If you want to create a successful company—one that is durable and values-driven—it’s time to move away from platitudes and further define the “S” in ESG. Right now, social-impact metrics are highly focused on board diversity, which doesn’t come close to painting the full picture. But now, investors have the ability to measure social impact more accurately in the context of equity in the workplace.
Investors are increasingly focused on environmental, social, and governance (ESG) performance to assess investment risks and opportunities. In fact, 85% of investment professionals take ESG factors into consideration in their investing, up from 73% in 2017.
That’s because research is showing that companies that excel in these areas are better long-term investments. A 2018 study found that firms with a better ESG record than their peers produced higher three-year returns, were more likely to become high-quality stocks, were less likely to have large price declines, and were less likely to go bankrupt.
The next big “S” metric is pay equity
It’s easy for a company to say that they value diversity and equity—but investors are starting to demand proof. That starts with pay equity, a measurable deliverable that can be solved over time.
We see this everywhere. BlackRock Chairman and CEO Larry Fink has been vocal about equity and transparency, recently stating in his 2021 letter to CEOs:
“While issues of race and ethnicity vary greatly across the world, we expect companies in all countries to have a talent strategy that allows them to draw on the fullest set of talent possible. As you issue sustainability reports, we ask that your disclosures on talent strategy fully reflect your long-term plans to improve diversity, equity, and inclusion, as appropriate by region. We hold ourselves to this same standard.”
Recently, Arjuna Capital also published its fourth Racial and Gender Pay Scorecard in 2021, which ranks many major U.S. companies on their “quantitative disclosures (not qualitative assurances), commitments to report numbers annually, global coverage, and goals to close racial and gender pay gaps.” Only five of 51 companies received an “A” grading. Over half received an “F.”
But it’s not just investors that are demanding deliverables on equity. More than ever, employees are looking for values-driven organizations that are putting actions behind words and holding themselves accountable. Recent studies show 61% of workers choose their jobs based on personal belief, and 58% of U.S. employees would consider switching jobs for more pay transparency. Any employer looking to retain its talent will need to prove its worthiness to the “belief-driven employee.” Making pay equity a priority and taking the next step of pay transparency through ESG reporting is a powerful way to attract and retain top talent.
The pressure goes even further beyond employees. Consumers are calling for pay equity as well. A 2021 Just Capital survey found that 85% of Americans overall and 91% of Black Americans believe it is important for companies to conduct annual pay analyses across different demographic groups to ensure equal pay for equal work. The 2021 Edelman Trust Barometer found that 51% of global consumers believe CEOs need to make gender and ethnic pay equality a higher priority.
As investors, employees, and consumers call out companies more publicly for their progress around pay equity, forward-thinking companies are already looking to get ahead of it. This gives companies an opportunity to take control of the narrative and show that they truly value their employees.
What leaders can do to measure and report the “S” in ESG
More and more investors will start asking for pay equity reporting. Knowing and fixing those weaknesses now will put your company in a much better position when it happens.
Start analyzing pay equity. But keep in mind: Employees are hired and promoted throughout the year. So if you’re doing a manual pay equity analysis only once per year, the result is out of date before you even see the results. The outsourced annual “audit” has no place in a world where leaders and employees expect cutting-edge tech for issues of importance. Tech is getting embedded into every business unit. Make sure your analysis is ongoing, consistent, and that it uncovers underlying issues, such as pay policies, so you can fix and prevent them.
Talk to your employees about why they’re paid what they’re paid, and how your pay policies work. Pay transparency and communication go a long way toward your ability to recruit and retain quality talent. It helps maximize employee engagement, tenure, performance, and productivity. In fact, companies with high employee engagement experience 23% higher profitability.
In addition to transparency with employees, the Securities and Exchange Commission is increasingly focused on transparency around ESG metrics and recently proposed rules around board diversity and human capital management, including pay equity. ESG reporting is already mandatory in Europe and other countries, and it’s only a matter of time until there are more reporting requirements in the U.S. Companies that get ahead of this transparency shift decrease their regulatory burden and benefit from being leaders in a space that is growing in importance.
While current reporting requirements focus on CEO pay ratio, board directors and their compensation committees—some are calling them the “ESG committees”—must broaden their focus to overall pay equity by gender, race, and more. And this is not only an issue for comp committees to keep an eye on. Audit committees must focus on the many risks of pay inequity, including reputational, financial, legal, and supply chain risks.
Be proactive about your pay equity journey to show investors you treat this issue with the seriousness it deserves. It’s no longer enough to simply say that you are working toward 100% pay equity—investors and employees want to know exactly how you’re doing it.
Recently, an alliance of outside experts started Fair Pay Workplace, a nonprofit that certifies companies who sign up to rigorous, transparent, and measurable pay equity standards. Already, top companies across industries, ranging from American Airlines to Anthem, have been certified to show investors, consumers, and employees that they are leading the way in equal pay.
By validating your pay equity analysis results and strategy through a third party like Fair Pay Workplace, companies can prove to stakeholders that they’re taking the best possible actions toward true pay equity.
Leaders who identify and get ahead of these trends not only protect their organization’s reputation with employees and the public but also reap the benefits. Pay equity impacts the bottom line by making your company more resilient and more attractive to forward-thinking investors.
The longer you wait to address the issues, the more expensive and more difficult they will be to fix. And it won’t only cost you more money to remediate pay disparities, it could cost you a damaged brand reputation, legal fees from a lawsuit, consistent employee turnover, and more.
There are so many benefits from continuing to define the “S” in ESG with pay equity for investors, boards, and company leaders. So what are you waiting for?
Maria Colacurcio is the CEO of Syndio.
Tama Smith is the head of Women Living a Richer Life, Brighton Jones, and an advisor to Syndio.