We explore the common assumptions in reward that could be limiting improvements over a series of blogs. In this edition, let’s interrogate pay equity and fairness.

As we discussed in part one and two, making assumptions is something the human brain is wired to do: we’re seeking patterns to help us understand the world and will make assumptions based on previous experiences. In some situations, this can be beneficial, even critical. In others, making assumptions can restrict and damage.

We started our exploration of reward assumptions by looking at motivations, before delving into the topic of pay transparency. Now, for part three, we will interrogate the assumptions around pay equity and fairness, cognisant of the connection these have with pay transparency.

Using assumptions to underpin rewards can stifle creativity, innovation and positive development in the system and prevent either the organisation or the workforce gaining maximum benefit from rewards. However, awareness can be instructive. If we are aware of the common assumptions, we can challenge them and review them, making the reward decisions that are best for the business and its specific workforce.

What do we mean by pay equity?

Pay equity refers to the fair and unbiased treatment of all employees in regards compensation, particularly between different genders, races, ages, or other demographic groups. The term implies that individuals performing similar work with similar skills, experience, and responsibilities should receive similar pay.

Despite the easy definition, there are complexities in pay equity due to the multiple perspectives:

• External equity, or the fairness of an employee’s pay in comparison to what others in similar roles are earning in the external job market.
• Internal equity, which involves fairness within the organisation itself.
• Individual equity, with pay dependent on an individual’s unique contributions, performance, skills, and responsibilities, justified by measurable distinctions.
• Procedural equity, which seeks fairness in the processes and methods used to determine pay.
• Distributive equity, which relates to the fairness in the allocation of pay and other rewards based on clear and justifiable criteria for rewards.

Assumptions made on pay equity

One of the first assumptions is moral imperative: it is commonly assumed that pay equity is a fundamental right and ethical necessity, reflecting principles of fairness and justice. Gender pay-equity is a key area in this regard, particularly in countries where gender parity is seen as important both culturally and socially. It can also often be underpinned by laws and societal trends that impose gender pay equity and make it a matter of a compliance.

Assumptions around gender pay equity can be good and bad. It assumes that men and women are doing equal work, but defining and assessing what equal work means is complex. Some argue that pay differences are a result of individual career choices and not systemic discrimination, while others believe that these choices are influenced by societal and cultural factors.

Another assumption is that the companies committed to pay equity will enjoy a better reputation, potentially attracting more customers and talented employees. This would be true for some people some of the time but links us back to assumptions made around motivations. Not all workers are motivated by fair pay or perceived equity; some may prefer more benefits or high salaries.

It’s often assumed that adhering pay equity principles helps an organisation comply with relevant laws and regulations, avoiding legal consequences. Again, this would be true some of the time in some countries and situations.

Many of these assumptions are made by the employer. Employees, on the other hand, might assume that pay transparency automatically leads to pay equity. While transparency can be a tool to achieve equity, it doesn’t guarantee it. There can also be the assumption that pay differences are solely a result of individual performance and merit, overlooking potential systemic biases and discrimination that can contribute to pay disparities.

As is surely becoming clear, pay equity is assumed to be simple to achieve but is in fact highly complex. In reality it may require an in-depth analysis of job roles, responsibilities, and various other factors.

There are also assumptions around pay equity that would disincline a company to adopt it. For example, some assume that pay equity efforts could lead to unintended negative consequences, such as pay compression (where there’s little differentiation in pay among different skill levels) or resentment from employees who feel their unique contributions are not being recognised. Also, there are those who believe market forces alone should determine wages, and any interventions by the organisation in the name of equity might distort the labour market.

Equity and fairness: a happy symbiosis?

It’s important to understand the relationship between pay equity and fairness, as these are two terms often used together. Equity can be seen as a tool or approach to achieve fairness, especially in situations where equal treatment would lead to unequal outcomes.

They are interrelated concepts that often overlap in discussions of justice, ethics, and societal values. While they are sometimes used interchangeably, they possess distinct nuances that differentiate them. Fairness is a much broader concept, seeking outcomes that are seen as just, balanced, and free from bias. While equity is one pathway to achieve fairness, it’s not the only one.

Pay fairness has its own assumptions associated with it that also need to be considered. These can be both explicit and implicit, and can vary across cultures, organisations, and individual beliefs. For example, some may equate fairness with equal pay for equal work, but others may see it being fairer if pay is adjusted for factors like living costs, seniority, or additional responsibilities. Fairness can be relative and multifaceted.

One of the most fundamental assumptions is that individuals who perform the same job with similar skills, experience, and performance levels should receive the same compensation, regardless of their gender, race, age, or any other non-job-related characteristic.

There’s an assumption that pay should be based on merit, meaning those who contribute more or have higher performance levels should be compensated more than those who don’t. The assumption of meritocracy demonstrates the interrelation of pay fairness with transparency. It’s often assumed that transparency (e.g., sharing salary ranges or even specific salaries) can help ensure fairness. The thought is that when everyone knows what everyone else is being paid, it’s harder for unfair disparities to persist.

Another important assumption is that pay should reflect the market rate for a specific job to be fair. If an individual can earn a higher salary doing the same job elsewhere, then the current salary might be viewed as unfair. There is also a balance to be struck between pay fairness internally (fairly paid compared to co-workers) and externally (fairly paid compared to similar workers in other companies).

As with pay equity, there is always the underlying assumption that when employees perceive pay as unfair, they are more likely to be dissatisfied and disengaged, with the organisation struggling to retain staff.

Unpicking assumptions is key for the future of reward

Assumptions may be long-standing and traditional, but those made around equity and fairness are only becoming more crucial to the future of the reward space. There are already several indicators and trends suggesting that equity and fairness will continue to grow in importance in the coming years; reward leaders need to pay attention.

This direction of travel is partly influenced by the growth of social media and global communications, with an increase in societal awareness of pay inequities – particularly the gender pay gap. There has been more attention paid to social justice issues, including pay fairness, and this increased awareness results in employees demanding change and puts organisations under greater pressure to comply.

The trend will be maintained as newer generations enter the workforce, many of whom already show a greater commitment to values around social justice, diversity and inclusion. As the older generations become less of a driving force in the employee base, companies will need to address pay equity.

Additionally, more countries and jurisdictions are introducing legislation to enforce pay equity or to strengthen laws related to equal pay for equal work. This not only includes gender pay equity laws but also broader considerations for pay fairness related to race, age, disability, and other protected characteristics. These laws often require companies to demonstrate that they are paying employees equitably or face penalties.

Investors and shareholders are becoming more active in pushing for sustainable and equitable business practices. As part of this trend, there’s a growing expectation that companies will address pay fairness in their operations. Indeed, some investors see companies that prioritise pay equity as more sustainable and less risky in the long term.

Movements like #MeToo and Black Lives Matter have increased the general awareness of issues of gender and racial equality, which has prompted discussions about pay fairness. As these movements continue to shape public discourse, pay fairness will remain a central topic.

Companies’ reputations are increasingly tied to their ethical and social responsibilities. Organisations that fail to address pay equity could face reputational damages, which might translate into lost business or investment. Companies perceived as unjust in their pay practices may face boycotts, negative publicity, or other repercussions. Many companies are now integrating social responsibility into their business strategies. Addressing pay equity aligns with broader goals around corporate sustainability and responsible business practices.

Technology is also having an impact. As tools that analyse and detect pay disparities become more accessible, companies will be more aware of inequities and so forced to become more accountable. They will also have more digital tools to help remediate and automation to drive reward systems of the future.

Fundamentally, the pressure on companies to provide equity and fairness in reward is generally positive for society. However, the risk remains that assumptions are blindly taken as fact rather than being interrogated and challenged to ensure the reward systems are fit for purpose, not merely ticking a box for compliance. Reward systems need to be equitable and fair in a way that is meaningful to all involved – this is hard to achieve, but crucial, especially as we work towards building solutions fit for the future of reward.

TR2050 Members can look forward to discussing this issue at the upcoming virtual Think Tank meeting in August 2023. More blogs in this series will follow the discussion and be based on issues raised or ideas explored.