Three hidden pitfalls in pay equity data — and how to avoid them
International Women’s Day in 2024 features a new and powerful theme: "Inspire Inclusion."
This has challenged us to reflect on the pivotal role pay equity and transparency can play in forging a more inclusive world. Fostering an open dialogue on pay equity is one important way in which inclusion is expressed. This is because pay transparency is not just about complying with standards. It is also about accessibility — ensuring that every woman, and every person, feels seen, valued, empowered and included, and that everyone has an equal opportunity to progress. But what happens when revealing pay gap data only makes this overall picture more complicated?
In today’s environment of growing pay transparency, companies that don’t actively engage in open dialogues on pay risk isolating and losing the trust of their employees, candidates and even customers. Conversely, companies who do engage with pay equity and transparency are certain to see this work have a significant impact on their employees’ overall work experience, productivity and sense of inclusion.
Transparency and accessibility don’t always go hand in hand. Pay equity statistics can be tricky and intimidating to navigate for both employees and employers, and it is easy to feel confused and excluded. When we read numbers in the news and on company disclosure reports — full of technical terms such as gender pay, equal pay and the adjusted pay gaps — we are not always clear what they mean, or how they relate to us. It is very easy to gloss over nuances or flaws in the data, or to miss them entirely.
To help with this complexity, organizations like Eurostat — the statistical office of the European Union that releases data on pay gaps — accompany their numbers with helpful information on how to interpret the statistics. This is a good start and we are looking forward to seeing their updated figures for 2024.
Technology can help with demystifying data, but it can also make the situation more complex. As we saw in WorldAtWork’s recent paper on AI and pay equity, and as we have discussed in our own Mercer research on pairing AI with a keen DEI lens, more and more companies are starting to use AI to assess and communicate pay equity, and to even determine pay. While there are clear advantages to doing so, we must also be aware of the potential misunderstandings and unintended negative consequences this approach can bring — problems that can have an impact on individuals, businesses and the broader workforce. This is something we unpacked as part of the recent 2024 Global Risk Report.
Turning challenges into opportunities
Challenge: Many organizations have achieved parity of gender representation horizontally (i.e., across the company) and may have lower raw pay gaps in average pay for women versus men. Some may even see numbers less than 1%. However, when these figures are adjusted for performance, experience or tenure, pay disparities may suddenly emerge.
In one company, we recently calculated a raw pay gap of 1%. However, after adjusting for tenure, performance and role the adjusted pay gap increased to 4%. This can be a complex situation for companies to understand and may cause dismay amongst employees and management.
Looking at Eurostat’s 2021 data, we see this issue play out on a national level in Italy. The unadjusted pay gap figure for Italy is often listed as 5.5%. Moreover, the unadjusted figure for the country’s private sector is 15.5%. After accounting for employee and employer characteristics, the unexplained pay gap lands at 10.9% — this is mostly due to differences in the representation of women and men across the workforce.
Opportunity: Again, companies should consider drilling down and examining where and why these anomalies are occurring. Is it possible that there is different treatment for men and women when it comes to setting salaries? Is there bias in the performance management system or a lack of pay for performance alignment? Do you need to review your foundational job architecture?
Challenge: A country or business unit’s pay gaps can and will shift year over year, with the gap closing or expanding. Sometimes these trends are due to intentional remediation activity. Sometimes they can be caused by other environmental factors. Causation vs. correlation can be difficult to understand, especially when it is based on consolidated pay equity statistics alone.
Opportunity: We have increased our understanding around pay equity in recent years, so in 2024 we should be taking a more nuanced look into the root causes of pay equity changes. Are broader new hire gaps expanding or shrinking and why? Have merit pay increases helped or hurt the gender pay gap? What has the impact of terminations been on representation? These are all questions to consider.
Once you have a handle on root causes, you can identify action plans and work on targeting change in your own organization’s policy and procedures. This will help to embed pay equity into your organization’s operations, putting in place clear change initiatives, creating a more sustainable approach and supporting more accessibility for all.
In summary, pay equity data can be confusing and can present pitfalls. It can therefore be useful to take a step back and to dig deeper into the data. It is only through this additional analysis — and through the development of a robust change strategy — that you can move beyond compliance (and reporting requirements) to truly achieve the positive impacts of pay equity in your organization.
As we move through 2024 and beyond, HR and company leaders must play an active role in reviewing data inputs, understanding analysis, and communicating findings along with the appropriate context. Having access to market reference data, by using tools such as Mercer’s TRS Pay Gap Detector, can help to provide context and steer stakeholders in the right direction.
Do you have more questions on pay transparency? Do you want to learn more about Mercer’s holistic approach to pay equity? Or do you have lessons you’ve learned and want to share? If you do, please reach out to our team.
Regional Pay Equity & DEI Leader, Europe & UK
, Pay Equity and Workforce Analytics Consultant, Mercer