5 Things You Need to Know About Pay Equity

HR leaders are scrambling to address pay inequity. Compensation is key, but can’t fix everything. Here’s what you need to know as you tackle your pay gaps.

A service center manager at Citicorp, the principal flautist at the Boston Symphony and fourteen partners at major New York law firm Chadbourne & Parke. These are just a few of the women who have sued their employers over pay inequity. While pay discrimination based on gender has long been illegal in many major markets, pay gaps remain — and Gartner research shows only one in seven employees believe their organization is making a credible effort to close them.

The credibility issue is well-founded: only 28% of organizations are confident that they have closed pay gaps between employees performing similar work (role-to-role pay gaps). As the pressure for pay equity rises, HR leaders are key drivers of a comprehensive, orchestrated response. To succeed, it’s important for organizations to know what they can control and how to target their efforts for comprehensive and sustained progress on pay equity.

Role-to-role gaps are clearly something compensation leaders can and should address

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Here are five things most companies don’t realize about the pay-equity issue.

No. 1: There’s more than one type of pay gap

While ‘pay equity’ is used as a catch-all term, there are actually two types of pay gaps. One is the group-to-group pay difference, which stems from environmental factors other than gender or race. Examples are long-term systemic workforce trends such as the concentration of women in certain lower-paying occupations and industries, and the cumulative effect motherhood can have on careers.

A role-to-role gender pay gap — like male nurses earning more than female nurses — can be targeted through compensation practices. “HR can’t directly and immediately control environmental factors, although they can collaborate more broadly to influence them,” says Gartner HR advisory leader Anna M Krasniewska. “Role-to-role gaps are clearly something compensation leaders can and should address.”

Attend webinar: Effectively Address Pay Gaps

No. 2: Compensation can’t fix everything, but is responsible for a very real part

By 2027, almost 60% of the U.S. labor force will be comprised of women and racial and ethnic minorities. By that time, women will make up almost 50% of the EU labor force. As workforces become more diverse, organizations become increasingly vulnerable to pay inequities.

Our research shows the average organization’s gender pay equity gap is 27% — that means the average pay for male employees is 27% higher than for women. That’s even more than the 20% that is generally reported. However, that number doesn’t reflect only pay discrimination: 9% is attributable to choice of occupation; 6% to organizational factors like size, industry, or geography; and 5% to human capital factors like differences in education and experience.

The remaining gap —  7.4% — can be directly ascribed to gender. This is the role-to-role gap, which HR leaders can resolve with rewards structures. “HR owns this gap and has an obligation to close it before it becomes a serious problem for the organization,” says Krasniewska.

No. 3: It will never be cheaper to achieve role-to-role pay equity than it is today

Role-to-role pay gaps are growing. “Ten years ago, that 7.4% figure was a full percentage point lower, and ten years from now, it will be close to 10%,” says Krasniewska. In short, it probably won’t ever be cheaper than it is now to address this element of pay equity.

For a typical large company, that cost is growing by as much as $500,000 a year. The bigger the organization and its payroll, and the wider the gaps, the faster that cost is accelerating.

No. 4: Pay equity requires an ongoing commitment

Closing pay gaps can’t be an ad-hoc initiative. Pay equity analysis needs to be integrated as a key process of the rewards function. “HR leaders must do their due diligence, but they also must be prepared to keep doing it every year,” says Gartner research director Benjamin Arendt.

The headlines are replete with announcements from corporations overhauling their compensation budgets in a bid to close gender and/or racial pay inequity. But even organizations that succeed in closing pay gaps can’t assume those gaps will remain closed.

Addressing pay equity issues through a series of ad-hoc audits and adjustments consumes more resources and exposes organizations to greater risk than if they found a way to address them continuously. Leading organizations conduct equity audits as an ongoing process, rather than a one-off event.

No. 5: Perceptions matter, and perceptions are often skewed

Public awareness of pay equity as a whole is rising, but since little attention is drawn to the different types of pay gaps, many employees misunderstand the reality. In our research, we found employees tend to overestimate role-to-role gaps and women tend to overestimate them more than men.

Pay equity perceptions strongly influence employee retention and morale so it’s incumbent upon organizations to be more transparent and communicative with employees about their pay gaps and what they are doing to close them. Fewer than 20% of organizations we surveyed said they communicate this information externally — or to employees. This number will need to increase.

HR leaders will need to get the leadership team on board to build credibility with employees that the organization is taking equity seriously. Organizations will also need to take steps to publicly validate employees’ questions and concerns — and show how they are being answered by publicizing the results of their pay efforts to close pay gaps.

Watch and learn: The Price of Perceptions: The Cost of Not Addressing Pay Equity

Gartner for HR Leaders clients can read more in Paying a Diverse Workforce.

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