Closing the gap: Addressing policies and practices that contribute to pay disparities 

In line with those findings, Mercer’s 2024 Global Talent Trends report indicates that pay disparities and equity remain key issues for both employees and organizations. In fact, fair pay is the second most important factor for why employees stay in their current jobs according to both employees and HR leaders, moving up from number four in the previous report.³

Today, forward-looking organizations are routinely conducting proactive pay equity assessments and have established policies and practices for making employee-specific pay adjustments to achieve pay equity, minimize risks, and ensure compliance. However, these same organizations often fail to use the assessment period as an opportunity to uncover the underlying sources of inequities across groups and miss the occasion to review and refine their talent policies and practices.

Talent policies and practices, which drive pay equity outcomes, must be both designed and executed to support diversity, equity, and inclusion (DEI) and pay equity goals without inadvertently limiting the organization from achieving progress toward these goals.

Based on over two decades of experience conducting thousands of pay equity assessments, Mercer has found that there are two key areas that contribute to pay gaps: manager discretion and not having the right policies and practices in place.

Organizations that allow managers to have a significant amount of discretion in the talent life cycle introduce subjectivity and bias, leading to pay discrepancies. This discretion may impact initial salary offers, annual pay increase, bonus allocations, equitable access to opportunities, and promotion recommendations. If there is bias or inconsistency in these decisions, pay inequity will result.

Even when organizations have strong compensation policies, managers may apply them inconsistently across different employees or teams. There may also be variations among managers across the organization.

For instance, during the performance evaluation process managers may interpret performance criteria differently, leading to inconsistencies in ratings, which drive salary decisions. There may also be disparities in how policies, are enforced or the type of exceptions that may be made. Or, if a manager fears losing a valued employee who has complained about their pay, the manager may make an exception that is outside the scope of standard practices.

Effective policies and practices and ongoing attention to the impact of manager discretion on pay gaps can help minimize issues. 

It’s important to have structured talent practices in place that aim to minimize the impact of bias. Ensuring that your talent acquisition, promotions, mobility,  and performance management practices are clearly outlined and consistently followed across the organization will mean that talent and pay decisions are based on objective factors, rather than subjective judgments. For instance:

• Clear recruiting practices for extending and negotiating offers, with a focus on inclusive recruiting practices at all levels to minimize raw pay gaps.⁴
• Standardized and transparent compensation policies with clearly defined and communicated pay bands/range for each role, and criteria for pay decisions based on objective performance metrics.
• Objective performance metrics with standardized evaluation criteria, along with regular calibration sessions where managers can discuss and align performance ratings to ensure consistency.
• Structured and transparent mobility processes to ensure equitable access to promotions and lateral opportunities.
• Centralized pay decisions that might involve HR oversight or a compensation committee.
• Training and awareness to help managers understand, identify, and mitigate areas of potential bias.

Assessing pay equity, but not addressing the root causes in your talent practices, limits the progress and speed at which you can achieve your goals. We can help. A partnership with Mercer’s experts will pinpoint areas of risk and will guide you in implementing changes to mitigate sources of bias across the employee lifecycle.

_{¹ Attributed to Carrie Ashton Johnson, an American suffragist who said in 1895: “When women are given the ballot, there will be equal pay for equal work.”}

_{² https://www.gartner.com/en/newsroom/11-28-22-gartner-hr-research-finds-only-thirty-two-percent-of-employees-believe-their-pay-is-fair}

_{³ Competitive compensation, a different issue, is number six per Global Talent Trends}

_{⁴ Raw pay gaps are the actual differences in average pay between groups (e.g., white and Black employees, women and men, younger and older employees, etc.). Unexplained pay gaps are the differences that exist between groups that cannot be explained by legitimate, job-related factors such as experience, performance, education, or job level.}