George Floyd’s death and the global call for an anti-racist and equitable society sparked a call to make meaningful change now. In my work helping technology industry executives on their human resources strategies and programs, I see a huge opportunity for companies to make immediate change for Black employees, as well as other marginalized groups. Although many companies have quickly introduced anti-bias training for their employees, they have in large part left room for managers, even unwittingly, to introduce bias into their pay decisions.
Uprooting bias is a critical pillar in the fight for equal pay for equal work and one that as yet has been largely ignored.
Race-based pay inequity has deep roots in the United States. Emancipated slaves expecting a better life experienced the harsh reality that, in many cases, their situations improved only marginally as they toiled under the dual yokes of sharecropping and Jim Crow. In many cases, they were paid unjustly or not at all for decades. Black Americans who moved North and West during the Great Migration found that the best jobs were not available to them and that they were likely to be paid less than their white peers; a pay gap of 40% persisted as late as 1960.
Unequal pay is shameful and needs to end. But even now, practices that perpetuate unfair and inequitable pay persist. The race wage gap between college-educated white and Black employees has gone up from 17% in 2000 to 21% in 2018. On average, Black women earn just 61 cents for every dollar a white man earns. One key source of this inequity is something known as “manager discretion.”
This means that a manager has the ability to apply their own judgment when deciding how much to pay those who report to them, extending from an initial offer given to a job candidate to an annual raise. Discretion sounds like it would be a good thing. If an organization trusts a person to manage others, and the manager is the closest to the work that needs to be done, surely they are in the best position to determine how to allocate scarce resources among their team, such as bonus pools, raises, and so forth.
However, when a manager exercises discretion, they are introducing their own biases. This can depend on whose work they can recall most easily, what they have in common (or not) with those on their team, first impressions, etc. And these biases, when introduced in decisions about pay, can have devastating effects.
There are three key points in an employee lifecycle that are consistent across many employers and that are consistent sources of bias and as such, are obvious points to target pay inequity.
New hire offer
A new employee’s compensation, while typically guided by cash and equity ranges, is often influenced directly by the manager. The manager can push the recruiter to hire at one end of the pay range for that position over another, or can even make a higher offer with certain approvals. This opens the door for a manager’s bias to influence a job candidate’s compensation.
Managers influence their employee’s rating as part of a regular performance review cycle. The rating may also be influenced by a calibration process that is meant to balance a manager’s singular perspective, but ultimately, the biggest factor tends to be the manager’s assessment. According to Harvard Business Review, more than half of a rating reflects the rater’s own characteristics, not those of the person being rated. This well-studied phenomenon is called the idiosyncratic rater effect. This is important because the rating is often a key input to annual compensation adjustments.
Annual compensation adjustments
Managers often have the discretion to adjust the recommended compensation outcomes when it comes to raises or equity grants. They may also have an additional “slush fund” of cash or shares that they can arbitrarily grant to whomever in their organization they wish.
That was the bad news. The good news is that these opportunities for bias can be eliminated. Even if you are not in a position of power beyond your own direct team, consider making these changes now.
Use data to make new hire offers
Remove yourself from compensation decisions related to candidates for your team. Employment is a market, and there is a clearing price for talent that should be determined by what the overall job market is paying for a particular type of talent and your own company’s compensation philosophy. Pay the midpoint of the band that your employer uses, or ask HR to let you know the average salary for employees at your company who are already in that role and pay that value.
If you are a CEO or other executive, set compensation bands as tightly as possible to eliminate recruiters’ and hiring managers’ ability to introduce bias by choosing where in a band to pay.
Consider eliminating performance ratings
This element is harder for the individual manager to eliminate, but if you’re in calibration conversations with other managers, call out nonspecific language when used to describe a person of color’s performance. For example, “She doesn’t go the extra mile,” or “he doesn’t gel with the rest of the team.” Ask the speaker to be more specific, and don’t stop until you’ve really sussed out what the person is saying. Being specific versus using general language helps reduce bias discussions about performance. Hold yourself accountable for this kind of specificity as well.
If you are a CEO or other executive, consider eliminating ratings completely from your performance review process. According to research conducted by the Corporate Executive Board, 90% of HR executives believe that their performance management systems are tied to inaccurate results. Yet they are still widely used to determine compensation outcomes. If you must maintain these rating systems, at the very least, be sure to introduce mechanisms and structures that help ensure that ratings are being given based on real performance factors, not vague character and behavior descriptors.
Decline to use discretion for annual compensation adjustments
If you are a manager who has been given “discretion” to make annual pay increases or new equity grants, graciously decline to exercise that discretion. Ask how your HR team made their compensation recommendation, and, if you believe it was unbiased, follow it. If you have a slush fund, allocate it algorithmically. For example, you could consider prorating any additional cash budget based on base pay, or on the midpoint of the employees’ compensation bands. Ask the HR team or compensation team for help doing this. Explain to other managers that this and other types of discretion are ongoing sources of bias and systemic underpayment of Black employees.
If you are a CEO or other executive, in conjunction with recommending the organization eliminate ratings altogether, move your company to a market-based compensation structure. Based on your budget, business goals, and the resulting goals for your people, determine where in the market you should be positioning your pay (e.g., 50th percentile for cash) and move your company there. Then adjust all salaries to these targets on an annual basis.
These are not the only sources of systemic underpayment of Black employees, but they can go a long way toward ensuring that you are paying Black (and all) employees fairly. These changes also benefit Latinx, female, LGBTQIA, disabled, and other marginalized or underrepresented employees in your organization.
Some argue that if you remove ratings and corresponding performance-based compensation adjustments from an organization, you will not be able to build a culture of strong performance. However, there are clear examples of winning organizations across numerous industries that have removed many of these elements and continued to drive strong business performance. Some noteworthy examples are Netflix, Adobe, Medtronic, Microsoft, GE, Cigna, Deloitte, and Accenture.
Additionally, researchers such as Daniel Pink, author of Drive, and Neel Doshi, former McKinsey consultant and coauthor of Primed to Perform, have demonstrated that the anachronistic carrot-stick motivators are not drivers of performance among knowledge workers. This observation becomes even more troubling when the incentive structures are also rife with individual manager discretion, a critical source of systemic bias, and the underpayment of Black employees.
Even if you are an employee without managerial responsibilities, you can still act now to reduce bias and inequitable pay.
- Ask your company’s HR department to do a pay equity study. If they have done one already, ask what actions were taken as a result and how the company plans to ensure pay equity going forward. Pay equity work is not a one-time effort, because inequity is constantly being reintroduced through bias.
- If your company uses performance ratings, ask the HR team to study ratings outcomes based on race and gender to ensure that there isn’t systemic bias. This is a simple analysis that ensures that rating distributions mirror Black employees’ representation.
- Ask your colleagues clarifying questions when they use nonspecific language to discuss a Black employee’s performance in your presence. Bias and discrimination hide in blurry language.
Pay inequity is a form of systemic racism, and reduction of bias in the workplace is one way to eliminate it. Regardless of your level, consider making these changes immediately. And if you are an executive, CEO, or board member, the call to action is even more imperative. Answer it.
Susan Alban is operating partner and chief people officer at Renegade Partners an early-stage venture capital fund investing in technology businesses where she works closely with founders on all elements of company growth. Previously, Ms. Alban was a consultant at McKinsey & Company and the first general manager of Uber Eats in the San Francisco Bay Area.