What fair pay really means
There is no universal definition. Not to my knowledge. But for me fair pay* means employee compensation should be:
- At least the legal National Minimum Wage.
- Equal regardless of gender. As well as race, disability and the other protected characteristics.
- Consistent with the individual’s responsibilities, skills and experience. Which companies should assess using an objective framework.
- Adjusted to the costs of living. For example, the London Living Wage as a step up from the National Minimum Wage. Or a geographical weighting allowance for an employee seconded to a more expensive city or country.
- Benchmarked against comparable roles within the organisation, and reflective of a fair market rate for the role.
*Note that pay can incorporate salary, bonuses, share options and other benefits.
To be clear. Fair pay does not mean people doing different roles should necessarily be paid the same. It’s fair to pay a senior manager with a lot of responsibility more than junior employees in the same team. Moreover, I believe it’s also fair to pay a software engineer whose expertise is in short supply, more than a generalist in the same company. Even if their levels of experience and responsibility are comparable. And I say that as a self-described generalist. My point is, contrary to what some critics would say. It’s perfectly possible to pay employees fairly without distorting the labour market. Let alone overthrowing capitalist economics.
But what about the “gender pay gap”?
Unequal pay is paying one employee less than another to do the exact same work. It’s been illegal in the UK since 1970. Although it’s still rife. The gender pay gap is different. It reflects the fact that even if women are paid equally to do the same jobs as men. They may not have equal opportunities to progress and get the better paid jobs. Which means on average women earn less than men – at 78% of large UK businesses. A common reason is companies filling senior management roles with a significant majority of men. There’s also an ethnic pay gap. These are more difficult problems to solve because they require societal changes as well as better business practices. So while they’re hugely important I won’t cover them in depth in this article.
The benefits of pay transparency
The more fairly people are paid. The less awkward they feel talking about it. And the more satisfied they are with their pay. As long as there’s transparency. That’s my experience.
Public sector pay scales
I got my first salaried job when I joined the British Army. Like everyone else I was paid according to my rank. With increments for experience in terms of time served. As well as fixed bonuses for time spent away from home – and any specialist roles if I’d done them. And I can honestly say I never worried about pay. Not until I re-entered the civilian world several years later. It helped that I was paid well. Even though I made less than many of my civilian friends. But more importantly the pay scale was public, and there were no exceptions.
No male lieutenant was paid twice as much as a female counterpart. No sergeant could give his favourite soldier a secret bonus. Pay was clear cut and equitable. So it never even occurred to me to question the system. That’s not to say the Army is perfect in this regard. Arguably the vital junior ranks should have been paid more. And in some roles it was possible to sit on a comfortable salary without working as hard as one’s peers. But generally the parallel systems for promotions, professional development and postings helped to keep the system fair. And any conversations about people being paid too much, or too little, were generally light-hearted.
Of course similar pay structures are in place in many other UK public sector jobs. And I’ve spoken to people working in medicine, teaching, the civil service and other disciplines. They aren’t all satisfied with their pay. But on the whole they like the transparency. And there are some inspiring examples of private companies embracing pay transparency. US tech startup Buffer uses a compensation formula and publishes every employee’s salary online. With great results for employee satisfaction and retention.
How pay secrecy undermines fair pay
Fast forward to my first steps in the world of business. And you could say I was naive. But I was shocked when I started applying to civilian companies. Most vacancies I found were posted without salaries – not even brackets or ranges.
Moreover, potential employers often asked me how much I expected to earn. So suddenly I had the opportunity to determine my own personal pay scale. Simply, this made me uncomfortable and I had no idea what to do. Should I tell them what I earned in my last job, or should I inflate it? When they make an offer should I counter it? And if so, how hard should I negotiate? In the end, I tended to feel dissatisfied with my pay because there was no transparency. So I had no way of knowing whether or not it was fair – for me or for those around me.
Pay secrecy leads to discrimination
Personally I made some expensive mistakes. By not negotiating my compensation well – or at all – and leaving money on the table. Some would argue that’s too bad. That it demonstrates a lack of business acumen on my part. But does it really make sense to pay employees based on how well they negotiate? Particularly if negotiation has nothing to do with the job they do! And especially when they don’t know if the employer’s negotiating position is fair.
I talked about my experience with friends; from corporates, small and medium-sized businesses and startups alike. And I quickly discovered the military-style pay scale is far from the norm. I learnt that some companies have no compensation structure. Or at least not one that’s fit for purpose. And even those that do often have a whole host of outliers. With no justification for why certain employees are compensated very differently to do the same role. Of course, I’m generalising. Many organisations take fair pay seriously. But it remains a systemic issue. And sadly unfair pay disadvantages women more than men. Not to mention pay secrecy stops them from doing anything about the gender pay gap. All in all, pay secrecy and unfair pay go hand in hand.
Pay secrecy is bad for business
As an experienced manager adapting to a new working environment in the civilian world. I was not only concerned about my own pay relative to my peers. But also about my team members’ pay relative to theirs. I was unprepared for the amount of resentment bred by pay secrecy and unfair pay. And as much as I tried to level things out, I didn’t always have the power or budget to do so.
I’ve seen promising young employees distraught because they found out a friend in the same role was paid significantly more than them – or less, which they felt guilty about. I’ve had a team member quit because they felt they were undervalued. Only for HR to offer them a huge pay rise. Which didn’t win them back. It just rubbed salt in the wound. Because they realised they should have been paid more all along. Almost as bad, I’ve seen employees worrying unnecessarily because nobody had ever explained to them the justifiable disparity in pay between more and less specialised functions.
In my view most of this emotional turmoil was avoidable. And for many companies addressing the issue with a change management strategy would have improved employee retention and increased productivity. More than offsetting any costs.
Who benefits from pay secrecy?
Frankly, we should consign any arguments against fair pay to the dark ages. Certainly the equality aspect is a legal requirement. And ethically you’re doing your business a disservice if you’re not making a concerted effort to pay your employees fairly. It’s one of the responsibilities of running a company. Furthermore, I guarantee it will result in a more engaged workforce, and a more successful business.
Pay transparency is a more controversial issue. At least for those employers who resist transparency. Because unfortunately it’s easier to pay who you want, what you want, without scrutiny. However, I can say I’ve been a government employee, a startup employee and a business owner. I’ve also advised companies of all sizes across a range of industries. And I’ve yet to hear any convincing argument for pay secrecy. If you have, please let me know – I’m intrigued.
How to achieve pay transparency
My advice is to establish a clear compensation policy, with appropriate salary levels or brackets. Your system doesn’t need to be as rigid as a military pay scale but it should be robust and defensible. The bigger and more cross-functional your organisation, the more complex this exercise will be. And you shouldn’t take it lightly. You may need to seek specialist support to ensure it’s done properly.
And don’t forget that communication is key. You should engage your employees early on and manage their expectations appropriately. Putting in place a new pay policy is a serious undertaking and will be an iterative process. Dependent on budgets, progression and other factors you may not be able to level everyone’s compensation at once. Just remember this. If you conduct a compensation benchmarking exercise but aren’t transparent with your employees about it, it won’t inspire confidence.
Ultimately though, if you embrace this opportunity to better recognise and reward your employees. You’ll reap the reward of a more engaged and satisfied workforce. And if you’re keen to go a step further, you could take a more radical approach. Like this American CEO who introduced a minimum salary of $70,000. Based on a Nobel prize-winning academic study on how much money you need to be happy. And funded by his own massive pay cut. Now that’s a commitment to fair pay.