Benefits and Compensation

Pay Equity and Merit Increases: Optimally Aligning Processes

For many, merit increase season is coming to a close. Often, pay equity related increases are coordinated with the merit cycle. But reviewing pay equity after merit increases are finalized provides opportunities to:

  • Counter any potential bias that might occur in the allocation of merit increases
  • Ensure that merit increases are not altered by managers to undo the intended effects of pay equity adjustments
  • Manage a budget, distinct from the merit budget though perhaps carved out of it, focused on pay equity and potentially market-related pay changes
  • Adequately coordinate and communicate with leaders and managers about the pay equity process

While conventional wisdom has long suggested pay equity adjustments should be processed together with merit increases, so that employees focus on the total increase as opposed to the distinct pieces, the right timing for analysis and processing of adjustments depends on a balancing of a few key considerations.

The Source of the Unexplained Gap

Pay equity analysis can provide information on when pay gaps emerge. They might be associated with pay rates set at the point of hire, merit increases, promotion-based increases or other ad hoc increases (e.g., off-cycle increases made in response to outside offers). If merit increases are driving pay inequities, pay equity adjustments are best processed behind merit, though they can be implemented on the merit date if the compensation calendar allows sufficient time for review of manager decisions. Where that time is not available before the merit date, processing the adjustments in a mid-year cycle can be optimal.

Where merit increases are neutral or equity enhancing, processing pay equity adjustments based on analyses conducted before merit decisions are made is another option to ensure that there is sufficient time to scrutinize the pay equity analysis and consider appropriate remediation actions.

Coordination with Business Leaders and Managers

If pay equity adjustments are processed behind manager decisions in the merit cycle, the revisions of manager decisions – even if they are only further increases – can create friction if managers are not provided sufficient information about the reasons for the changes or do not have time to process the reasons for the changes.

Often, organizations at year-end have a lot going on relating to compensation. Merit increases generally parallel performance reviews, promotion considerations and bonus decisions. With all that is in play at year-end, it is reasonable to move consideration of pay equity to a time later in the year when the review can receive the attention it requires from all the key stakeholders and when managers can be properly educated about the analysis and its purpose.

Precluding an Upward Spiral

Because pay equity budgets tend to be small (e.g., less than half a percent of payroll), they can generally be funded via a “hold back” from merit. The hold back ensures that pay equity spend is not on top of new merit spend that is allocated with bias.

But there is efficiency in considering pay equity adjustments alongside merit adjustments, if there is time in the process to do it well. Potential merit adjustments can be scaled back where they are associated with inequities, which can also help to fund pay equity increases.

Another Consideration for Next Cycle

Bias in the performance management process can create pay inequity, as merit increases are tied to performance ratings. Review of performance ratings, in the year-end cycle or, better yet, in advance of the cycle, can reduce the opportunity for merit to create equity issues. For more on pay equity considerations relating to performance ratings, consult Merit’s recent blog.

Brian Levine, Ph.D., a partner at Merit Analytics Group, has been a pay equity thought leader for more than two decades. His paradigm for pay equity analysis has been implemented for dozens of global companies, many of whom have disclosed their resulting successes. Prior to Merit, Levine pioneered Mercer’s pay equity offering and led the company’s workforce analytics business. He holds a Ph.D. in labor economics from Cornell University and has taught at New York University and Baruch College.

Leave a Reply

Your email address will not be published. Required fields are marked *