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Compensation bias is bad for business. Here’s how to fix it.

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Are you paying your employees fairly? Despite good intentions and substantial investments in diversity programs, companies are finding that bias in compensation is difficult to detect, remove, and keep from recurring.

Pay equity is more important today than ever. Beside the potential negative consequences of landing your organization in the headlines, in court, or both, it brings many bottom-line benefits. Compensation equity:

  • Enhances your brand and your ability to attract and hire the best talent, which is especially valuable in today’s tight labor market.

  • Helps you retain valuable employees and avoid costly turnover.
  • Increases productivity because employees who feel valued and fairly compensated are more satisfied and more invested in their work.
  • Leads to a more diverse workforce, which can increase profitability. For example, a 2016 survey of 22,000 companies worldwide by the Peterson Institute for International Economics found that companies with at least 30% women in senior management had 15% higher profits.

However, equity remains elusive, and progress has been slow in closing gaps. Today, U.S. women make 80% of what men earn, compared to 60% in 1970. And the rate at which that gap is closing has slowed since 2000, according to a report by the American Association of University Women.

 

“If change continues at the slower rate seen since 2001, women will not reach pay equity with men until 2106,” the report’s authors write. As for racial pay gaps, the Pew Research Center found that black workers earn just 75% of white workers’ compensation. And the Economic Policy Institute reports that wages for black men have actually fallen since 2000, to 70 cents on the dollar.

To a large extent, gaps persist because of unconscious bias. Despite decades of diversity programs, hidden assumptions and beliefs in stereotypes still influence hiring, promotion, and compensation in subtle yet substantial ways. It may require big changes in long-standing traditions in hiring, salary-setting, and performance reviews to achieve and sustain equal pay. Even then, there are no guarantees.

“Given the millions of dollars spent on making and monitoring [diversity efforts], surprisingly little evidence exists on the efficacy of various policies and practices adopted by organizations to address the problems and to capture the benefits of having a demographically diverse workforce,” write MIT Sloan professor Emilio Castilla and Cornell University professor Pamela Tolbert in the introduction to a January 2017 special issue of the Industrial and Labor Relations Review on inequality in the workplace. “And even less evidence is available on the conditions that may moderate the impact of these policies and practices.”

Nevertheless, academic and think tank research does yield insight that may help lessen bias’s harmful influence on salary.

Make sure there’s a fair starting line

An employee’s first salary at her first job can set the wage bar for the rest of her career, perpetuating any initial inequity.

Companies with at least 30% women in senior management have 15% higher profits

One way to correct for this is explored in a November 2018 study by MIT Sloan professor Roberto Fernandez and Stanford Graduate School of Business assistant professor Adina Sterling, published in Management Science. The pair analyzed data on several hundred 2009-10 MBA graduates, studying salaries offered to those who were hired without internships and those who were hired after internships.

Without internships, women were offered an average of $102,165; men were offered $109,899, a difference of $7,734. Internships appeared to close the gap, with women receiving average offers of $108,600 versus $108,196 for men. Women were actually offered $400 more than the men.

While it’s hard to pinpoint the many nuanced factors that go into salary offers, initial offers are typically made “when employers know the least about individuals’ skills and abilities,” the researchers write. That can open the door to bias based on stereotypes. Internships help employers get past that because the more they get to know someone as an individual, the less likely bias is to impact compensation, according to the paper.

Fernandez said that internships cut both ways, giving employees a chance to test drive the employer as well. In a competitive labor market, where candidates post information and assessments of employers on sites like Glassdoor, these tryouts can either enhance or sully an employer’s brand, he said.

Forget about the past

Another way to counteract existing bias is to stop using salary histories in hiring, said American Association of University Women Senior Vice President Deborah Vagins.

“Even well-intentioned employers, if they peg your salary to your last job, can carry forward discrimination from previous jobs,” she said.

Several U.S. companies have eliminated salary inquiries in the hiring process, Vagins said, including Staples and Amazon. And since 2016 at least a dozen U.S. states and as many cities have passed laws banning the use of salary history in hiring, according to the American Association of University Women.

On the federal level, the Paycheck Fairness Act was recently passed by the U.S. House of Representatives. Although it has little chance of passing the Senate, the bill would ban employers from asking candidates how much they made in previous jobs, eliminate employer rules that penalize workers who disclose their salaries, and require employers to be more transparent about worker pay.

Practice real transparency

Full salary transparency, which could expose any wide divergences in pay, would be an effective way to spot potential bias, but few companies want to reveal their salary data to their employees, much less the public. There may be ways, however, to reduce the chances that secrecy around salaries and performance evaluations hides bias.

“Pay secrecy ... may make it easier for managers to use any criteria they wish to compensate employees [including demographics] because their pay decisions are less likely to be scrutinized by others,” Castilla writes in a 2015 paper on transparency and accountability in pay. “In addition, it may provide no expectation for managers to justify how rewards are distributed —  thus making them less accountable for their decisions.”

Castilla examined bonus payments for 9,000 employees of a large private company. He compared compensation decisions before and after management implemented procedures to increase transparency and accountability, including the formation of a committee that monitored and analyzed pay decisions. The comparison showed that those procedures narrowed the pay gap between U.S.-born white men and a group of women, ethnic minorities, and non-U.S.-born employees.

Another tactic is the periodic pay audit and report, in which a company surveys its salaries by gender, race, and other factors, then publicly reports any pay gaps and its actions to correct them. A growing number of companies are publishing these reports, some in response to public or shareholder pressure.

But these reports don’t always tell the whole story. Results depend on what companies measure, and how. For example, Google was criticized when its latest report found that in one category — level four software engineer — it was paying women more than men. The company therefore raised the men’s salaries.

Google’s measurements are too simplistic, said diversity consultant Kim Elsesser, SM ’92, author of the book, “Sex and the Office: Women, Men and the Sex Partition That’s Dividing the Workplace.” Because the company looked only within job categories, it did not account for women that are either improperly put in a lower-paying category or are stuck in a category without opportunity to advance, she said.

“The women at a particular level were making more than the men at that level, but if women aren’t being promoted but rather are being held at that level, then you would get this result,” she explained.

In fact, a gender-pay lawsuit against Google claims that women were inappropriately placed in lower-paying job categories.  

Pursue equity for the long term

Increased salary transparency and pay equity audits aren’t necessarily long-term fixes, said Joan Williams, MCP ’80, founding director of the Center for WorkLife Law and distinguished professor of law at University of California, Hastings.

 “You can make a one-time correction, which is admirable, but unless you go back and address the kinds of biases that influence the kinds of assignments people are given and the kind of performance evaluations they get, the same biases will re-emerge over time,” Williams said.

Even after leveling up salaries or providing anti-bias training, “what typically happens is these subtle and not-so-subtle forms of bias are constantly being transmitted through your basic business systems — through hiring, through assignments, through performance evaluations,” Williams said.

 One way to counter that is to institutionalize what Williams calls “bias interrupters.” When posting an open position, for example, including the phrase, “salary is negotiable,” can interrupt pay bias by giving women, who tend to be more reluctant to negotiate than men, permission to raise the topic.

Another interrupter is to ban global performance ratings, which rank employees on a scale of 1 to 5, or excellent to poor. Williams calls global ratings “a petri dish for bias,” because they use highly subjective rankings to set objective pay levels. Instead, managers should have to “show their work” when evaluating employees.

“They should have to provide enough evidence that another person reading the performance evaluation can show the evidence upon which the manager bases the judgement,” she said.

Constant vigilance

All of these methods require substantial changes in traditional hiring, promotion, and compensation systems. Even if companies adopt all of them, they aren’t fully inoculated against compensation bias. In short, there are no easy solutions, Castilla and Tolbert write in summing up recent research.

“For organizational leaders and practitioners ... the quest for ‘best practices’ — connoting ones that yield positive results across the board and under all conditions — is a quixotic one,” they write.

Instead, eradicating bias requires nuance, careful attention, and constant vigilance.

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