Pay transparency: a return to job evaluation and the end for 1990's orthodoxy of broadbands and performance-related pay?

Copyright: Dr Duncan Brown, Principal Associate, IES

I joined some 4,000 viewers for an excellent WorldatWork webinar last week on the latest US developments on pay equity and pay transparency. Some of the key  points emerging were:

• Transparency legislation continues to spread across US states, with a majority now banning salary history discussions in recruitment and those requiring pay range publication on job ads rapidly catching up.  

o   The District of Columbia is the latest to pass a salary range disclosure law requiring ‘all employers with at least one employee to post the minimum and maximum projected salary in all job listings or advertisements (that) the employer in good faith believes it would pay for the role’. The legislation will go into effect on June 30th.

o   Combined with local and city regulations some estimates are that some 75% of US employees are now covered by one or both of these requirements. The American Society of Human Resource Management maintains a useful database of these requirements with links to the relevant legislation.

• A salary history ban was also  announced by President Biden through the Office for Personnel Management on January 29th (the 15th anniversary of the Lily Ledbetter Fair Pay Act) for all federal government employees, to be implemented by October 1st, with a further requirement for agencies ‘to establish policies that further promote equity in pay setting’. There is also a proposed new rule to extend this into their supply chains through government contracts, along with salary range publication. President Biden called these actions ‘commonsense policies that will help pay millions of workers fairly, close gender and racial wage gaps and yield tangible benefits for the federal government and contractors’.
• Despite the ‘noise’ and ‘pushback’ in some Republican states such as Texas against the ‘toxic ideology’ of diversity, equality and inclusion (DEI) ‘wokeism’ and of course the horrendous abortion bans, surveys by organisations such as Gartner show that virtually no employers are scaling back their work on DEI and pay transparency at all. It does  though appear to be influencing the form of this work in some cases, with a generally lower profile adopted, and according to all of the speakers on the WorldatWork webinar, more focus on the structural causes of pay gaps and inequalities, such as recruitment and promotion processes, rather than just setting targets and having specific programmes restricted to minority groups. There was also, the attendees on the webinar reported, now more pressure to show evidence on the impact and ‘tangible benefits’ of their DEI and pay transparency initiatives, which we might regard as at least one positive outcome from this unfortunate development.

On this latter point, I was surprised at the lack of knowledge of the practitioners on the webinar of the academic research from organisations such as the International Labour Organisation, and World Economic Forum showing these ‘tangible benefits’ that President Biden referred to. Although much of this legislation is relatively recent in the US, there is already emerging evidence over there of the positive impact of these initiatives.

For example, an NBER study (2020) led by researchers from the universities of San Diego and Oregon found ‘using both difference-in-difference and synthetic control approaches’ that the gender pay gaps had reduced ‘by 1 percent in states with salary history bans…driven by households with children over 5 years old, by workers over 35, and by those who have recently switched jobs.’ IES has a wider resource centre of research and tools to help support you in addressing your gender pay gaps that is free to access.

But this discussion of the ‘structural’ causes of inequality, and the (positive) pressure resulting from the legislation to justify differences in people’s pay carrying out similar work at the same level and in the same pay band, was for me the most interesting aspect of the webinar. The vast majority of employers on this webinar seem now to be doing work on what the Americans call ‘job levelling’ and justifying pay variations. Reported actions include:

• The adoption of more UK-style job evaluation systems based on objective methods and criteria of job measurement to place jobs in grades/levels, rather than just relying on external market pay surveys. The traditional assumption that UK employers set pay on the basis of internal evaluation as well as market pay, while American companies just rely on the market is rapidly becoming out-of-date, and the legislative pressures and risks – in the UK resulting from equal pay legislation – that have seen job evaluation’s rebirth and expansion here, now  seem to be being repeated in the US through their pay transparency laws (see for example, Brown and Munday, 2016);
• The narrowing of pay ranges and especially very ‘broadbands’, with moves to fixed ‘spot rates’ for the lowest graded jobs and executives; and narrowing and clearer zoning of pay ranges to justify any differences in pay between individuals for management and professional roles. One person on the video call talked about ‘getting rid of our pay complexity and generally simplifying our pay structures’, including removing their wide geographic pay differentials, a trend confirmed by recent surveys (for example, see Smith, 2022)

The traditional designs of  grading structures, with 50% pay ranges and someone’s pay positioning in their range under performance-related or merit pay systems dependant on their annual rating, as as another attendee put it, are 'under severe threat'. Employers seem to be narrowing their pay ranges and removing their rating systems, focusing on more positive, forward-looking and engaging pay, performance and career management processes

My US consulting friends and former colleagues confirm that these trends are evident in their clients over there. And that larger US and multinational companies are increasingly looking at developing pay transparency on a global basis, particularly since the EU’s pay transparency directive was passed last year, with a three-year time-frame for member states to implement it through domestic legislation.

The directive includes requirements for pay rate/range publication and salary history discussion bans. But it is much stronger than any of the US state legislation on the job evaluation requirement, with employers with 250 or more employees needing to justify any gender pay gaps of  more than 5%; and a much greater consultation and involvement role required for trade unions in the process of measuring and closing their pay gaps.

A number of  Labour MPs and advisers have visited Brussels, Washington, Boston and California in recent months to learn more about the pay transparency regulations and their impact for themselves. Assuming that the Labour Party can convert its  huge lead in the opinion polls into electoral victory and government later this year, then the UK seems likely to follow the US and European lead on transparency.  Labour already announced in January that it would extend the current gender pay gaps reporting requirements to include mandatory ethnicity and disability pay gap reporting.

I  first provided input to the then Equal Opportunities Commission on the best measures that might be used in mandatory pay gap reports in 1998. It took  another 19 years for that requirement to be implemented. Greater pay transparency in support  of fairer pay management, which  IES has supported and promoted for  many years, at last, appears to be heading our way in the UK.

Are you ready?

Copyright: Dr Duncan Brown, Principal Associate, IES