Rethinking “Merit” Increases: How Pay for Performance Can Perpetuate Bias and Fail to Reward Merit

Many employers attempt to provide some form of “merit”-based pay using performance factors for base pay increases, bonuses, and other forms of compensation. This approach to compensation is typically well-intended. Employers want to motivate employees to improve their performance, to reward high performers, and to attract and retain top talent. Unfortunately, merit increases are a terrible way to try to accomplish those goals. 

While merit pay can, in theory, reward and recognize strong performance to the benefit of employees and the company, the challenge with performance-based pay or any other assessment measure is developing accurate, consistent and unbiased evaluations. In practice, these systems are often poor measures of actual performance that are more risk than reward.

Lack of meaningful distinctions of performance

Managers are often reluctant to identify performance problems or issues and provide good feedback. This can affect the perception of whether a reward system is fair and can lead to score clustering. For example, a five-point system where almost everyone earns 4s, with few 3s and 5s reduces the ability of the score to meaningfully distinguish between strong and weak performers.

Inappropriate or irrelevant criteria

A second problem occurs when employers use criteria that are not appropriate. For example, employers may measure intrinsic traits or generic or irrelevant skills instead of job-related actions and behaviors – or try to evaluate employees with vague or ambiguous measures that require interpretation. While it is possible to create validated systems and processes, using job-related criteria or conducting a formal job analysis can be a complex and costly proposition.

Subjectivity and bias

Too often, merit increases are subjective and are not linked to performance scores, which may themselves reflect subjective biases. As such, merit increase practices do a poor job at measuring performance. Common performance review systems and evaluation practices can result in biased decisions, including rating performance by Black employees lower than comparable performance by white employees, evaluating women and men differently for similar performance, or providing women or employees of color lower rewards than white men for similar scores where there is discretion or a range of potential rewards. Studies have outlined the various ways that subjectivity in performance assessments can impact women and people of color

Merit-based pay can also exacerbate the problem of in-group favoritism. Supervisors may be more likely to provide higher ratings for employees they like or who have similar backgrounds or experiences. Basing pay increases on biased performance assessments can create unlawful pay disparities and exacerbate existing pay inequity.

Performance evaluations often perpetuate race and gender biases, making it harder to achieve pay equity and to align pay programs with values. In our experience conducting assessments of all kinds of workplaces, we have often seen merit increases and other performance-based pay practices as a key factor in race-based and gender-based pay differences. They can also make it difficult to provide transparency around pay practices and decisions about increases.

Unintended consequences for morale

Merit pay systems usually feature time-consuming bureaucratic structures that managers and employees hate. Efforts to incentivize performance by tying it to compensation can be counter-productive, by contributing to job dissatisfaction and lowering morale for those who are not selected for pay increases – particularly if they question the fairness of subjective assessment practices. As a result, merit pay systems fail to motivate, reward and retain the best workers.

Compounding effect for pay inequity

Merit increases based on a biased performance assessment can have a compounding negative effect on employee compensation over time. By contrast, a one-time bonus to incentivize and reward strong performance may have less risk of embedding bias into salaries going forward. (However, the metrics used to award bonuses should still ensure consistent, accurate and unbiased assessments as much as possible.)

A Better Approach

At Working IDEAL, we advise clients seeking to strengthen equity and transparency in their pay practices, and we believe traditional merit increases are inconsistent with those key values. These approaches can reflect and amplify race and gender bias in performance assessment measures, leading to disparities in pay based on gender, race, and other protected characteristics. To incentivize strong performance while also mitigating the risks of bias and favoritism in compensation, employers should take the following steps:

Use objective performance assessment measures. Performance assessment measures should be based on objective, clear, and measurable criteria that relate to the job. Employers should avoid using subjective criteria, such as personality or attitude, which can be biased. Regular, informal check-ins provide an opportunity for supervisors to provide substantive feedback in real time and can be more effective than annual performance reviews.

Regularly review performance assessment measures for bias. Employers should regularly review their performance assessment measures to identify and eliminate any potential bias. The performance assessment process and review should involve input from employees from a variety of backgrounds. Data on performance ratings should be analyzed regularly to identify and address potential disparities based on protected characteristics, such as gender-based or race-based differentials.

Provide training to managers on unconscious bias. Managers should be trained on unconscious bias so that they are aware how their own biases can impact their performance assessments.

Implement a transparent and fair pay system. Employers should utilize a clear and transparent pay system that is based on objective criteria. Compensation should be reviewed regularly to ensure that it is fair and equitable. 

Consider alternatives to merit-based pay increases. While merit-based pay is intended to motivate employees to do their best work, rather than the bare minimum, employers should keep in mind that merit-based pay is not the only way to motivate employees and reward them for their performance. 

Employers should provide promotion opportunities for strong performers to grow and advance. Typically, promotions should come with a pay raise. Training and professional development opportunities can provide a means for strong performers to develop their skills. 

Non-monetary rewards can also be effective in motivating employees. For example, employers can reward high performers with public recognition, time off, or a celebratory lunch for a team that completed a successful project. Celebrating successes helps to create a culture of recognition and appreciation, which can boost morale. By using a variety of rewards and recognition strategies, employers can create a more equitable and inclusive workplace while also reinforcing employees’ contributions to foster a motivated and engaged workforce.

While employers may have a vested interest in incentivizing and rewarding strong performance, employers must be aware of the risks of bias and favoritism in merit-based pay systems. Employers can mitigate these risks by implementing best practices to eliminate bias in compensation and performance review policies and practices.

Working IDEAL provides trusted and innovative advice on inclusive workplaces, diverse talent, and fair pay. Our audits and assessments apply the best thinking on how to promote gender, race and other forms of equity in your pay practices. Our robust quantitative and qualitative reviews go beyond basic compliance to align effective compensation strategy. Let’s connect.  

Five tips for employers to set geographic pay differentials: A growing consideration for remote workforces

Employers with operations in multiple locations have long grappled with concerns about how to handle compensation. Employers often offer geographic pay differentials, by adjusting base pay with locality pay to account for variations in the cost of labor and the cost of living. 

With increasing numbers of employees working remotely, many employers are facing new and complicated questions. In determining the right approach to locality pay, employers should consider the following recommendations.  

Set expectations with a clear policy that applies to all employees.

Employers should adopt a formal policy that sets clear expectations about how locality pay applies to all employees. For example, the policy should make clear how location is determined–by city, state, region, country, etc. Employers should avoid ad hoc decisions based on a specific situation or individual negotiation at time of hire. 

A system that applies a locality differential on top of regular base pay can make it easier for employers to address situations where employees move from higher-cost to lower-cost areas. The federal government’s pay system offers a clear, transparent approach to setting locality pay that utilizes locality adjustments to base pay. The standard pay scale is adjusted upward for 54 specific localities. For example, in 2022, the base pay for an employee at the Grade 8, Step 1 level would be $42,641. But an employee in San Francisco would be paid an additional 42.74% locality adjustment, bringing total salary to $60,866 in San Francisco. By comparison, an employee at the same level would be paid $49,813 in Corpus Christi, with an additional 16.82% locality adjustment to standard base pay. 

 

2022 Federal Locality Pay Corpus Christi, TX San Francisco, CA
Base Salary for Grade 8, Step 1 $42,641 $42,641
Locality Adjustment Percentage 16.82% 42.74%
Locality Adjustment Additional Pay $7,172 $18,225
Total Salary $49,813 $60,866

 

Smaller employers could adopt a more streamlined approach that identifies just a few high-cost locations eligible for a geographic differential, like New York and San Francisco, rather than try to benchmark all salaries for each different location. 

Consider the potential costs and budgetary impacts.

In weighing different options, employers should consider any potential budgetary impacts. Do most employees live in higher cost areas or lower cost areas? What will be the total annual cost of additional compensation to raise pay for employees in areas with a higher cost of living? Consider the possibility that some employees may relocate in the future, which could translate to additional costs.  

Consider potential impacts on employee recruitment, morale, productivity, and retention. 

A new locality pay policy should be viewed as a net positive by employees. The policy should help attract and retain talent. A reasonable policy should reassure employees that they are compensated fairly. 

To the extent possible, employers should avoid adopting policies that reduce pay for incumbent employees who live in lower cost areas. While some employers may seek to cut costs by reducing pay for remote workers who opt to move to a lower cost area; an unexpected cut in pay may have negative consequences for employee morale, productivity, and retention. An alternative to cutting pay is to phase in adjustments over time for employees in higher cost areas and freezing pay for employees in lower cost areas

Employers also should consider how locality pay factors into the calculation of raises and bonuses. For example, when employers use a high-cost area as the baseline for all employees, employees who live in the high cost location may perceive that their raises will not go as far. 

Identify opportunities to communicate and reinforce the policy.

Once a new locality pay policy is in place, employers should seek multiple opportunities to communicate the policy verbally and in writing. Encourage open discussions about compensation.

Regularly review employee compensation and address inequities.

To ensure pay equity, employers should regularly review overall compensation to identify potential concerns and correct unexplained gaps and discrepancies. This review should include an assessment of geographic pay differentials. 

 

Working IDEAL provides trusted and innovative advice on inclusive workplaces, diverse talent, and fair pay. Our audits and assessments apply the best thinking on how to promote gender, race and other forms of equity in your pay practices. Our robust quantitative and qualitative reviews go beyond basic compliance to align effective compensation strategy. Let’s connect.  

Rethinking Unpaid Internships: Equity Upon Entry to the Workforce

Authors: Joelle Min and Sarah Crawford

Young people across the country often pursue internships with hopes of return offers and greater career opportunities once graduation comes along. In 2022, internships are of greater importance as the height of the pandemic last year canceled almost half of internship opportunities. Often, students are expected to be grateful and willing to take up any internship opportunity, even if it means foregoing monetary compensation. This Harvard Business Review article reports that 43% of internships by for-profit companies are unpaid. However, despite their ubiquity, unpaid internships are unfair, inequitable, and exploitative of young students, many of whom lack the bargaining power to fight for fair working terms and conditions. Many companies justify unpaid internships by arguing that they provide educational and professional development opportunities that they would not otherwise offer as paid positions. This ignores the financial implications of doing unpaid work that especially burdens young, low-income, and first-generation students of color.

Internships help set the stage for career success

It is clear that internship experience can give candidates a leg up in the job market, but those who cannot afford to take unpaid internships lose out on opportunities to gain that experience. The Washington Post reports that “nearly two-thirds of college graduates who complete paid internships receive job offers upon graduating, compared with just 35 percent of recent graduates who do not have internship experience.” 

Even though the Fair Labor Standards Act of 1938 requires covered employers to pay employees for their work, a 1947 Supreme Court case Walling v. Portland created a carve-out for unpaid “trainees.” In this case, the Supreme Court decided that participants in a weeklong training program for potential railroad brakemen were trainees rather than employees and did not need to be paid. Under the Fair Labor Standards Act, the Court held that “the definition of an employee cannot be interpreted to make a person whose work serves only his own interest an employee of another who gives him aid and instruction.”

Walling v. Portland offered the legal foundation for a theoretical defense of the educational benefits of uncompensated work. Although organizations are not obligated to pay interns where the interns receive more benefit from the relationship than the organization, organizations must pay interns who function more as employees. The Department of Labor offers a seven factor “primary beneficiary test” to determine whether an intern or student must be paid as an employee. This test includes factors relating to expectations about compensation, the type of educational training provided, whether the intern receives academic credit, whether the intern’s work complements or displaces paid employees, whether the internship is expected to lead to a paid job, etc. 

Paid internships lead to stronger career opportunities for all than unpaid internships

Too often, the claimed benefits of skill-building and professional development used to justify uncompensated labor fall short and they also may fail  to account for the actual financial costs of the individual seeking work. In many cases, the educational benefits that students receive from the internship program are mainly work experience, from which the company can profit. Additionally, since young people enter the workforce with minimal to no experience, they tend to have little knowledge of their bargaining power in seeking internships. 

Some students end up taking on an additional service job to pay bills, while others have the financial freedom to accept unpaid jobs at high-profile organizations, setting them on a more profitable career path. For students ranging from 17 to 25, the summer internship search tends to value generational wealth – in terms of financial dependence and nepotism – over talent, contributing to a job market where critical career-building opportunities more often go to those who can depend on their family’s wealth. Take, for instance, an internship opportunity and two student applicants: Student A with a financial safety net provided by their parents to cover expenses like rent, groceries, and gas, and Student B with student debt and no financial support from family. Student A can immerse themselves completely into the role, as they do not have many more obligations outside of completing the internship. Student B, on the other hand, must find additional work to fund their current financial situation, carrying the weight of two full-time jobs. Often, they would not even get the opportunity to work in an unpaid internship due to its financial burden, as the risk cannot guarantee employment and causes immediate financial burdens.  

Paid internships help to level the playing field and open opportunities, regardless of the candidate’s financial background.  As a recent blog post on the DEI impacts of unpaid internships explains, “paid internships are the best way for students of color to have the same opportunities as white students, especially as higher education in the U.S. becomes more demographically diverse and the percentage of undergraduate students from low-income households rises.” Unpaid internships only compound financial insecurity for students who are already taking on student debt. 

The importance of DEI in considering student professional development

The urgency of a student’s current financial situation should not be compromised for the future opportunity for employment. Unpaid internships can shut out these students from entry-level experiences in certain fields, which then result in long-term deficits of diverse talent and perspectives in all sectors. A stark example of these concerns is internships in government and public affairs. Many times, those who are shut out of unpaid internships due to financial strain are the people who could really make a difference in the policymaking and government with an internship opportunity. While colleges have taken measures to offer class credits or stipends to students for unpaid internships, these alternatives do not absolve the financial burdens of unpaid positions and are not sustainable for already cash-strapped schools and students. As diversity, equity, and inclusion have become a priority for businesses stemming from the social pressures of 2020’s overdue racial reckoning, it is of vital importance to find solutions to equity of opportunity not only in hiring but also the step that precedes that stage: student professional development. 

DEI in the workplace requires equitable access to internship and employment opportunities. Unpaid internships further marginalize emerging BIPOC and low-income workers from industry pipelines. As newbies in the job market, many marginalized students have minimal bargaining power. In many cases, interns are doing actual work that an otherwise paid regular employee would be doing. There are many companies that care and provide for their interns as a moral practice of what they should be doing. Legal precedent should not be the only justification or direction of companies’ interactions with young people seeking to enter into the job world. Businesses should break the cycle of exploiting students. Paid internships provide important opportunities for those entering the job market  to realize their potential and for employers to diversify their workplaces. 

About the Lead Author

Joelle Min
Joelle Min was an undergraduate paid intern with Working IDEAL from June of 2021 to August of 2022. She is currently a junior at Claremont McKenna College studying a dual major in Politics, Philosophy, and Economics and Public Policy and currently interning (in a paid position) on Capitol Hill. She has worked closely in local politics, electing the youngest trustee in California, as well as running sexual harassment education programs in her hometown.

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Working IDEAL provides trusted and innovative advice on inclusive workplaces, diverse talent, and fair pay. Our audits and assessments apply the best thinking on how to promote gender, race and other forms of equity in your pay practices. Our robust quantitative and qualitative reviews go beyond basic compliance to align effective compensation strategy. Contact us for more details. 

Working IDEAL: 2020-2021 in Review

Looking back over the past two years, our team at Working IDEAL has navigated a global pandemic and seen a new sense of urgency around our work for racial justice and workplace equity. As we wrote in the summer of 2020, we support the call to dismantle systemic racism and over the last year we have acted on our belief that a just and inclusive workplace is essential to sustain our democracy.

In this post, we share some highlights of how our clients are engaging on racial equity & global DEIJ across the public, private, and nonprofit sectors. Indeed many of them had already started this journey before July of 2020. In these first months of 2022, we see newly empowered workers and labor movements, new understandings around workplace safety, flexibility and economic justice, and opportunities to innovate to better serve workers, missions, customers and society. We encourage companies, nonprofits and government agencies to continue this work.

Strengthening DEI in Local Governments. In the summer of 2021, we completed a deep multi-year engagement with the City of Cambridge, Massachusetts, conducting an independent external assessment of recruitment, hiring and promotion through a diversity, equity and inclusion lens. Through a survey of all City employees, analysis of workforce data and interviews and documents, we evaluated the City’s structure, practices, policies, and culture as they relate to fostering a diverse workforce. Our recommendations, which were included in a publicly-available report on our website, included expanding the ability to promote opportunities and connect with a broader pool of talent by strategic outreach, building relationships, strengthening tools and resources, leveraging the current workforce and city residents, and better utilizing technology.  

Nonprofit Pay Equity Projects to Align with Mission and Values.  One of the signature services Working IDEAL provides is ensuring fair pay and we conduct pay equity analyses for public, private and nonprofit organizations. Since the summer of 2020, and particularly in light of the impact of the pandemic on workers, progressive organizations have sought to raise pay and also ensure their compensation programs align with values of equity and transparency. Over the last 18 months we have completed new compensation policies and structures for a number of national nonprofits, assessing race and gender equity, employee perceptions and experiences, workplace culture and market analysis. 

Strengthening Equity and Inclusion in Tech. In 2021, Working IDEAL partnered with Atlassian to provide resources and ideas to improve experiences for Atlassians from underrepresented groups and apply research on increasing equity and inclusion in the tech industry.

#CampaignEquity for Political Workplaces. During the summer and fall of 2020, federal, state and local candidates — and many organizations — built major campaigns to persuade and turnout voters in a critical election, as well as responding on the ground to addressing police brutality, sexual harassment, climate action, and immigrant justice. Working IDEAL collected its experiences advising political and advocacy campaigns and candidates with Redwood Enterprise and the Melanin Collective in the #CampaignEquity handbook (2020). The handbook includes tools and checklists of best practices for campaign workplaces in seeking to achieve seven campaign equity goals — like Great Hires, Pay Equity, and Safe and Inclusive Culture. It’s a useful strategic and tactical guide for ensuring your campaign or organizing workspace lives up to your values.  https://www.workingideal.com/news-resources/campaign-equity-toolkit/.

Building Best in Class DEI Programs for Small Businesses. 

We work with employers of all sizes, and frequently conduct evaluations and assessments of workplace culture and climate, equity and inclusion.  Because our work is customized and includes significant qualitative elements, it can be an effective tool for smaller businesses.

Our assessment methodology uses a consistent approach. We apply a broad lens grounded in social science data collection and analysis, seeking to understand how organizational culture, process, structures and practices relate to outcomes and experiences for different groups in the workplace.

One example of this work is the DEI assessment Working IDEAL conducted in 2021 for Linea Solutions, a consulting firm specializing in pension, health, and insurance markets with offices in Los Angeles, Washington, D.C., and Toronto. This project was led by the company’s internal DEI committee and strongly supported by leadership, two elements that we find can result in more successful projects.

Our review encompassed a quantitative and qualitative analysis of data relating to employee demographics, workplace culture, perceptions and experiences of fairness and equity, and equity in policies and practices — including recruitment, hiring, retention, promotion, career development, and training. Because many employees are consultants embedded in client workspaces, we also explored ways for Linea to provide connection and consistency – an emerging challenge for many workplaces developing stronger remote work policies. We identified strengths, challenges, and opportunities, and we recommended best practices supported by research literature and tailored to the organization. We will proceed with the implementation phase in 2022.

10 Steps Toward Equal Pay: A Call to Action for the Biden Administration

March 24 will mark another Equal Pay Day, which signifies how far into the year women must work to earn what men earned in the previous year. Pay gaps for women of color are even greater. Without decisive action, these persistent pay gaps will not close for decades. To move the dial on equal pay, the Biden Administration should take these critical steps:  

1. Support passage of the Paycheck Fairness Act.

Passage of the Paycheck Fairness Act, which was first introduced in 2014, is long overdue. This legislation would prohibit retaliation against employees who discuss pay with coworkers and eliminate the perpetuation of pay discrimination caused by employers’ consideration of prior salary. The law would make it easier to challenge systemic pay discrimination through class action lawsuits, require legitimate, job-related reasons for pay disparities, and provide the same remedies that are available to employees who file similar civil rights claims.

 2. Reinstitute the collection and analysis of pay data.

The Equal Employment Opportunity Commission (EEOC) should reinstitute pay data collection in line with revisions made to the EEO-1 Survey during the Obama Administration. Pay data should be used to identify significant problems and target enforcement efforts, considering specific challenges and different approaches in particular industries. Aggregate pay data should be published, in keeping with existing practices to identify trends within industries and for particular demographics.

3. Ensure equal pay in federal contracting.

The Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) should take critical steps to ensure equal pay by federal contractors. OFCCP could issue executive orders or initiate rulemaking to promote equal pay in a variety of ways. OFCCP could require federal contractors to include compensation analyses in affirmative action plans, publish pay ranges on job postings, include an equal pay certification in affirmative action plans, or make public disclosures about aggregate pay information. Contractors also could be prohibited from considering salary history in setting pay.

4. Require public companies to disclose gender and race pay ratios.

The Securities and Exchange Commission (SEC) can build in sunlight by requiring public companies to disclose gender and race pay ratios and other compensation data on an annual basis. The SEC already requires many publicly held large companies to report on the pay ratio between the CEO’s annual earnings and the median annual compensation for all employees. Such disclosures would empower investors and customers to make informed choices about where to spend their money. The SEC also could provide guidance to companies regarding voluntary reporting on pay equity to investors.

5. Promote best practices and compliance with employers. 

Private sector employers play a critical role in reducing the pay gap, and there are many ways that they can and should take action to ensure equal pay. The Administration should work with high road employers to promote best practices, building on commitments made by employers that signed the Equal Pay Pledge during the Obama Administration. The Equal Pay Pledge includes a commitment to  conducting an annual company-wide gender pay analysis across occupations; reviewing hiring and promotion processes and procedures to reduce unconscious bias and structural barriers; embedding equal pay efforts into broader enterprise-wide equity initiatives; and pledging to take these steps as well as identify and promote other best practices that will close the national wage gap to ensure fundamental fairness for all workers.

The Administration should re-engage with Employers for Pay Equity, a consortium of nearly 40 leading employers committed to collaborating to eliminate the national pay and leadership gaps. These employers come together to share best practices in compensation, hiring, promotion, and career development as well as develop strategies to support other companies’ efforts in this regard.  

6. Conduct outreach to human resources organizations, job search websites, shareholders, and investment firms.

The Administration also should engage with management-side organizations like the Society for Human Resource Management and job search websites like Indeed, LinkedIn, Glassdoor, CareerBuilder, Monster, Google for Jobs, etc. Many of these organizations are taking action on pay equity. This collaboration could promote best practices such as encouraging employers to publish pay ranges, discouraging employers from requesting pay history information, and minimizing discrimination in salary negotiation.

Shareholders also have mounted efforts to request public companies to report the median gender pay gap, equal pay policies, and reputational, competitive, and operational risks, including risks related to recruiting and retaining female talent. Shareholder resolutions have helped to promote pay equity in many sectors and leading corporations. 

7. Reinstitute an equal pay task force to ensure coordination and enforcement of the law.

The Administration should ensure interagency coordination by reconstituting an equal pay task force, including the EEOC, the Department of Labor, the Department of Justice, the Office of Personnel Management, the Government and Accountability Office, and the Securities Exchange Commission. Interagency coordination on outreach, education, and enforcement efforts will maximize the effectiveness of existing authorities. The task force should meet regularly and establish a detailed strategic plan with accountability measures to adhere to established timetables and deadlines for implementation. Each member agency should convene internal working groups focused on promoting equal pay through outreach, education, and enforcement.

8. Ensure that the federal government leads the way as a model employer.

The federal government wields tremendous influence as the employer of millions of workers across the country. The Administration should continue to study causes of the pay gap in the federal workforce, including the impact on women of color, as well as pay gaps within different agencies, industries, and types of jobs. The Administration should identify problematic practices that perpetuate pay discrimination, such as use of prior salary in requesting an exemption to the usual starting salary. The Administration should also implement promising practices that combat pay discrimination. Cutting edge innovations in the private sector should be adopted in the public sector. The Administration should consider implementing bold changes.

9. Reinstate the protections that were provided by the Fair Pay and Safe Workplaces Executive Order.

The Fair Pay and Safe Workplaces Executive Order was rescinded by the Trump Administration and has since rolled into the Fair Pay and Safe Workplaces Act of 2020, which would require prospective federal contractors to disclose labor law violations and give agencies guidance on how to consider labor violations when awarding federal contracts.

10. Issue reports from the National Council of Economic Advisers

Issues of gender and racial equity should be a focus of the Council of Economic Advisers. The Council should issue briefs and reports about trends, causes, and effects of the pay gap, as the Council did during the Obama administration.

Working IDEAL provides trusted and innovative advice on inclusive workplaces, diverse talent, and fair pay. Our audits and assessments apply the best thinking on how to promote gender, race and other forms of equity in your pay practices. Our robust quantitative and qualitative reviews go beyond basic compliance to align effective compensation strategy with mission and values. Contact us to learn more about the services we offer.

Author: Sarah Crawford

Best Practices to Increase Engagement, Productivity, Retention, and Innovation | Excerpts from Diversity, Inc.

It’s been over a year since noted journalist and scholar Pamela Newkirk published Diversity, Inc., an essential account of the promises many companies made to strengthen diversity, equity and inclusion, the billions spent on programs and initiatives over five decades, and the huge gap that still remains in fulfilling those promises. This acclaimed book, which Time Magazine declared a “must-read”, is a deep study of how the most popular responses to calls for justice and equity at work have not only failed to make progress, but even led to declining numbers of Black leaders in Corporate America, a continued racial wealth gap and pay gap, and persistent discrimination in the workplace. Her book also highlights the rare examples of successful progress and the lessons from social science about what actually works to move the needle on workplace equality. 

In the wake of George Floyd’s murder last summer, companies again, as they have many times in the past, made statements and pledges to do more. While some of the responses are more symbolic, others have greater potential for meaningful impact – from shifts in corporate giving and community support to belatedly addressing longstanding criticisms of images, names and branding, recognizing the need to invest in changing systems and practices, and making concrete commitments to hiring benchmarks or other specific and potentially meaningful policy changes. But as Professor Newkirk shows, Corporate America’s track record on racial justice is not promising. Just as longstanding approaches to sexual harassment were more symbolic compliance than meaningful intervention, the world of diversity consulting is a story of as much as $8 billion a year spent with little to show for it.  So what can companies do that can actually make a difference?

In the new paperback edition of Diversity Inc., Professor Newkirk included a series of best practices provided by Working IDEAL — ways that companies can make good on their promises by applying best practices based on social science research and our experience with organizations large and small across multiple industries. 

Here are a few of those recommended practices that Working IDEAL recommends to our clients to hire and retain great people and increase engagement, productivity, retention, and innovation.  Want the whole list?  Get the book!

Expand Recruitment Through Intentional Outreach. For example, work to build relationships with programs in your field, industry and community to access talent, and then tailor recruitment plans to identify the best sources of diverse candidates for specific jobs or groups of jobs. 

Identify and Remove Barriers in Hiring, starting with how you identify and evaluate skills and criteria. Education and specialized training requirements can serve as unnecessary barriers to increasing diversity in key entry-level and higher-level positions, especially when there are equivalent or alternative skills and experience that may add value, or the potential to invest in on-the-job training.

Institute a “Rooney Rule” diverse slate policy but also take steps to ensure its success. This means defining diverse slates to require consideration of multiple women and people of color, and providing the training and tools for hiring managers and holding them accountable to follow the policy. 

Make information on pay practices transparent and accessible to employees.  Instead of guessing about what candidates will accept, or trying to underpay those with less market power or information, affirmatively provide starting salary information to job candidates.  Ensure employees can freely share information about pay — in most cases it’s legally required.

Measure your results like any business process, auditing your hiring, pay and promotion practices — and your culture and developing metrics to track them going forward. You can use anonymous tools like surveys, and internal discussions across functions and levels, to identify issues and source responses. Track attrition and understand why some groups of employees are more likely to leave. And make sure to regularly share all that information with leaders and decision-makers and use it to hold them accountable. 

Don’t ignore problem behavior. Have safe and accessible options to report, address, and resolve workplace problems, and make sure you act quickly to address toxic or harmful workplace culture at any level of the organization. 

Give people in your organization the power to make change.  If you have named an internal DEI leader or officer, make sure they have the information, access, and power needed to successfully carry out their responsibilities. If you are using an internal committee, resource group or affinity group to support and engage employees, provide the resources and processes that empower them to deliver meaningful value and support to leadership.

Working IDEAL provides trusted and innovative advice on inclusive workplaces, diverse talent, and fair pay. Contact us to learn more about the services we offer.

Author: Pam Coukos

How the SEC Can Harness Shareholder Power to Support Racial and Gender Equity Through a DEI Index

On its very first day, the Biden-Harris Administration made racial justice and equity, and principles of nondiscrimination and equal opportunity, top priorities on its agenda.  The first of the 17 Day One Executive Orders committed to advancing racial equity and support for underserved communities across the federal government.  The EO requires a review of federal programs and regulatory processes to incorporate equity principles – while rescinding the Trump Administration’s anti-DEI Executive Order. It also includes improvements to data collection, which is a key practice of accountability. Other actions include:

The Administration could bolster this by leveraging the SEC’s  power to regulate publicly traded companies. A Diversity, Inclusion and Equity Index could harness shareholder power to ensure our publicly-traded companies make good on their their commitments to equality. A standard set of disclosures about hiring, representation, leadership and pay would empower customers and investors to make informed choices about where to spend their money. Workers could use this information to find jobs at places that offer true opportunity for all. Companies would compete to show their progress and we could all have a clearer sense of who is living up to their stated values. Competition would be the engine behind genuine, long overdue progress.

All large publicly traded companies should disclose standard information on key measures of DEI performance.

First, demonstrate Board Accountability for DEI, by sharing Board representation, whether the Board uses key best practices to foster diverse membership, and whether the Board provides effective oversight of People and Culture programs to address workplace harassment and promote inclusive culture.

Next, provide data on Leadership Diversity, including how the top 200 highest compensated individuals identify (by gender, race, ethnicity, and if available, by disability and sexual orientation).

Third, disclose Workforce Diversity and Pay Equity metrics, including companywide EEO-1 representation data and standard pay equity benchmarks similar to those already reported in the UK, and corporate performance on its own diversity metrics over time. 

Lastly, share progress on Inclusive Workplace Practices, including whether the company has developed and implemented key best practices to address workplace harassment and promote inclusive culture.

We already recommended that the SEC impose this type of requirement, but there are plenty of other ways this could come about. Indexes could make this a listing requirement. Institutional investors could use it as a factor for their portfolio decisions and federal, state and local agencies could use it as a benchmark in awarding contracts. And companies could voluntarily commit to these disclosures as a way to demonstrate leadership. 

The biggest winners will be the companies themselves. The research we shared with the SEC supports the view that diverse teams can provide key benefits, like increasing productivity and innovation. Strengthening DEI can lead to stronger and more sustainable financial performance.

Indeed, that is exactly the reason that this information is material to shareholders. The traditional view of shareholder disclosure is only aimed at information relevant to short-term shareholder gain. But the modern view includes any matters material to other stakeholder long term interests including investing in employees and fostering diversity, inclusion, dignity and respect, an approach championed by the Business Roundtable.

Despite the benefits, too many companies have not made DEI enough of a priority. Reviewing a typical corporate annual report or 10-K will show frequent touting of corporate physical assets, new product lines, mergers and acquisitions, but see very few, if any, words touting new investments in people and culture, or new efforts to develop, retain and strengthen the workforce. Most annual reports to shareholders virtually ignore the companies’ most important asset: its workforce.

We learned that to create change in a company, someone has to own and drive the change, which means the Board should have a specific subcommittee focused on oversight of People and Culture programs, with regular reporting from management on goals and measures. Through increased transparency of key measures of leadership and workforce DEI, we can use the market to move stalled progress on glass ceilings and wage gaps for people of color as well as for women. 

We want to motivate companies to invest in diversity and inclusion, people and culture, growth and retention. It’s good business that can yield an enormous competitive advantage and allow companies to make good on their commitments to equity.

Working IDEAL provides trusted and innovative advice on inclusive workplaces, diverse talent, and fair pay. Contact us to learn more about the services we offer.

Authors: Pam Coukos and Cyrus Mehri

A Just and Inclusive Workplace is Essential to Sustain Our Democracy

In 2017, the increased public visibility of the #MeToo movement made clear we were not doing enough to make the workplace safe from sexual harassment. In 2020, #BlackLivesMatter organizing similarly forced a broader and overdue reckoning with how deeply racial inequity runs in many institutions — including our nation’s workplaces, which need to be more inclusive.

The images of the first week of 2021 – a Confederate flag carried through the halls of Congress, people in the crowd breaking into the Capitol wearing shirts emblazoned with slogans about genocide of the Jewish people, a Black police officer against a mostly white crowd of insurrectionists – reinforce the urgency of our work to build a just and inclusive society.

As Cyrus said in December, in a recently-published interview in the Wall Street Journal, “Our democracy is not sustainable if don’t embrace equal opportunity.” 

But to do that we need truly innovative approaches. We must expand our thinking about what the barriers are and how to break through them.  As we welcome a new Administration that has committed to make racial justice and economic empowerment top priorities, and a new Congress that can move this agenda forward, we want to highlight some key innovations in government policy and workplace practices that can have the biggest impact.

1. Have the Security and Exchange Commission require transparency on diversity and inclusion. All large, publicly traded companies should make standard disclosures about hiring, representation, leadership and pay. As Cyrus explained to the Journal:

Merge SEC disclosures—annual reports, 10Ks—with advancing equal opportunity. For example, require companies to disclose race and gender data for their top 200 highest-paid employees. It’s a way to understand where the glass ceiling is. Do it by total compensation so it includes stock options. It’ll tell you who’s in the decision-making pool of the company. 

And as we explained in our 2016 proposal to the SEC, this empowers investors, workers, customers and community stakeholders  to make informed choices about where to spend their money.

2. Make your default hiring practices more inclusive, by ensuring you interview multiple women and people of color.  Cyrus explains why this disrupts default assumptions:

If you have one woman versus two women on a slate, when you go to two women, it’s 79 times more likely that a woman will be selected [than if there was only one woman in the pool]. When you go from one to two people of color, the number goes up like 190 times. If there are multiple diverse candidates, they’re multiple times more likely to be hired. Why is that? When you have isolated, coveted jobs, you need to do something to change the norms because the presumptions and stereotypes are so deeply rooted. 

Congress can lead the way by adopting the Rankin-Chisholm rule for its own hiring (a “Rooney Rule” for the Representatives), and by encouraging members to practice #CampaignEquity when they run for re-election.  

3. Make our nation’s first civil rights law a more effective tool for racial justice, so it can work to close the racial wealth gap, ensure real equal access to credit, capital, employment and economic participation. Amending Section 1981 would enable it to live up to its promise.

4. Understand how building racial justice at work includes ensuring fair pay. As Pam shared in an online presentation last fall:

Make equity a top priority when you make decisions, take actions, design programs and measure results. Gender, race, sexual orientation, disability, or any aspect of your identity should not determine your outcomes in the workplace – including pay.

The Administration can do its part by reinstating and expanding pay data collection and reinvigorating equal pay enforcement – and by ensuring that we do not just talk about the gender pay gap. We must recognize and address pay gaps based on race and ethnicity and the particular impact of both on women of color.

5. Promote an inclusive workplace culture free of harassment, bias and discrimination – starting with the people who do the people’s work in our federal and state governments.  Assessing culture, ensuring inclusive policies and practices, and acting quickly to address disrespectful behavior before it becomes toxic should be standard practice. President Biden should consider an Executive Order directing all federal agencies to adopt effective initiatives to promote equal employment opportunity and inclusive workplaces, and revoking a series of anti-DEI actions from the fall.

At the end of the day, Cyrus’ observation from December of 2020 seems even more true in January of 2021: 

There is a moral case for diversity and inclusion. And there’s a business case: long-term value is tied to diversity and diversity is tied to innovation. But the last few years have told us there is a democracy case, too.

 

Working IDEAL provides trusted and innovative advice on inclusive workplaces, diverse talent, and fair pay. Contact us to learn more about the services we offer.

Authors: Pam Coukos and Cyrus Mehri

How Your Company Can Take Action to Close the Wage Gap

In order to advance pay equity, it’s important to adopt an “equity first” mindset. Make equity a top priority when you make decisions, take actions, design programs and measure results. Gender, race, sexual orientation, disability, or any aspect of your identity should not determine your outcomes in the workplace – including pay. 

Our co-founder and CEO, Pam Coukos, shares her insights about how to close the wage gap:

Here are three ways to put equity first:

  • Remove barriers: Do your due diligence. Go looking for the places where equity gets out of balance and bias can operate. Do you value new untried talent over the committed and valuable people who have been delivering the work? Do you rely on objective, measurable and unbiased factors to set pay? 
  • Change norms: Justifying or excusing a difference in pay isn’t good enough. Start with the principle that you pay the same for the same kind of work, the same kind of experience, the same level of responsibility. Hold everyone accountable for making fair, consistent and equitable decisions.
  • Embrace transparency: Secrecy can’t protect you in a world where pay transparency is a legal right and a cultural reality for large parts of your workforce. Look at your data and pay practices with the assumption that are or will be public – and if they don’t measure up, take action. Share your progress to build trust in your workplace and in the marketplace.

Prioritizing pay equity is the right thing to do. It’s the law. Also, it can make your pay program better, cheaper and more efficient. It can drive innovation and provide a competitive advantage when hiring, retaining and supporting a truly diverse workforce.

Working IDEAL provides trusted and innovative advice on inclusive workplaces, diverse talent, and fair pay. Contact us to learn more about the services we offer.

The UK Gender Gap Reporting Calls Into Question Those Big Companies With Perfect Scores. The Answer Is More Reporting.

It’s Equal Pay Day, and I’ve decided not to have that conversation again – the one about exactly how many cents women lose on the dollar, and whether if you try really, really hard to narrow it down you can get it to single digits. (At the end of the day, there’s always a gap.)

That’s because I’m worried about whether our legitimate desire to quantify and explain is making it easier to justify and excuse. The law allows employers to pay men more than women when those men are more qualified, better performers or doing more complex or higher skilled work. But I am not convinced that we have the right tools to make those distinctions consistently, fairly and objectively.

So I tend to question pay equity analyses that just focus on identifying and applying differences between employees. An explanation may not be an explanation. And it certainly might not be a justification. Can we be so confident these really are objective, meaningful distinctions in practice?  Can structural gender and race bias and cultural norms affect the inputs and the outputs of the decision making process? Do we have the right data to really answer the question of whether these differences even exist? While some places are better than others, it’s hard to find a situation where every difference is satisfactorily explained and justified.

It’s hard in our imperfect world to get a perfect score.

And yet, the last couple of years have seen major US tech companies triumphantly announce they have virtually no gender and race wage gap. These studies are, to put it mildly, at odds with other estimates of pay gaps in the industry. I find them disturbingly perfect, but without disclosed methodology, who is to say if they are accurate?

Now we can bring at least one more data point to this debate.  The UK has implemented an important new law requiring many companies to disclose aggregate gender pay gaps, so we can begin to see more clearly the kinds of distinctions – and excuses – that may be in play.  And the questions we should be asking.

To take just one example, Microsoft’s 2018 UK report shows a 17% aggregate gender pay gap, with men making over 8% more than women in median hourly pay and more than 11% more comparing median bonuses. At the same time, Microsoft’s report states that when it comes to “equal pay for equal work” women working in the UK earned 99.8 percent of what men earned “at the same job title and level” – comparable to their 2017 U.S. report showing almost perfect pay parity for women and men (and for white employees compared to employees of color).

What does this mean? How can there be both a gap looking at it one way and no gap looking at it the other? It probably means that there are differences between the numbers of men and women at particular job titles and levels, with men more likely to occupy higher paid positions. That’s a useful piece of information! It suggests that Microsoft, like its peers, has more work to do when it comes to gender equity. In particular, the path to addressing the aggregate wage gap probably includes looking at trends and factors around advancement opportunities, hires and exits, or challenging assumptions around technical job paths and cross-functional work. But since we can’t see much beyond these two sets of numbers for the UK workforce, it’s hard to know exactly why they are different.  And we don’t have the comparable US aggregate numbers, meaning we know even less about what the 2017 US report might really mean.

(Of course the aggregate numbers don’t tell the whole story either. And it’s not entirely fair to hold one company to account for a problem that pervades every industry and all sectors of the economy. But aggregate reporting like the UK requires can be helpful. And it’s why I supported the EEOC pay data report that the Trump administration placed on hold.)

Getting to a virtually perfect score on a gender or race pay gap analysis can also mean making some potentially questionable technical adjustments — like excluding any pay differences that didn’t meet a certain statistical test, or not even analyzing any jobs or levels with very small numbers of women or people of color. Or disaggregating the analysis too finely, which can obscure patterns of disparity. Even if those decisions are valid and defensible in a particular case, it’s important to know about them when evaluating the bottom line number.

There are other things that I always want to know when looking at pay equity analysis, some of which are specific to certain industries or types of jobs. In industries like tech, law and finance, whether the study analyzes base pay or also includes bonuses or stock, has a big impact on the size of the pay gap. For hourly and part time work, a gap may be based on differences in hours of work, or overtime, even if there is no difference in  the rate.  Are there controls for performance, tenure or other factors?  If so, how are they measured?

Considering the effect of factors and explanations and constructing a good model based on proper comparisons is important in any pay equity study. But it’s also important to question each assumption and understand why and how a particular explanation or approach changes the result. It’s even more important to report on those choices and why you made them, allowing others to evaluate whether they are legitimate or not.

If the reason there is no statistical pay gap is there weren’t enough women in higher level jobs to study, that fact should be reported and considered as relevant piece of information that could place a 99.8 percent figure in proper context. A study that finds no pay gap for individuals at the same title and level might a very accurate depiction of wages, or it might also just be very, very good at justifying pay differences that do exist.

When I do a pay equity study, I want to learn as much as possible from the data. I want to know where there are issues and barriers, where policy or practice or culture or technology is helping promote more equity and inclusion and where it is holding the workplace and workers back. Identifying legal liability and good risk management are important, but so are productivity, competitiveness and efficiency.

Ultimately, a gender or race pay gap is like a compensation program stress test. It can help identify disconnects between what compensation should be based on and how it is actually working in practice. Even if a pay difference can be “explained” for purposes of defending against a charge of pay discrimination, it might still be problematic. It might still be hurting individual workers and the workplace as a whole.

A pay equity study can embrace some real complexity and still be good PR. Buffer, a tech company which has transparent pay (based on an objective salary calculator to ensure clear and consistent compensation levels for its employees), also released its 2018 pay gap analysis with all the numbers – aggregate gaps, adjusted gaps, differences by team and level, and a description of barriers and challenges to full equity that they are still working on.  More methodology would be helpful, but this is a more useful way to think about the numbers.

So more reporting, of all kinds. More context, more analysis and inquiry. It’s an imperfect world. I don’t buy your perfect score.