How to Achieve Fair Pay Policies
Your guide to creating pay policies that lead to employee satisfaction, pay equity compliance, and fairness at work
Are your pay policies working the way you think they are?
You want to reward and pay your employees fairly. But what exactly is fair pay?
Fair pay means that if someone makes more than someone else, there are clear, consistent and objective reasons-pay policies-behind those differences. These pay policies should be driven by what you want to reward at your organization. If you say you pay for performance, your highest performers get paid more. If you say you pay for tenure, your long-time employees get paid more than new hires.
Fair pay also means paying employees equally when their role and responsibilities are the same-regardless of gender, race, or ethnicity.
According to Gartner, "Concrete actions, like measuring, validating and reporting on pay policies and pay parity, lead to a 20% increase in employee engagement." ¹
Most businesses think they're paying employees fairly. But despite their best intentions, when they look under the hood, their pay policies aren't always working the way they expect-like the company that thought they were paying for performance, but then analyzed the data and found they actually paid their highest performers less; or the one that found they paid male employees more for tenure than their female counterparts.
This is because HR creates pay policies, but dozens or hundreds of different recruiters, managers, and department heads apply them. Without pay policies that are clear and intentional, a precise view of how policy translates to pay, and guidance and training for using those policies, intentions can quickly go off the rails.
In this guide we provide step-by-step guidance on how to:
- Design pay policies that support your organizational goals and values;
- Understand and measure whether your pay policies are fair and effective;
- Communicate your pay policies internally and publicly.
What are pay policies?
Pay policies. Compensable factors. Pay practices. Pay philosophies. Whatever you call them, they're the path to motivating the right behaviors, achieving workplace fairness and ensuring pay equity.
Pay Policies
The practices organizations put in place to determine and justify how to pay employees differently, especially those doing similar work and those in similar roles.
Common pay policies
include paying employees differently based on their performance ratings, location, years of experience, or tenure with the company.
An Effective Pay Policy
facilitates unbiased decision making, drives the right behaviors and outcomes, and is defensible in a court of law. It also works the way you intend it to, informing differences in pay that are consistent, intentional, and aligned to what you've communicated to employees, managers, and executives.
Tech
Location, Tenure, Grade/Level
Tech companies also apply Job Family/Function for groups of employees who do substantially similar work, but have varying specialties that justify different pay. For example, within Engineering, you may have Job Families like QA, Software Developers, and Data Scientists.
Manufacturing
Location, Grade/Level, Tenure
Grade/Level and Tenure are likely common because employees in manufacturing roles often move up in pay from one level to the next on a set timeframe.
Insurance
Performance Rating, Grade/Level, Time in Role
In the insurance industry, other factors that differentiate pay tend to deal more with differences in work. For example, some claims adjusters work in an office setting and some go out to accident sites-different working conditions that should be assessed separately.
Retail
Location, Tenure, Time in Role, Grade/Level
In retail, employers are also starting to differentiate pay based on business unit, division or brand.
How to design fair, effective pay policies
When it comes to designing pay policies, some teams are creating them for the first time, and others are in the final stages of optimizing them. Regardless of where you are in that journey, following these seven best practices will ensure that your pay policies are clear, effective and fair, helping you prevent pay inconsistency and inequity before it starts.
1. Align policies to goals
Policies should reflect your goals as an employer. What are your corporate values? What do you value in your employees? What behaviors do you want to motivate and reward? Get clear on goals to help you weigh which factors to use to determine pay. If your priority is employee loyalty, pay generously for tenure. If your priority is to compete for fresh talent, reward new hires with higher pay.
2. Be objective
Lean towards pay policies that are objective and related to skill, effort, and accountability:
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- Hire date (seniority/tenure)
- Location (city, state, facility)
- Years of relevant job experience
These are easier to formalize and reduce the possibility of bias.
3. Customize policies by group
Does it make sense to reward the same factors for every team at your company? Probably not. For example, education might make a big difference in the effectiveness of one team, like R&D, but not for others. In that case, only use education to differentiate pay for one group, not all.
4. Watch out for subjective factors
Some pay policies have more potential to introduce bias that others or inaccurately reflect what's going on with your employees. While there are clear advantages to using many of the pay policies below, proceed with caution and confirm you have the right data and frameworks in place before using them.
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- Performance evaluation scores-We all want to be paid more if we're a rockstar performer. But subjective manager discretion makes it hard to ensure there's no bias in this pay policy.
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- Level (or grade)-Level is another tough factor to implement evenly and fairly, since different managers might use different factors to level or grade employees. A safer approach is to pay for the factors that should determine level in the first place-like years of experience, tenure, education, or manager status.
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- Age-It's often the case that employers don't know how many years of relevant experience their employees have, which leads them to use age as a proxy for experience. But as with any proxy, it doesn't always work. For example, in industries and roles where switching careers is common, age belies the true years of experience. Be aware of the complexities before using this pay policy.
Lessons learned: Are you really paying for performance?
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- No-we needed to remove performance as a pay policy. For one brand that described themselves as a pay-for-performance organization, a look at the data uncovered some surprising inconsistencies. In one group, high performance ratings benefited men, but not women. In another group, employees (men and women) were uniformly paid less for higher performance ratings. And overall, when looking at the average impact of performance scores on compensation, it was a wash, with little-to-no consistent correlation between performance score and pay. Because of this, the team decided to move away from performance as a pay policy, because they felt it was too biased and difficult to implement consistently to be fair.
- No-we needed to add other pay policies to ensure fair pay. One company thought that they had just one pay policy that was driving differences in pay: performance. Yet, when they analyzed the data, they found little-to-no variation in pay due to performance ratings. Meaning, high performers were paid the same as low performers, all things equal. Further analysis showed that other important factors like tenure and education were driving pay differences, giving the team the opportunity to refine their pay policies to reflect the true drivers of pay at their organization. In parallel, because paying for performance aligns to the team's strategic goals, they are using their findings to reeducate their team about how to apply all of their pay policies - including performance and other factors - consistently and fairly.
5. Avoid overlapping policies
When pay policies start to overlap-such as saying you pay for Time in Role plus Tenure plus Time in Job band-it introduces too much grey area. This hinders your ability to set clear, objective guidelines for managers and employees, and it won't stand up in a court of law.
6. Measure, measure, measure
It's great to design the perfect policy, but if you never measure its impact, you won't know if it's working as you intended it to.
The key is to run a pay policy analysis. This will tell you which policies are driving differences in pay, and by exactly how much. Knowledge is power and the results will tell if your policies are having the impact you want. And if not, you'll be able to pinpoint issues and drive change using data to back your suggestions.
Pay policy analyses take specialized skills and time. Pay equity software gives you pay policy insights in seconds. Learn more.
Pay Policy Analysis Pro Tips
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- Use data to test a theory about what might be going on in your organization, like differences in pay after merger or acquisition, or because of different implementation of pay policies across managers
- Identify hidden or unintentional drivers of pay differences (e.g. gender, race) that benefit one group more than another.
- To get useful insight, don't just analyze pay policies company-wide-look at individual groups of employees doing similar work.
- Don't just measure once. Pay policies-and the people implementing them-are living systems that should be consistently monitored over time.
7. Train your managers
When pay policies start to overlap-such as saying you pay for Time in Role plus Tenure plus Time in Job band-it introduces too much grey area. This hinders your ability to set clear, objective guidelines for managers and employees, and it won't stand up in a court of law.
Best practices for communicating about pay policies
When it comes to designing pay policies, some teams are creating them for the first time, and others are in the final stages of optimizing them. Regardless of where you are in that journey, following these seven best practices will ensure that your pay policies are clear, effective and fair, helping you prevent pay inconsistency and inequity before it starts.
Transparency Drives Employee Satisfaction
According to Gartner's "Addressing Pay Inequity" report, "Leading companies proactively communicate through multiple channels to get credit for their work and shift what their employees are already thinking. When employees perceive a credible organizational effort to address equity, they report the following talent improvements:
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- Performance-20% more employees are willing to put in extra effort to get a job done.
- Attraction-Nearly twice as many employees would recommend their organization as a great place to work.
- Turnover-24% fewer employees say they are actively looking for a new job at a different organization."
You've looked under the hood and used data to analyze how your pay policies impact compensation. You've designed pay policies that reflect your company's values and priorities. You've trained managers and other stakeholders to implement them effectively and minimize bias. And you've made (and continue to make) adjustments to ensure they're fair.
Now it's time to communicate more broadly, both within the organization and publicly.
✔ Document your pay policies so that they're clear and easy to reference when it comes time to make pay decisions.
✔ Make sure all key stakeholders are bought into the factors you're rewarding.
✔ Reach out to groups or departments that have had inconsistencies in the past and make sure the policies are clear.
✔ Communicate to the entire organization about how pay policies will impact employee pay.
✔ Once you're confident your pay policies are working and you're on the right track, open the floodgates of communication. Publicly share your commitment to fairness and back it up with your pay policy analysis data. Fair pay-especially when measurable-is a key brand differentiator.
✔ Ensuring fair pay policies isn't a one-and-done process. Neither is your communication effort. Keep a pulse on how your pay policies are working and continue to be transparent, with ongoing dialogue with leaders, managers, and employees.
Case Study: Transparency supports employee buy-in, trust, engagement
Through a pay policy analysis, a software company was able to validate that their pay policies were indeed working as intended. The company was paying for what they said they were paying for and that was reflected in pay equity results across the organization. But they didn't stop there. In an all-hands meeting, they polled employees about pay policies: Do you think it's fair to pay someone differently by location? By years of experience? The poll helped the company understand where they needed to do more work building buy-in among employees for their pay policies, while growing employee trust and engagement.
¹ https://www.gartner.com/smarterwithgartner/what-is-the-new-employment-deal/
Ready to learn more about how to create fair pay policies that motivate the right behaviors so that every employee-and the business-can thrive? Learn more about Syndio Pay Policy Analytics.
About Syndio
Syndio's mission is to empower employers to eradicate unlawful pay disparities due to gender, race, and ethnicity and make ongoing compensation decisions informed by fairness and equity data. Syndio customers drastically reduce legal risk, saving millions in ongoing remediation and create a positive brand reputation, which helps attract and retain top talent at every level of the business. Syndio is proud to partner with brands who are leading the way in equity and setting the standard for workplace fairness.