in Latin America responding?
Prado. Large companies concerned with diversity, inclusion and sustainability issues are starting to take action in the area of pay equity. In particular, gender pay equity has been growing in importance for corporate leaders.
In Latin America, 58% of employers think their managers are effective at fairly reflecting performance in pay decisions, versus 49% globally. And 55% of employees think they are paid fairly compared with people in other companies who hold similar jobs, versus 50% globally. A similar percentage of employees in Latin America think they are paid fairly compared to employees in their organizations who hold similar jobs, versus 51% globally. It will be interesting to see how these percentages change with the growing awareness of the importance of pay equity.
Luss. What’s the current state of pay equity in Asia Pacific?
Bakshi. Our research shows that 57% of employers in the Asia Pacific region say that their managers are effective at fairly reflecting performance in their pay decisions, versus 49% globally.
Companies that can afford to build a talent pipeline from the ground up can focus their attention on internal pay equity, i.e., making sure employees feel they are paid fairly relative to others within the organization. However, in some industries, this is not always possible. For example, in industries where companies need to grow very quickly, employers may be willing to pay a premium to acquire needed talent. Such situations often give rise to pay equity issues, as the pay of new hires is not governed by the same code as that of existing talent. In addition, pay equity surfaces as a concern in industries such as professional services, trading, commodity trading and investment banking, where certain critical talent directly contributes to a company’s competitive advantage and employers are willing to pay more for this talent whether internal or external.
Luss. Let’s focus on the importance of external factors. What impact is the trend toward greater transparency and pay equity having in high tech and in the overall marketplace in North America?
Romanyshyn. High-tech companies view themselves as disruptors, challenging the status quo. As already mentioned, this trend toward greater transparency appeals to their employee populations and potential hires, as they are living in an era when information is so accessible. In addition, many of the roles in high tech are new with no history of inequity, providing those organizations the opportunity to begin with a truly level playing field.
But for companies outside of the tech industry, especially those with roles in male-dominated fields in North America, this topic is challenging. The first question these companies typically ask is if they are taking all the steps necessary to ensure that they are paying employees equitably. Next, these employers ask how they should communicate the results of their analyses of their practices to employees and other stakeholders.
Our research shows the extent of pay transparency in North America: Only 40% of employers say their managers are effective at fairly reflecting performance in pay decisions, versus 49% who hold this view globally and 57% in Asia Pacific. And only 40% of employees in North America report a clear link between their job performance and pay. This is likely to impact whether employees see themselves as being paid fairly relative to their performance.
Luss. Can organizations be transparent about pay if they haven't gotten their house in order in terms of pay for performance and pay equity?
Bakshi. An organization needs to address the pay equity issue before it can afford to be transparent. Transparency does not involve disclosing everyone’s salary. Rather, it has more to do with providing clarity around how compensation budgets are allocated.
In the Asia Pacific region, employees appear to have greater clarity around key compensation issues than their counterparts globally. For example, 52% report understanding how their total compensation compares to the total compensation of the typical employee in their organization, versus 47% globally. And 58% report understanding how their bonus is determined, versus 54% globally.
Luss. So if organizations have to address pay-for-performance and pay equity issues before they can be transparent, and many are not as successful as they should be in these areas, what’s the business case for transparency, and is there any downside to being transparent about pay issues?
Romanyshyn. As noted, labor market activity along with changes in employee expectations and an increasing regulatory push are changing the calculation of how much transparency around pay is required. One of the reasons employers have not been more transparent up to now is that it invites scrutiny of management’s pay decisions, but the scrutiny around those decisions has already increased. Employees (and others) are already having the conversations and employers need to join in.
Being transparent about compensation is definitely a challenge. But the establishment of a career framework can serve as the foundation for conversations about pay decisions and facilitate open communication about the skills and performance needed to be successful. Employers need to emphasize that a mix of factors, which are not always obvious to employees, contribute to pay decisions, for example, if a certain skill set is particularly valued or in short supply in a given market or if certain roles are perceived as critical to the future direction of the organization.
Wonders. It’s also important for employees to understand how pay programs operate, i.e., they are designed to drive certain behaviors and outcomes, which influence pay decisions.
Romanyshyn. I agree. If our employees understand how they can be successful and our programs reward that success, then we’ll be successful as an organization.
We’re also starting to see the difficulty of paying for performance in some areas. In North America, merit budgets have been constrained and bonuses have generally not been funded at target over the past decade. In retail, employers are struggling to keep pace with changing minimum wage legislation, which can make it difficult to use base pay as a differentiator. And so, employers are turning to other programs, such as recognition programs, to differentiate talent. And we know from our research that differentiation is particularly challenging in North America, where only 44% of employers say that their managers are effective at differentiating performance between high and low performers, versus 53% globally.
Luss. Let’s focus on how to build transparency. In Asia Pacific, what happens in situations where the employer is not the government and there is significant pay differentiation — can these employers be very transparent?
Bakshi. The best way to differentiate pay is through incentives. For example, in commodity trading, the trades are transparent to everyone. And the commissions traders earn on those trades can be an order of magnitude two to three times greater than what other colleagues may earn. However, employers can’t afford to have significant differentiation in the area of base pay.
Luss. What are the steps employers need to take to build a transparent pay culture?
Wonders. A transparent pay culture starts with the communication of a clear reward strategy to employees. As already stated, the employer needs to clearly explain the different factors that influence pay decisions. For example, in some cases, the role of the market, or individual or collective performance could be a key driver of these decisions.
Next, it’s essential to equip the line managers with the skills and tools required to explain the reasons for pay decisions clearly in the context of the broader reward mix.
Only after an organization has these elements in place can it begin to think about discussing pay ranges, target incentives and performance requirements.
Luss. Are there other challenges or pitfalls in building a culture of transparency?
Romanyshyn. In the face of headlines highlighting new legislation and other developments in this area, employers need to take control of the narrative on rewards and explain what it means to be an employee in their particular organization. It’s also important to ensure that employers are using technology to measure performance, integrate those metrics in their reward programs and make that information readily available to employees. This will help employers include rewards in an ongoing performance dialogue.
Luss. If we build a transparent culture where everyone inside the company knows what people are paid and why, does that give our competition too much information?
Romanyshyn. In North America, legislation is forcing the issue of transparency. In the past, companies have justified being less transparent because they viewed rewards as part of their competitive advantage. Going forward, employers will not be able to avoid this issue.
Wonders. Websites such as Glassdoor have dramatically increased the awareness of pay levels in the market and among employees. It’s a question of weighing different risks. In fact, there are four key risks to consider: talent (attraction and retention) risks, reputational risks, legal risks and the risk of noncompliance.
Luss. Where does technology fit into the picture with regard to pay equity and pay transparency?
Bakshi. Technology and analytics can help companies make, implement and communicate their pay decisions faster.
Romanyshyn. As more organizations begin to treat employees as consumers, technology can be used to the company’s advantage. For example, mobile apps provide employees with immediate access to information on how they’re doing with regard to bonus or recognition programs.
Luss. Over the past few years, the issue of pay equity has evolved from a rather narrowly focused matter of statistical analysis to an issue that requires examining not just pay but the factors that drive pay and involves a broad group of employees, not just lawyers and compensation professionals.
Where does each of you see the issues of pay equity and transparency heading in the next five years?
Bakshi. In Asia Pacific, we’re seeing a conscious effort to fix the gender and minority pay gaps, and address the issue of manager bias in pay decisions. If these trends continue to the extent we see them today, then pay transparency will be a more important issue in five years.
Wonders. In the EMEA region, we’re seeing a trend toward greater levels of segmentation, individualization and flexibility in terms of rewards. All these factors make pay equity more challenging to achieve. At the same time, these factors are also causing employee expectations around pay equity and transparency to increase. The challenge of addressing these issues will continue to grow in the next few years.
Romanyshyn. In North America, we’ll see new and innovative ways of rewarding and engaging employees. We can expect greater differentiation among companies as employers link their specific business strategy and culture to their reward programs. In addition, organizations are beginning to aggressively press the case that they’re providing greater opportunities for diverse employee populations and that this is reflected in their actual pay levels as a way of differentiating themselves and attracting top talent.
Prado. Despite emerging concern over inclusion programs and pay equity in Latin America, there’s not much appetite on the part of politicians to create pay equity legislation in the near term. But, as noted, companies are starting to take action in this area, and we can expect this push to continue in the future.