Part 7: Creating a Fair Compensation Strategy and Philosophy

*Editor’s note: Download our full Diversity and Inclusion Handbook for more than 70 pages of tangible strategies to help you cultivate diversity and inclusion on your team.

We believe passionately that diverse and inclusive companies make for more innovative, engaged, and happy teams, and we speak with forward-thinking talent leaders all the time who feel the same. We’re writing this series on how to improve diversity and inclusion in the workplace because people are ready for the next level of discourse around diversity and inclusion; one aimed at actual solutions. In it, you’ll find tactical advice, beneficial resources, and examples of what companies are doing today to make real progress in diversity and inclusion. Read our series introduction to see what we cover throughout the series. 

Creating a fair compensation strategy

There is no higher proof of a workplace that values diversity or practices equality than if it is backed up by compensation data.

Only a few people within an organization are privileged to directly influence compensation strategies. This post is authored for those who hold that power and to inspire them to take action in a way that disproportionately impacts the movement towards workplace diversity.

Realize the gravity of the situation

Worldwide, women make less than men, even when comparing across similar titles and seniority. In one study of such apples to apples comparisons, Glassdoor found that women still only earn about 95 cents for every dollar men earn. The problem was the most acute for female computer programmers, chefs, and dentists, who made 72 cents per dollar made by their male counterparts. More research from the firm Procurement Leaders, found that the pay gap persists even in upper levels of management. Women with “CPO, Global head, or SVP,” in their titles, for example, made 84 cents to the male dollar.

The gap exists by race, as well. Pew Research, for example, found that college-educated black and Hispanic men earn roughly 80 percent the hourly wages of white college educated men.

Compensation ends up unfair for a myriad of reasons. Women are less likely to negotiate than men, and more likely to be viewed negatively when they do. Employers might face pressure from hard negotiators, or hiring managers and recruiters who aren’t strong negotiators themselves might hide behind a system where they’re not held accountable for compensation.

Despite being one of the most sensitive, and potentially toxic subjects in the workplace, compensation is also quite public. Not only are many online sites gathering anonymous compensation data for the world to search, but employees talk about compensation among themselves more than you think. You should assume that everyone finds out about unfair compensation practices – and faster than you’d think.

Whatever the reasons, committing to fair compensation strategy and removing any pay gap is paramount for a shot at retaining your talent from underrepresented groups. Your business will thank you for it, too; doing the right thing when it comes to comp is good for the bottom line. When employees feel they’re compensated fairly, you’ll have less costly turnover, and it will be easier to budget and plan.

Document your status-quo compensation philosophy and strategy

You may not immediately be in a position to change your compensation philosophy, but just documenting the status quo can be useful for getting everyone to adopt consistent behaviors. The fairness of your compensation strategy is only as good as your weakest link, and documenting your current compensation practices can help raise your floor.

What is a compensation philosophy?

A compensation philosophy answers these kinds of questions:

What are the various components of our compensation and what purpose do they serve? For example:

  1. Cash salary
  2. Equity
  3. Starting bonus
  4. Relocation bonus
  5. Title
  6. Perks
  7. Intangibles like mission, growth opportunity, and culture

Which of these are mechanisms of equality and fairness?  Which are mechanisms to recognize varying degrees of performance?

In the recruiting process, which components of compensation are negotiable and to what extent? What is your company policy on countering competing job offers?

What structural factors affect compensation?

  1. Cost of living
  2. Hiring markets
  3. Employee tenure

Who is making compensation decisions?

  1. Managers: as a tool in their performance, bonusing, and promotion
  2. Recruiters: to be equally articulate and consistent in how they explain an offer

Who is documenting or reviewing compensation decisions for:

  1. Adherence to established policies or philosophy?
  2. Consistency across employees?
  3. Alignment to values?

Cash isn’t the only part of your compensation strategy that can win candidates

If you’re relying on cash to win over candidates, your highest-compensated employees (relative to their seniority and role) will simply reflect your toughest negotiators. Instead, train the recruiters and hiring managers who extend offers on your compensation philosophy, how to handle objections, and how to sell on your company’s intangibles.

At Lever, we have geared our recruiting process to minimize negotiation. Unsurprisingly, that means very narrow compensation bands and the risk of losing great talent to companies that will pay more; but surprisingly, it also means a bigger emphasis on candidate experience and a higher likelihood of hiring successful cultural fits.

Long before it’s time to make an offer, we must explain our compensation philosophy to the candidate and take the time to highlight the ways it ties back to our company values. A candidate’s reaction to the conversation can actually be helpful for evaluating a very crucial dimension to culture fit; compensation philosophy is all about the cultural consensus on how your company values contributions and rewards people.

Sharing your compensation philosophy can help you close the right candidates. Some candidates may even be relieved to hear that they might be able to join a company that takes fair compensation so seriously, or who agree with the company’s assessment on how work should be rewarded.

Negotiation-proof your offers

By investing in richer and more persuasive offer letters, you can decrease the likelihood of negotiation. Here are a few things to consider adding to your letters:

  1. Include a reference to your compensation philosophy
  2. If you benchmark data, leverage it in the document (see eshares)
  3. List out the skills and level of the candidate on the document as justification for the current role, title, and comp, so they see evidence that you understand what they bring to the table
  4. List out the intangibles of the opportunity
  5. Include a section which describes why others accepted the job, and how they thought about it

If you can’t get away from negotiation, you can at least create fair guard rails, like:

1. Introduce compensation bands for each role if you don’t yet have them. And if you already do, then push to make your bands narrower.

2. Designate certain parts of compensation packages negotiable in order to protect equality of other aspects. Leeway on starting bonus, for example, is usually better than salary.  Sometimes, you can choose something that is of relatively low monetary value, high perceived value, and low visibility, like vacation days or perhaps the ability to be sponsored for training or mentorship.  Also, be aware that some things that are cheap or free can actually introduce a disproportionate sense of unfairness, like titles, access to resources (like an assistant), or workstation/equipment.Establish “budgets” for each hiring manager (or recruiter) to negotiate with candidates.  If there is even a little scrutiny/enforcement, hiring managers may invest more into their hiring strategy, for example focusing on “selling” candidates earlier in the process.

3. And, while this may be obvious, don’t incentivize recruiters on how much they can shave off an offer.

Keep a list of exceptions for your compensation strategy

Exceptions happen, but accountability should always be a counterbalancing force. Keep a list for when you make exceptions, and hold participants in the decision accountable to documenting their decision.

Every time you have to vary on comp, ask the parties involved richer questions that can indicate bad patterns or weak links, like these example below.

  1. Do you believe the compensation bands set for this role are inaccurate?
  2. Did you lack any information or resources in order to negotiate more successfully?
  3. Did the best person possible extend the offer or negotiate it? If not, who would have had better results?
  4. Was this candidate receiving an offer for a position or compensation level more senior than your own?

Many companies have formal processes for reviewing or evaluating offers that go outside a given compensation range. Make sure that the people who are reviewing those offers are well-versed on the compensation philosophy and goals of your workplace diversity program.

If you’re an executive, get involved creating your compensation philosophy and strategy

Executive buy-in matters immensely in a company’s ability to adhere to its compensation practices in all areas – in offer packages during the recruiting process, in granting promotions and raises, and in designing leveling and career pathing.

Ask yourself how you anchor your compensation within your org (is it against market data?), and if you’re comfortable standing by variances in your comp. You may also find that you have a leveling problem. Can you explain which roles fetch the highest compensation, and why?

Audit compensation regularly (annually, quarterly) for adherence to your compensation philosophy. At Lever, we have chosen to do leveling regularly and do look at gender and race/ethnicity as a dimension. Even if you don’t adjust compensation itself, you can come out of it with the goal of calibrating or training the managers or recruiters who seem to be outliers in either direction.

Conclusion: Compensation strategy

For executives in a position to generate commitment to fair and consistent comp practices, it might mean pushing your team to discover uncomfortable things. You might find that close relationships lead to certain privileges, or that you can’t seem to uphold your negotiation strategy in real life. But companies that claim to take diversity seriously, must take fair compensation seriously.

For more, read our next post on how to design an inclusive onboarding process, and download our Diversity & Inclusion Handbook for hundreds of impactful tactics like the ones above.