This last Friday, June 25^th, President Biden signed Executive Order 14035 (Diversity, Equity, Inclusion, and Accessibility in the Federal Workforce) to progress diversity, equity, inclusion, and accessibility processes and procedures in the Federal Government. Among the various directives, the order dedicates a section to advancing pay equity in the federal government. In support of this objective, this blog outlines some background on workplace pay equity challenges and provides strategies leaders can use to advance pay equity in their organizations.

The conversation around pay equity usually centers on the difference between the overall median wages paid to men and women in the U.S. (called the “raw gender wage gap”), which is typically reported as between 80 and 85 cents earned by women for every $1 by men¹.

Researchers have been able to account for most of that gap by controlling for relevant non-gender factors (e.g., industry, region, and job)², but an unexplained gap remains, and this gap is larger for women of color, reflecting additional race/ethnicity wage disparities³.

At a high level, these disparities mostly result from different social norms/roles for men and women, as well as the presence of implicit biases, or unconscious beliefs, in organizational human capital systems⁴. Aside from these general biases, behavioral scientists have identified many cognitive biases that also cloud rational judgement and result in substandard decision-making (e.g., anchoring bias, availability heuristic, decision fatigue)⁵.

Many studies over the years have focused on understanding the societal norms that result in inequities and developing empowering guidance for individuals. Alternatively, this blog focuses on wage inequities from a human capital systems perspective and highlights some strategies human capital leaders can take to proactively mitigate systemic disparities.

Bias in Human Capital Systems

Implicit and cognitive biases result from automatically formed judgements or decisions people make about an individual or situation based on their past experiences. In both cases, these unconscious thoughts are products of mental heuristics that limit our ability to think logically and it’s the unconscious nature of these biases that presents the biggest obstacle to eliminating their influence.

Human capital systems broadly refer to the practices, processes, and/or technologies used in human capital management, including functions such as recruiting, hiring, training, compensation, performance management, etc. Since all people have biases, each of these systems will have some amount of bias influencing outcomes/decisions within that system (e.g., bias in the recruiting system strongly influences which candidates are invited to interview).

However, in addition to this “within-system” influence of bias, human capital systems are interrelated, where the outcomes of one system typically influence the outcomes of the other systems (e.g., employee performance appraisal scores strongly influence compensation decisions). As a result, the more your human capital systems rely on the unevaluated judgement of individuals to make people decisions, the more opportunities will exist for bias to influence those decisions and result in inequities that linger and often multiply across your human capital systems.

Thankfully, reducing the influence of unevaluated human judgement from people decisions is not a new concept and much research has been conducted to reduce these biases in particular systems. To better understand how bias enters the pay-setting process, let’s look at the well-examined area of bias in hiring.

Applying Standardization Practice from Selection Research to Compensation Policy

 Since the late 1970’s, the Uniform Guidelines on Employee Selection Procedures have helped employers make fair and equitable selection decisions (e.g., pre-hire interviews, performance evaluations, promotion tests) in accordance with Title VII of the Civil Rights Act⁶. The guidelines ban any employment decision that results in employees from protected classes being disadvantaged (intentionally or otherwise) due to a non-job-related organizational decision⁷.

One now ubiquitous selection best practice to come out of the Guidelines is the use of standardized hiring assessments, where every candidate receives the exact same test, with the same instructions, time limit, scoring procedures, etc. This is clearly a fairer way to select candidates, primarily because it significantly reduces the possibility of bias influencing people decisions.

Expanding on this, the following section outlines actionable steps you can take to reduce the organizational impact of bias in compensation practices and work toward eliminating wage disparities across your human capital systems.

Strategically Narrowing the Wage Gap

To begin to reduce the unintended pay gaps, it’s important to take a critical look at your organizational human capital systems and seek to add structure or checks-and-balances as much as possible. Consider evaluating your human capital systems against the following best practices.

Of course, these recommended practices won’t apply or be appropriate for every organization and there are many ways of strategically evaluating your human capital systems to reduce unintended disparities.

Embrace pay transparency:

• Develop and communicate pay transparency policies that outline what, why, and how employees are compensated and how your compensation relates to the relevant labor market. This approach greatly reduces the likelihood of workplace pay discrimination and inequities for women and people of color and has also been linked to greater employee job satisfaction and productivity⁸ because employees who understand how pay decisions are made are more likely to perceive the compensation strategy as fair.

• Avoid producing employee pay secrecy policies. Workplace policies that seek to discourage employees from discussing pay have an outsized negative impact on women because they seek to reduce the ability of employees to negotiate, which creates ambiguity that amplifies wage disparities.⁹

Develop a structured compensation strategy:

• Produce a pay formula/structure (often a multiple regression equation) that allows you to input job-relevant candidate information (e.g., work experience, education level) to determine a candidate’s offer. This structured approach reduces pay disparities by systematically eliminating non-job-relevant factors from compensation practices.
  • Note: Developing a structured pay formula may mean reducing or eliminating pay negotiation practices for hiring and promotion. The major reason for this being salary negotiations inject differences in pay that are related to a candidate’s ability to negotiate and not necessarily to job-relevant factors¹⁰. This is particularly relevant to the gender wage gap discussion when you consider researchers have found women are generally less likely than men to engage in salary negotiations.¹¹

• Avoid factoring previous salary into candidate offers. The President’s recent EO actually prohibits agencies from asking for candidate previous salary information during hiring¹². The reason for this is that women and people of color are more likely to have been underpaid in the past and using previous salary as an input to candidate offer/compensation decisions continues wage disparities that may have been influenced by discrimination. These disparities can compound as well when you consider performance raises/bonuses are almost invariably issued as a percentage of base salary—meaning compensation decisions that include prior salary information often propagate inequities in the present that multiply in the future.¹³

What other strategies do you recommend to mitigate pay inequity? Share your thoughts with us on LinkedIn!

James Wilcox is a Senior Human Capital Consultant in the Analytics, Technology, & Transformation (AT&T) Center of Excellence at FMP, where he applies his research and statistical methods expertise to empower client data-driven decision-making. Outside the office, James enjoys reading personal growth books, cooking, and taking self-guided walking tours of new (to him) cities.

References

1. Pew Research Center. The Narrowing, but Persistent, Gender Gap in Pay. From: https://www.pewresearch.org/fact-tank/2019/03/22/gender-pay-gap-facts/
2. Google. Guide: Structure and Check for Pay Equity. From: https://rework.withgoogle.com/guides/pay-equity/steps/understand-the-research/
3. Center for American Progress (CAP). Quick Facts About the Gender Wage Gap. From: https://www.americanprogress.org/issues/women/reports/2020/03/24/482141/quick-facts-gender-wage-gap/
4. Harvard Business Review (HBR). 7 Practical Ways to Reduce Bias in Your Hiring Process. From: https://hbr.org/2017/06/7-practical-ways-to-reduce-bias-in-your-hiring-process
5. The Decision Lab. Cognitive Biases. From: https://thedecisionlab.com/biases/
6. U.S. Department of Justice (DoJ). Brief Description of the Uniform Guidelines on Employee Selection Procedures. From: https://www.justice.gov/crt/brief-description-uniform-guidelines-employee-selection-procedures
7. Society for Human Resource Management (SHRM). Clearing Up Misconceptions About the Uniform Guidelines on Employee Selection Procedures. From: https://www.shrm.org/resourcesandtools/hr-topics/talent-acquisition/pages/clearing-up-misconceptions-uniform-guidelines-employee-selection-procedures.aspx
8. Mercer. Navigating the Pay Transparency Journey. From: https://www.mercer.us/content/dam/mercer/attachments/north-america/us/us-2020-mercer-navigating-the-pay-transparency-journey-infographic.pdf
9. Washington University in St. Louis – Newsroom. Women Are More Likely to Work Under, and Violate, Pay Secrecy Policies. From: https://source.wustl.edu/2021/02/women-are-more-likely-to-work-under-and-violate-pay-secrecy-policies/
10. Society for Human Resource Management (SHRM). No Salary Negotiations Allowed. From: https://www.shrm.org/hr-today/news/hr-magazine/Pages/0915-salary-negotiation-bans.aspx
11. Monster. How Salary Negotiation Contributes to the Wage Gap. From: https://www.monster.com/career-advice/article/salary-negotiation-gender-wage-gap
12. The White House Briefing Room. Executive Order on Diversity, Equity, Inclusion, and Accessibility in the Federal Workforce [Sec. 12, (ii)]. From: https://www.whitehouse.gov/briefing-room/presidential-actions/2021/06/25/executive-order-on-diversity-equity-inclusion-and-accessibility-in-the-federal-workforce/
13. National Women’s Law Center (NWLC). Asking for Salary History Perpetuates Pay Discrimination from Job to Job. From: https://nwlc.org/wp-content/uploads/2018/12/Asking-for-Salary-History-Perpetuates-Discrimination-1.pdf