Making Pay Fair Through Internal Equity Adjustments

Pay equity is top of mind for most employees these days. With inflation emboldening people to find better opportunities, companies are seeking ways to keep their employees happy. One strategy that is gaining fame is the internal equity adjustment. This is when companies analyze their pay practices to identify and address pay gaps between employees doing similar work. Internal equity adjustment may not be a quick fix, but it can be a vital part of building trust and fairness.

This article explores what companies need to consider when embarking on this process with the goal is to provide insights for making it work within different companies and cultures. With effort, internal equity adjustments can show that companies truly value their employees.

What Is an Internal Equity Adjustment?

An internal equity adjustment is when a company reviews and adjusts employee pay based on fairness within the company. They consider various factors such as skills, duties, and performance to ensure fair pay for employees with similar roles and impact.

The key is comparing similar roles. It will not be fair to compare an entry-level role to an executive. Companies group roles with similar requirements, tasks, experience levels, and impacts. They analyze the pay grades for each group to spot any unfair pay gaps. The things they consider include:

• Job responsibilities: Are the roles and expectations similar?
• Experience and skills: Do employees have similar backgrounds and expertise?
• Performance and contributions: Are high performers paid fairly relative to average performers in the same group?
• Pay relative to external market: Is pay for a group notably higher or lower than average pay for similar roles at other companies?

The company adjusts and fixes the internal equity issue when the analysis shows unfair pay gaps. This means increasing pay for low-paid employees in a group. They may get a pay increase all at once or through a series of adjustments over time. The goal is to bring their pay to a fair level relative to their colleagues in the same group.

Maintaining pay equity is crucial for employee satisfaction, retention, and motivation. No one wants to feel unfairly underpaid. Regular reviews and adjustments help ensure a fair, consistent pay structure within the company.

When to Conduct an Internal Equity Analysis

When hiring new employees or promoting current ones, it is crucial for companies to evaluate internal equity. This helps ensure fair pay for all employees and involves comparing the pay of employees in similar roles to determine whether there are any baseless pay gaps. Conducting regular audits every 1-2 years is a good rule of thumb.

• Upon Hiring New Employees

When bringing on new hires, HR must analyze the pay of current employees in similar roles. Disparity in the new hire's pay can cause resentment and hurt morale. For example, a company hires a new engineer for $95,000 but other engineers with the same experience are making $85,000. This may require pay adjustments for the existing ones.

• When Promoting Employees Internally

Promoting an employee often means increasing their pay.  HR needs to consider how this affects pay equity between the newly promoted employee and their colleagues. When the promoted employee's new pay is unevenly higher, others in similar roles can see it as unfair. In these cases, additional pay adjustments may be necessary to maintain equity.

• When There Are Major Pay Discrepancies

When a company's audit shows notable gaps among employees in similar roles, they must promptly address the issue. Unresolved pay gaps can damage work culture, lead to resentment, and even spur legal consequences. By conducting an internal equity analysis, companies can identify and resolve unjust pay gaps, ensuring a fair system for all.

How to Make Internal Pay Adjustments Fairly

Making fair pay adjustments within a company requires careful analysis and planning. Management must review current pay levels and job duties to identify inequities.

• Pay Audits

Conducting a pay audit is the first step. This involves analyzing the pay of all employees doing similar work to determine whether there are any unfair gaps. Gender, ethnicity, or tenure are not valid reasons for pay gaps. Skills, experience, education, and job performance must determine their pay.

• Address Unexplained Differences

Management must adjust when the pay audit reveals differing pay for employees with similar jobs and qualifications to address gaps. This can involve raising the pay of underpaid employees. When doing so, transparent communication about pay changes is crucial to prevent damage to company culture or morale. Managers must clearly convey that the goal is to ensure fair pay for all employees based solely on relevant factors.

• Maintain Fairness

To keep pay fair over the long run, companies need to establish strong policies and review procedures. This includes guidelines for setting pay levels when hiring or promoting employees. They must conduct regular pay audits to catch any emerging gaps quickly. The management must consider not just an employee’s performance when giving annual pay increases. They must evaluate their current pay as well relative to peers to ensure any increases are fair and help preserve equity.

With a commitment to fairness and transparency, management can make internal pay adjustments to address inequities. This strengthens company culture and ensures pay is solely based on the value of employees’ work. By auditing, addressing gaps, and monitoring equity, companies can build a fair system and a trusting relationship with their employees.

Conclusion

Fair pay is an essential part of any company’s pay strategy. Through internal equity analyses and adjustments, companies can ensure their pay structures align with their values and culture. While it does require extra work, maintaining internal equity is crucial for attracting and retaining top talent. It boosts employee engagement, satisfaction, and helps avoid potential legal issues as well. With the right approach, companies of any size or industry can achieve pay equity.