Pay transparency – let’s get the terminology right

Gender pay gap, pay equity, pay parity, pay transparency.

We all use these terms – often interchangeably. But do we know what each one actually means? By mixing them up, we’re in danger of making mistakes and drawing the wrong conclusions when it comes to important issues around pay.

But before we tackle the terminology, let’s briefly look at the underlying issue.

The core issue is inequality in pay

In the EU, women earn on average 13 percent less than men. Globally, the gap is even wider at 20 percent, with research suggesting it could take over a century for there to be pay parity (see the link to a Reuters article in the comments section for more information).

That this pay gap exists is a travesty.

The good news, however, is that something is finally being done about it. According to Zo? Cullen, Assistant Professor at Harvard Business School, at least 18 types of pay inequality policies now exist in 32 countries, including 71 per cent of OECD members.

Not enough, but progress at least.

Because pay discrimination is so unfair, there are growing calls for firms to be more open and transparent about salaries. Not only will this force businesses to eliminate the gap, it may also help with attracting and retaining talent, as well as contributing to better employee engagement and job satisfaction.

Some argue, however, that making salaries transparent may actually have drawbacks. According to Jan Dewar, these may include potentially smaller candidate pools, workforce envy, increased pay negotiations and poaching of employees by competitors (read Jan’s LinkedIn article here: https://tinyurl.com/5v479mdy).

Benefits and drawbacks of salary disclosure aside, the terminology around pay inequality is confusing. I’ve often noticed in conversations with clients how often people use the wrong terms or use them interchangeably.

Clearing up the confusion

I therefore consulted with Aon’s resident team of experts to produce a definitive list of terms around the issue of pay. I’ve also included advice about what firms need to do, and some of the ways Aon can help.

Thank you Suzanne Courtney, Stuart Hyland, Alessandro Linari and Ik Onyiah for all your valuable insights in drawing up this list!

Gender pay gap (GPG)

This measures the difference between the average (median) hourly earnings of men and women, usually shown by the percentage men earn more than women. It often accounts for both basic and variable pay differences.

What do firms need to do about it?

Across much of Europe there is now a regulatory requirement for firms to report their GPG, with specific requirements about how to calculate it often differing by country. Many nations are now also looking beyond the GPG to the pension pay gap and ethnicity pay gap.

How can Aon help?

We offer regulatory-compliant GPG analysis and reporting. In addition, we can also conduct additional analysis into pension and ethnicity gaps which, while not currently required in UK/EU regulation, may become law in the future.

Pay equity

This is about paying people fairly and consistently without discrimination and based on protected categories. It includes factors such as education, experience and tenure. Pay equity is one of the most important benefits of increased pay transparency.

What do firms need to do about it?

They should run a deep-dive analysis which goes beyond just mandatory reporting and aims to really understand the systematic factors addressing pay inequality. This will allow companies to identify ways to remediate any issues.

How can Aon help?

We offer a comprehensive array of pay equity audit and reporting tools. For example, we can take a client’s pay data (demographic and pay) and calculate the exact weighting/impact of gender on base and bonus pay for roles of similar complexity and output. We then calculate the cost of remediating the pay inequality and provide options and advisory around this.

Pay parity

This describes an organization’s strategy to close the pay gap between men and women, or with minorities – or to demonstrate that the firm is working to close the gap.

What do firms need to do about it?

They should create long-term, holistic people and reward strategies with a view to diagnosing and addressing inequality across pay. They must embed these goals into their ESG targets, total rewards and pay bands, as well as in the way they attract, hire, retain and sustain people.

How can Aon help?

We support and enable clients to achieve pay parity via a wide range of initiatives such as pay equity analysis, reward structure and strategy, job architecture, DEI&B strategies, benchmarking, performance management, as well as tools like our Fair Pay Calculator. This is just a small selection of the ways we can help!

Pay transparency

This is the practice of openly communicating information about compensation with employees and candidates.

What do firms need to do about it?

Pay transparency is likely to come into law once the EU Pay Directive (see a link to more information about the Directive in the comments section) is passed. This will have a number of implications for firms:

• Job descriptions will have to contain information on pay ranges
• Companies will have to make criteria on pay decisions easily accessible to employees
• Employees should be able to request information from their employer on their individual pay level and average pay levels for employees doing the same work, or work of equal value – this means job architecture will be important for comparison
• Pay gap reporting will evolve, with a new requirement being more detail on pay gaps between workers doing the same roles, or roles of equal value
• Employees will be able to hold companies to account and require them to remediate pay differences greater than 5%?

How can Aon help?

In addition to many of the things listed as part of pay parity above, we can also help you understand the impacts of EU legislation if your head office is not based in the EU. Added to that we can assist with redefining your EVP and differentiation outside of pay and, more generally, help you understand governance around the legislation and find ways to embed change as part of your everyday company culture.

More broadly, pay transparency is likely to create a number of new and difficult challenges for managers. They may have less control over pay decisions, for example, which could feel disempowering for some and add further stress to an already stressful role.

Any questions?

I hope this list of definitions and requirements (and the ways we can help) is useful. I understand, however, that the issues around pay transparency and inequality can still be quite confusing – and potentially challenging – so if you have any questions please don’t hesitate to get in touch.

#GenderPayGap #PayEquity #PayParity #PayTransparency