How Your Compensation Philosophy Can Advance Pay Equity

It’s been nearly 60 years since President John F. Kennedy signed the Equal Pay Act into law. And yet, the average female professional earns $0.83 to every $1 made by white, non-Hispanic men. LGBTQ+ workers bring home $0.90 to the same dollar. Working Hispanic and Black women make $0.57 and $0.64, respectively.

Statistics like these illuminate more than widespread injustice — they point to a problem only businesses can solve. But how can companies defeat a challenge that has persisted for so long?

That’s the question that drove a recent Equity Matters Chat, a monthly discussion about all things pay equity. The chat brought together members of OPEN Imperative (Organizations for Pay Equity Now), a coalition of businesses committed to ending gender pay disparities in their organizations, and seasoned comp expert Julia Dow, VP of Compensation Advisory at OpenComp.

As the discussion unfolded, an answer to the event’s question emerged: Businesses can ensure pay equity within their ranks by building a compensation philosophy engineered for consistency.

What is a compensation philosophy — and what does it have to do with equity?

When an organization employs a well-devised compensation philosophy, it ensures its pay decisions are consistent. “Consistency is key when it comes to compensation,” Dow said. “You want your comp philosophy to drive and encompass your whole organization. Pay shouldn’t be based on exceptions.”

Without a compensation philosophy, organizations use guesswork and anecdotal knowledge to make pay decisions instead of a data-based rationale. The swap causes comp programs to veer off track, introducing overspending, underspending, and potentially discriminatory pay gaps.

A compensation philosophy is a formal statement that explains how a company pays and rewards employees based on its culture, mission, values, and financials. In other words, it builds the foundation out of which all pay decisions flow. When used properly, a compensation philosophy can help employers proactively limit the impact unintentional bias can have on driving  pay inequities within an organization. 

“Comp philosophies can feel slightly abstract, but they translate to very tactical implementation,” said Dow. For instance, a pay philosophy will drive a number of important business decisions:

• It will state how an organization uses cash versus equity.
• It will define an organization’s cultural approach to pay. It will answer questions like: How does pay relate to performance? What does it mean to compensate employees equitably? How does pay relate to talent acquisition?
• It will guide a company’s creation of pay structures, pay cycles, and individual comp packages.
• It will promote a culture of trust and transparency that will help companies attract and retain top talent. 
  
  

4 decisions behind a pay philosophy

Businesses need to create a compensation philosophy that reflects their values and finances in order to drive an equitable and consistent approach to pay. By thinking through these four topics from a pay equity lens, employers can determine the components of their unique philosophy:

#1: Rewards culture

“Most companies choose to pay for performance but want to be as equitable as possible,” Dow said. This approach doesn’t rule out a multi-layered pay system accounting for different types of talent. For example, companies may benchmark against one strata of the market for business talent and another for tech talent based on their needs. A pay philosophy provides a framework for these decisions, ensuring they remain consistent among each group. However, when taking this approach, companies need to be mindful that gender segregation in various fields and industries could result in an increased imbalance in pay across the entire organization. 

#2: Affordability

“It’s nice to say: ‘We want to pay at the 90th percentile’ but if you can’t afford that, your good intentions don’t mean much,” Dow said. Organizations must understand their financial restraints to determine what they can afford to pay employees. They also need to have a grasp on their business trajectory: Do they plan to bring on a slew of new hires? Or are they focusing more on retention? As employers answer these questions, they ensure their pay philosophy provides the most accurate information to keep pay decisions consistent across their business while guaranteeing they are not systematically underpaying (or overpaying) employees. 

#3: Market positioning

Most companies don’t dip below the 50th percentile for base salaries, Dow noted. “But I’ve seen companies target all over the spectrum with equity, depending on the message they want to send.” Some companies set equity in the 25th percentile if they’re looking for talent in areas where there’s less of a demand for ownership. Other companies set equity much higher to encourage employees to invest deeply in their work. This strategy doubles as a cost-saving measure in an economic climate where many are closely monitoring their spend. However a company defines its market position for cash and equity, a compensation philosophy will ensure that ratio reflects the company’s goals to scale and engage talent and is consistently applied across the organization.

#4: Geo strategy

Geo strategy addresses the differences in pay related to employees’ work locations. It is based on the cost of labor — not the cost of living — in a given area. The advent of widespread remote work caused many employers to rethink their geo strategies. Most organizations with newly distributed employees took a more simplified approach, creating a two-tiered system based on the U.S. average and a premium city, like the Bay Area or New York. 

A defined plan regarding geo strategy will allow employers with remote or in-person workforces, or both, to consider location with purpose and consistency in any pay decision. This consistency sets clear expectations and protects both the employer and employee from pay discrepancies that can stem from initial compensation conversations.

Pursuing equity, together

When businesses create a comp philosophy, they also create the foundation for a pay program that’s consistent, scalable, transparent, and equitable. 

A thorough yet straightforward pay philosophy is the tool employers need to implement fair and consistent pay practices. Without it, companies risk reputation-damaging mistakes that are expensive to correct. With it, companies build the confidence that their offers, promotions, and bonuses leave no one behind. 

Understanding the pitfalls of a disjointed pay program may motivate you to explore the ways your organization can enhance its compensation game. It may feel like a daunting task — but it’s one you don’t have to take on alone.

Join OPEN Imperative to find know-how, accountability, and community. Our monthly Equity Matters chats will propel your pay equity efforts and connect you with leaders who share in your challenges and commitment to closing the gender pay gap once and for all.

Emily Sweet is VP of Social Impact and OPEN Imperative Lead at OpenComp. She writes about topics including pay equity and diversity, equity & inclusion (DEI). A board member of the National Council of Jewish Women, Emily is a veteran philanthropic leader and policy advisor with more than 20 years experience advancing bold solutions to big problems that drive impact and inspire collective action.  Connect with her on LinkedIn here.