Pay equity goes beyond being the right thing to do. It's soon-to-be a legal requirement for companies across the world. With the incoming EU Pay Transparency Directive and US pay transparency measures, organisations must manage their pay equity data soon, or face a risky game of high fines and potential brand damage.
But it does raise the critical question: how can companies guarantee fair compensation for all employees? And for those not monitoring pay equity, where do they even begin?
For many businesses, gathering and analysing pay equity data is daunting. The data is sensitive, and often housed in different places. You have the process of locating and centralising the data, and conducting a pay equity analysis to identify the pay gaps. It’s enough to scare even the most seasoned of compensation experts – let alone People teams in smaller organisations.
It’s unsurprising, then, why 95% of businesses are still struggling to implement effective, compliant pay equity strategies in 2024. In this post, we’ll cover what pay equity is and why it’s so important for your business, both this year and beyond.
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Pay equity is a concept that ensures all individuals are fairly compensated for their work, irrespective of gender, age, race, or disability. Pay equity aims to eliminate any type of discrimination in compensation practices. It guarantees that everyone receives equal pay for similar work or work of equal value.
Typically, companies monitor pay equity through pay equity software – normally as part of a compensation management tool – or an Excel spreadsheet. Implementing this requires a well-defined levelling framework and a clear salary band structure. While spreadsheets are commonly used in many companies, they demand a huge amount of time, effort, and expertise to maintain, and are also prone to errors.
On the other hand, pay equity software provides an instant overview of pay equity metrics. With compensation management software, it’s easy to conduct a pay equity analysis or pay equity audit, or easily benchmark a company against market data.
Pay equity ensures that employees who perform the same or similar work are compensated equally. It follows the principle: "equal pay for work of equal value", which is central to pay equity legislation. And while differences in pay might exist due to factors like performance, location, or tenure – pay equity mandates that organisations cannot base these differences on gender, race, religion, sexual orientation, or any other demographic characteristic.
When we look at the pay gap within an organisation, we can do that in one of two ways.
For more information on adjusted and unadjusted gender pay gaps, check out our blog here ➡️
In contrast, pay equality addresses the broader issue of whether men and women earn the same on average across an organisation. It looks beyond a job-to-job comparison. Instead, it aims for the average salaries (mean or median) of all female and male employees to be equal, irrespective of their roles within the company.
Let’s look at an example:
Imagine a technology company where both John and Sarah are software engineering managers with similar levels of experience and responsibility.
Pay equity is achieved if John and Sarah receive the same salary for their similar roles, reflecting equal pay for equal work regardless of their gender, age, race, or other characteristics.
Pay equality, on the other hand, focuses on the average earnings of all female employees being equal to the average earnings of all male employees across the entire company. It addresses the overall balance of earnings between genders within the entire organisation, highlighting the systemic issues that influence these outcomes.
If John and Sarah are both managers in the UK, Sarah would earn 17% less than John. This disparity varies across different job levels within the same company:
Understanding the importance of fair compensation for employees is crucial. However, implementing it can be more complex. For instance, determining what is a fair and equitable salary can be challenging due to the vast amount of available data.
Next, we'll outline four key reasons why pay equity benefits your business.
One of the main reasons pay equity is so important for business is to ensure companies comply with any legislation around it. As we’ve mentioned, the biggest change on the horizon is the incoming EU Pay Transparency Directive. This huge piece of legislation will come into effect across EU countries, including France, Germany, and more by 2026. The aim? To remove discrimination and ensure equal pay across men and women.
It affects all EU businesses and companies with more than 100 employees based in EU member states. And despite it coming into full force in less than two years, Ravio’s Compensation Report shows that nearly half (45%) of organisations believe the implementation of the legislation is still too far away to be a priority.
It’s crucial that companies get on the front foot when it comes to pay equity data. Doing so too late may come at a high cost for your business.
“Pay transparency allows workers to detect and prove possible discrimination based on sex. It also shines light on gender bias in pay systems and job grading that do not value the work of women and men equally ... Since such bias is often unconscious, pay transparency can help raise awareness of the issue among employers and help them identify discriminatory gender-based pay differences.”
According to Gartner research, only 32% of employees believe their pay is fair. And whether or not that’s actually true can oftentimes be irrelevant. When it comes to retaining your best talent, it’s important to control perception.
The same study found that employees who perceive their pay as unequitable have a 15% lower intent to stay with their employer than those who don’t. What’s more, for those who do stay, engagement at work is down by 13%.
Ravio’s data tells a similar story. We found that the median tenure of an employee in a European tech company is 1 year and 9 months. To improve this, we found that 78% of People teams are increasing their focus on up-skilling, pay transparency, and salary reviews using benchmarking data. This is all geared towards having better pay equity in the future.
At the leadership level, our upcoming Pay Equity report highlights a significant gender disparity in executive positions. Specifically, male executives tend to stay in their roles 46% longer than their female counterparts. While pay equity is a huge, contributing factor – our new report will explore this issue in greater detail, among other findings.
Pay equity inherently fosters a diverse workforce. By ensuring fair compensation free from discrimination based on gender, race, age, disability, or other characteristics, companies create an environment conducive to a thriving diverse team. This is a significant advantage in attracting talent. For instance, the PwC ‘Women in Tech’ report reveals that 83% of survey respondents actively seek employers renowned for their commitment to diversity, equity, and inclusion.
The benefits of diversity and inclusion also extend beyond ethical considerations—they directly enhance business performance. Research by McKinsey shows that diverse companies are now more likely than ever to outperform less diverse peers on profitability. In fact, gender-diverse teams on the executive level are 25% more likely to have above-average profitability. Companies in the top quartile with ethnic- and culturally-diverse teams also outperform those in the fourth quartile by 36%. It’s clear that the higher the diversity, the higher the chance of outperformance.
The importance of pay equity goes beyond compliance and employee retention. It significantly influences workplace morale and the culture you aim to establish as well. Employees who perceive their compensation as fair experience increased satisfaction and a stronger sense of belonging. These are both vital for boosting productivity, job satisfaction, innovation, and an enriched workplace culture.
What’s more, demonstrating a commitment to fair pay not only reflects positively on your brand but also pays dividends. A 2022 Edelman report indicates that 60% of job candidates choose employers based on alignment with their personal values and beliefs, underscoring that fair and equitable compensation is crucial in attracting and retaining the best talent.
The average time it takes to conduct a comprehensive pay equity audit varies between 2 - 5 months. It’s dependent on whether you have someone in-house, or whether you rely on a third party vendor.
Whatever it is, a pay equity review is not a simple, linear process. It typically has several re-runs, where you need to find and address the complexities in your data and measure the impact of your changes.
While every company has their own requirements for pay equity software, below are some of the basics of a pay equity software product. It must be able to:
Pay equity is essential for any business, directly influencing organisational health by retaining top talent, enhancing morale, and strengthening your brand's integrity. By adopting transparent and fair compensation practices, your company not only meets global standards but also fosters a culture where every employee feels valued.
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In this session, Trine Palm, Global People Director at Formalize, shares how they built their levelling framework and compensation architecture from the ground up, and what it means for EU Pay Transparency Directive readiness. From IC and management track alignment to full salary band transparency, this is a practical look at what it takes to make pay transparency work in a fast-scaling team.
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