Which one of the following is not an internal factor in the compensation plan or strategy?

Pay inequity is increasingly becoming a reputational risk for organisations in an era where employees can share and compare their pay levels. In many countries, it is now mandatory to disclose pay levels to promote transparency and accountability. Companies that pay fairly are more likely to attract and retain top talent, whilst companies that pay unfairly experience lower morale, create resentful employees and dampen commercial performance. The World Economic Forum estimates reputational risk as the equivalent to 25 percent of a company’s market value.

But ensuring pay equity is a complex issue. We commonly encounter news headlines illustrating inequality by comparing executive pay with those of lower-level roles. Such an approach ignores the multi-dimensional pressures that drive, diminish or stagnate employee compensation over time. For instance, in Australia, a CEO can earn as much as 105 times the average worker salary while in India, headlines suggests they earn 229 times more. Such numbers however, don’t reveal the full picture. The average salary of ASX100 Chief Executives in Australia is $5.7 million while the average wage of full time workers is $81K. In India, by contrast, a CEO earns on average U$1.5M while the average wage is reported to be U$18K. Instead of jumping to conclusions that people doing the top jobs are being overpaid, it’s important to understand the forces that create these pay disparities. These driving forces can come from both inside the organisation and the external market.

Here is a summary that can explain why certain gaps exist:

Internal equity helps organisations ensure that similar level jobs are paid about the same; and “bigger” jobs are paid more than “smaller” jobs. Using Work Measurement techniques gives companies and employees an understanding of what is a “bigger” or “smaller” job.

Organisations that achieve internal equity pay employees fairly compared to their co-workers. Factors that impact internal equity include: Business units, location, job functions, job levels and any unique requirements of specific roles.

External equity exists when employees in an organisation are rewarded fairly in relation to those who perform similar jobs in other organisations. Factors such as external competition, market pressure, organisational size, geographic location, and cost of living can create pay differences across industries for similar roles.

Pay equity is more prevalent in certain businesses

While pay equity issues can exist in any business, they’re more prominent in certain industries and types of organisations where the shape of a company can impact on how remuneration is distributed.

A company that employs more people at a lower wage will have a higher disparity between top and bottom, especially if it’s a multinational organisation operating in markets with lower wage costs and a lower cost of living. By contrast, a professional services company will have lower pay disparity, even if the CEO earns more.

So, a company that has fewer people, but primarily hires skilled people (like a consulting firm, a law firm, or even an investment bank) will have much lower disparity but may have CEOs who earn far more than those in a manufacturing company.

To put it another way – if a company is entirely comprised of people earning in the top 1 per cent of worldwide pay levels, their CEO automatically looks more ‘equal’ than a company who employ people earning a broader range of wages. The simple illustration (below) shows the typical numbers of people at each job level for a retailer and a professional services company.

Forces at play 

Korn Ferry’s PayNet database provides organisations with access to pay levels of more than 24,000 global organisations in over 110 countries. The database accurately reports what the market is paying for similar roles, enabling organisations to be confident they pay employees fairly. The PayNet database classifies roles according to job levels and a recent PayNet analysis of data variances in APAC salaries of lower level employees (level 8 - Clerical Worker) compared to executive roles (level 24 - CEO) shows the gap continues to grow in most countries.

In India, business executive salaries were on average 29 times the average Level 8 salary in 2011, compared with 74 in 2017 showing a substantial increase in executive salaries. In China salaries followed a similar pattern.

Industry type can influence organisational compensation distribution. For example, India’s primary industries are manufacturing oriented, indicating that most workers are entry-level and unskilled. Business executives feature sparingly at the top of a hierarchical organisational chart. Another big driver of this discrepancy in pay ratio is that CEOs are paid in an international or global market, whereas workers at the bottom are paid according to the local cost of living which in some countries like China and India, is very low.

In contrast, Hong Kong and Australia showed a reduction in the compensation gap between business executives and workers. This decline could be reflecting the influence of the increasing globalisation, digitalisation and professionalisation of workers on their compensation.

When we exclude the very top and bottom-level jobs, the gaps are not as pronounced, and more countries show an overall reduction in pay inequity rather than an increase. The decrease in compensation variation between workers at level 20 (higher-level managers) and level 12 (IT Programmer) can reflect the increasing growth of wages at the professional level as well as the talent scarcity of some skills and people capable of working in complex environments. For example, higher-level managers (level 20) are responsible for more people and more responsibilities. An IT programmer (level 12) requires skills that are in high demand.

Organisations cannot easily control the variables that regulate wages. For example, to attract new talent during times of skills shortage, companies traditionally offer higher than average salaries to attract top talent, but this has the potential to upset internal pay inequity because two roles at the same level, one high-demand and the other in less demand, would no longer be paid the same. But there are measures that organisations can implement to minimise wage discrepancies and resentment and to maximise staff retention and performance.

Four steps to manage pay equity

1. Put in place a robust approach to measure jobs and salaries to diagnose, understand and address salary variance in your workforce.
2. Be transparent about pay policies, trends and the changing demands of your workforce. Speak openly about the skills needed and the skills you expect you’ll need in the future. This is not necessarily confined to your company – there may be a need for this on a national or international level, especially when it comes to training young people.
3. Be realistic and plan for these changes. Develop a compensation strategy that includes a risk management plan. Map out all the internal and external pressures that have historically affected salary levels, as well as those likely to in the future. And devise solutions to mitigate each risk when they occur. From skills shortages, to downturns, rogue business managers who recruit their own talent and ignore salary bands: Each eventuality can be planned for and tackled. Stakeholder management is key when an organisation’s reputation is risk.
4. Develop people to move up the ladder, improve their wages and how skills are taught at work.

• This is particularly needed with young people. In many cases, they haven’t yet learned the ‘soft skills’ needed in the workplace.
• Our Best Companies for Leadership study shows the best companies develop these skills internally (and promote from within), which is both cost effective and more reliable than going to the market. This can take the form of placements in different areas to diversify skills.

Internal and external pay inequity is a complex, multi-dimensional issue that reflects market and organisational pressures. CEO compensation packages receives a high level of public attention; however, it is often reflective of industry, market as well as geographic location trends. Every organisation needs to create a well-crafted compensation strategy that manages internal and external pressures and ensures ongoing pay equity for all employees, while mitigating reputational risk and driving superior performance.

Learn more about the Korn Ferry EQUAL model to address pay disparities.

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