The hidden cost of pay inequity: Bonuses and stock options
Forty percent of organizations use a relatively unsophisticated approach to pay equity analysis.
Companies have become increasingly diligent about ensuring the fairness of base pay, but they could still have hidden compensation-related inequities that might expose them to penalties and lawsuits.
According to workplace equity technology company Trusaic, pay equity efforts have not extended to compensation including annual bonuses and stock options. Many industries emphasize these as an important part of their compensation strategy, but few include them in their pay equity analysis, said Trusaic. Only 13% of organizations studied consider long-term incentives when doing pay equity analysis, and only 24% include short-term incentives in their pay equity analysis.
In its 2024 State of Pay Equity Policies and Practices survey, Trusaic discovered that 40% of organizations use a relatively unsophisticated approach to pay equity analysis, focusing on median or average pay, but ignoring variables that drive pay differences. The report emphasized that the gold standard for pay equity analysis is to use multiple regression to account for relevant factors that impact pay.
Survey respondents pointed to the cost of correcting pay inequities as a challenge, a concern Trusaic said is misplaced as progress can be made on addressing pay inequities with limited resources. The first step is to regularly conduct pay equity analyses. However, according to the survey, 44% of respondents conduct a pay equity analysis once every two or three years, on an ad hoc basis, or not at all.
“This creates unnecessary risk,” said Trusaic. “Hidden pay inequities can grow, leading to large remediation costs, as well as the potential for incurring back-pay liabilities in the case of a lawsuit.”
The best practice is to remediate pay inequities annually and monitor pay equity throughout the year, either on a quarterly or semi-annual basis, said the firm.
Related: Beyond base pay: Study finds companies miss equity in pay analysis
Further, fewer than half of the respondents report doing a pay equity analysis based on age, which could be a misstep given the increased interest in age discrimination.
“Companies have an ethical imperative, a legal imperative, a business imperative, and a compliance imperative to get pay equity right,” said Robert Sheen, CEO of Trusaic. “This can only be addressed by ensuring their pay equity programs cover all forms of compensation and use the appropriate analytical approach.”