Closing the Pay Gap Caused by Increased Market Demand

There is no arguing that the pandemic changed the job market.

The current tight labor market forces employers to offer higher pay to recruit new employees to fill open positions. When new hire salaries pass tenured employee salaries, retention problems arise. With 82% of employers planning on hiring and 40% of the global workforce planning a job change in 2021, how can employers close that pay gap and retain employees?

Pay is one of the biggest factors that can lead an employee to accept—and remain in—a job. Pay equity means compensating employees equally for performing similar job duties while considering their experience, job performance, and the length of time they have been with the company. When workers feel they are being paid less than their colleagues for doing the same work, it results in a 16% decrease in intent to stay. Employee morale, turnover and retention rates, and performance improve when employees feel valued and are compensated accordingly.

Is it time to review your compensation policies?

A great way to improve pay equity is by conducting a pay audit. An audit is an effective tool to help identify pay disparities. Some pay disparities are for legitimate reasons such as education, experience, and seniority. However, others are not, providing an opportunity to improve pay equity. The steps of a pay audit include:

  • Make sure auditors have good data. This includes the length of service, gender, race, age, job classification, and demographic information.
  • Account for legitimate differentials. Experience, education, and high-level training are legitimate reasons for higher pay.
  • Adjust employees’ pay to create equity. This may need to happen over a few years, depending on the budget until it reaches the correct amount. Equitable pay adjustments are usually made on a going-forward basis. Back pay is not typically part of the process.
  • Fix operational gaps. Investigate causes of unfair pay discrepancies and put processes in place to avoid future pay discrepancies.

How can employers avoid creating a pay gap in the future?

Once processes are put in place to create pay equity in an organization, they should be monitored annually. Employee turnover, changes in the company, and subjective bias can cause pay gaps to return. Here are a few tips for creating ongoing pay equity:

  • Set ranges for compensation before hiring. Many states have passed laws prohibiting asking candidates about previous salaries, which has historically contributed to the gender wage gap. Use market rates and internal pay data to make sure all employees are paid equally.
  • Be transparent and inclusive about compensation systems. Share the objective metrics used to create compensation ranges for job performance and communicate with employees about their progress on the scale.
  • Train decision-makers. Managers in charge of making pay decisions need to understand pay equity and why it is important. It is important to document all legitimate reasons for pay disparities in case of future litigation.

Pay equity has been top of mind over the last few years as social movements like #BlackLivesMatter and #MeToo have taken the national stage. Many states have pay transparency bills under consideration, and California now requires employers to file equal pay reports every year. As the effects of the pandemic ripple through the workforce, a focus on pay equity and pay transparency can help businesses recruit and retain employees who trust their businesses’ practices and are loyal to the company.

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