Hybrid work is the future of work.
A recent Accenture survey of over 9,000 global employees revealed that 83% prefer a hybrid work model. However, hybrid work environments come with unique compensation challenges. Work from home experts say that unexpected biases in hybrid work environments may exacerbate inequality.
Fortunately, a pay equity analysis can help your organization get ahead of unfair differences in pay. Here’s a look at what it takes.
A pay equity analysis is the process of finding pay gaps that might arise based on factors like race, age, gender, length of employment, and more between groups of employees who perform substantially similar work.
While regulations and laws like the Civil Rights Act, Americans with Disabilities Act, and the Equal Pay Act may require a pay equity analysis, conducting this analysis is also crucial to building a company culture of fairness and equality for all.
Importantly, you can’t just conduct a pay equity analysis once — you should do so regularly. According to WorldatWork’s 2022 Pay Equity Study, 70% of the organizations surveyed took action on pay equity in 2022, representing a 10% increase from 2019 and a 4% increase from 2021.
If your company already has or is planning to introduce a hybrid work model, make sure to conduct a data-informed pay equity analysis at least once a year to identify and resolve any wage gaps that might arise. This ensures that you provide equal pay for equal work to all your employees, wherever they are. Here are five steps you can follow to conduct this analysis.
Your compensation philosophy is your north star, serving as your mission and purpose for conducting a pay equity analysis. It drives how you compensate new employees as well as existing ones who are eligible for promotion.
Consider the core factors that fuel your compensation philosophy. These questions should help you determine what’s important to your company:
Be prepared to explain your compensation philosophy and the “why” behind any changes in compensation to your hybrid workforce. Communicating this information provides clarity and transparency behind your decision-making, which can eliminate employee confusion and secure company-wide buy-in for your decisions.
Look for data both externally and internally to inform your pay equity analysis.
Externally, it’s crucial to look at companies in your own industry for a truly apples-to-apples comparison, as compensation for the same role across sectors may vary. Research what others in your field pay employees by experience level, role, department, location, and company size. As you do so, be sure to consider total compensation: salary, total cash and equity, fringe benefits, etc.
Internally, group employees by those same variables (experience level, role, department, location) and compare them to your external data to get a better understanding of how your pay rates compare to the industry standard.
Pay equity doesn’t exist in a vacuum. You can’t work toward fair pay without also considering how different your employees’ lives and needs are based on their demographics, such as where they live and who they are.
Location
Compensation planning for hybrid teams can be complex when taking into consideration the differences in pay for a distributed workforce, as the market rate can vary across regions. Consider both the pros and cons of value-based and location-based pay models.
With a value-based pay model, also known as location-agnostic pay, everyone receives the same pay based on just two variables: the national market rate and their level of experience, regardless of where they live. Reddit is an example of a company that follows this model, tying their compensation to the market rate for the highest-paid areas of the U.S. They chose this model to help boost employee retention, since this approach gives Reddit employees more flexibility in choosing where they live. Value-based pay may be more equitable, but paying market rate based on the most expensive areas like Reddit does can be very costly. But, if your rate skews toward the national average instead, you risk losing out on talent who reside in areas with a higher cost of living.
With a location-based pay model, you adjust compensation based on location and pay employees based on their local market rates. While value-based pay is arguably equal pay, location-based pay is considered fair pay as it evaluates differences in the cost of living across regions. This approach can lead to savings on compensation since you can still pay a fair wage to employees who live in less expensive markets without breaking the bank.
Location-based pay does come with its challenges though. For example, calculating the average for every employee’s city can be taxing. One way to ease this challenge is to introduce tiers, like Slack does — aggregate cities and metropolitan areas into tiers based on the cost of living and establish salary bands to scale to new locations.
Additionally, some employees who can work remotely take advantage of the opportunity to move away from expensive cities. In these cases, should you ask employees to take a pay cut? Maybe. Companies like Redfin shifted their pay strategy to give employees who relocated as much as a 20% reduction in cash compensation in exchange for indefinitely working remotely full-time. Redfin isn’t alone: Facebook, Twitter, Google, and more also offered employees who wanted to work from home permanently a chance to relocate — if they took a location-based pay cut.
You could also incentivize relocation if it’s more favorable to your company. For example, Stripe offered their workers $20,000 to leave the notoriously pricey New York and San Francisco areas, but with a pay cut.
No matter what you choose, consider how your employees are distributed and what will best accommodate their lifestyles. Always be sure to communicate any changes associated with relocation well ahead of time so employees can factor that into their decisions.
Protected Groups
When it comes to compensation planning, you can’t just execute changes to your employees’ pay without considering the full picture, especially for those who are in protected categories based on gender, age, race, disability, religion, sexual orientation, etc.
Even if employees say they’re willing to take a pay cut to work remotely, not everyone may be on board. Robert Half’s 2023 State of Remote Work Survey found that 18- to 25-year-olds (42%) and working parents (41%) are most likely to accept a salary reduction to be fully remote.
Paying remote and in-office employees differently could also widen wage gaps for working parents, especially moms. Research shows that among college graduates with young children, women are 30% more likely to want to work from home five days a week, compared to men. Additionally, childcare disproportionately impacts women compared to men. Moms are twice as likely as dads to say they have a lot of childcare responsibilities while working, according to a survey of teleworkers with children. As a result, cutting pay for remote work may not be fair to your employees who are working mothers.
And sometimes the benefits that workers consider most valuable aren’t about putting more cash in their pockets but, rather, improving their way of life. Before making adjustments to compensation, consider offering benefits like flexible schedules or support structures to accommodate parents at work, whether through compassionate remote work policies, childcare subsidies, or otherwise.
The unfairness continues when you consider who has access to promotions — and, consequently, better pay. Recent data finds that workers who belong to protected racial minority groups — 88% of Asian workers, 83% of Black workers, and 81% of Hispanic or Latino workers — are more likely to prefer a flexible working experience, including working from home. And only 3% of Black knowledge workers compared to 21% of white knowledge workers want to return to the office full time.
However, research from a Chinese experiment on work from home showed that remote employees are less likely to be promoted. Going forward, it will be critical to ensure that everyone gets the opportunity to skill up and earn promotions, regardless of where they work, by providing equal access to training resources and establishing policies that eliminate biases favoring on-site workers for promotions.
Removing bias from the compensation equation means understanding how certain factors drive remote work and avoiding discriminatory practices that might unfairly pay protected workers less just because they pursue remote or hybrid work.
Now that you have the data and a better understanding of your employees’ pain points, you can identify pay gaps.
First, analyze the factors you can control, comparing pay rates for employees with similar titles and levels of experience. Then, compare by the variables you can’t control: demographics like gender, race, age, sexual orientation, disability, and veteran status. Historically, pay equity analyses have focused on comparing pay by gender to ensure that women and men are paid equally for the same work. That’s changing – with 43% of America’s largest 100 employers conducting pay equity analyses with a specific focus on race and ethnicity – but we still have room to grow.
Do you find any pay differences in your own data? If so, can you justify them? Pay equity dictates that compensation be determined primarily by the work that employees do and the experience they bring to the table. Therefore, justifiable reasons for pay gaps are strictly job-related, such as seniority, geography, level of education, work performance, etc. Unjustifiable or illegal pay gaps are based on protected demographics like gender or race, and these are the ones you should work to close immediately.
Knowing what isn’t working is half the battle; the final step of conducting a pay equity analysis is figuring out how you’ll fix pay disparities and wage gaps.
The short-term goal is to fix pay inequity for current employees. The Equal Pay Act prohibits companies from reducing compensation for anyone to fix inequality. Instead, you need to reallocate funds to boost compensation where necessary — with approval from accounting and HR.
Your long-term goal should be to address the root causes of pay inequity. Document your yearly or quarterly findings, and develop pay policies that make sure new hires and promotions are compensated accordingly. Publish your compensation philosophy internally and use it to inform compensation planning and ensure pay equity moving forward.
No matter how you address pay inequity, communicating the results of your pay equity analysis and any steps you’re taking to close wage gaps — both internally and publicly — will help you earn your employees’ trust and steer the company toward pay transparency.
And making that effort can pay off big time. The Josh Bersin Company’s Definitive Guide to Pay Equity in 2023 finds that companies that address pay equity see positive results on business and people outcomes. For example, these companies are 1.6x more likely to exceed financial targets, 1.5x more likely to engage and retain employees, and 1.7x more likely to adapt well to change.
Ready to put your data to work? Once you conduct a pay equity analysis, it’s time to bring your findings to your total compensation strategy. Check out our Total Compensation Quick Start Guide for tips on what it takes.
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