Can pay parity boost employee performance?

The promise of a substantial bonus can be a crucial tool when it comes to keeping ambitious employees incentivized. Yet pay-for-performance deals can also create problems – research suggests that in companies with individualized pay systems, bonus payouts tend to negatively impact the performance of unrewarded colleagues.

Could fairer pay across the board instead of one-off payments be the key to keeping more employees motivated?

With data showing that a record number of employees are leaving or looking to leave their jobs – a crisis now dubbed ‘The Great Resignation’ – it’s never been more important for companies to attract and retain dedicated employees.

While many companies are offering huge bonuses in the battle to attract talent, some experts believe there could be a better way to earn and maintain employee loyalty.

Rita Trehan is the founder of Dare Worldwide and has previously held senior HR roles at the World Bank and Coca-Cola. She says that pay parity is a key factor in ensuring employee loyalty.

“There is evidence that when people can compare their salaries and realize that they are being paid in line with everyone else they are more productive. Trust is key to keeping a workforce motivated.”

Rita Trehan, founder, Dare Worldwide.

But pay parity is about more than just keeping employees happy and productive.

“Employees will be able to make informed decisions on what they can expect and offer based on clear information,” she adds.

“For employers, this means lower employee turnover and less time recruiting. We see that companies doing this well already have a better grip on offering targeted packages to staff, aligning with employee needs and developing training programs that foster healthy, appropriate career development.

Trehan continued: “Being honest and frank about pay and parity is the way to secure long-term loyalty from staff.”

For some companies, striving to keep their staff engaged means turning to novel methods – and pay parity has been key.

In one Canadian experiment, tree planters were given a surprise bonus of $80 (just under half a day’s pay).

Unlike performance-based bonuses, which can demotivate some employees, researchers found that giving all employees the same wage top-up boosted the productivity of high and middle-performing employees by around 10%, and low-performing employees by around 35%.

An equal bonus scheme almost eradicated performance differences between low and middle-performers, leading some experts to argue that decreasing pay and bonus gaps could supercharge workforces.

For some businesses, fair pay has meant taking things to more extreme measures.

In 2015 Gravity, a credit card processing start-up, made headlines when founder Dan Price announced that he would be raising all employee’s salaries to at least $70,000.

Price was uncomfortable with the enormous gaps in pay and bonuses between senior staff and the majority of workers, and believed that making pay more transparent and equitable would benefit both his employees and his company.

Price even took a personal $1m pay cut in an effort to create a more level playing field within his business.

Gravity’s risk seemingly paid off – within six months company revenue had doubled, and Price says that his staff’s capability massively increased.

Five years later, he reported believing that with less money worries, his employees were able to focus on doing good work and bringing their best selves to the office, boosting the effectiveness of his workforce.

But leveling out pay for comparable work can also have its complications.

“One of the most efficient ways to cut a wage gap is to give raises to the people on the lowest pay,” Trehan explains. “But some say that paying the lowest earners more compresses a wage structure and, done carelessly, can reduce the incentive to push for promotions and climb the ladder.”

There is also the problem of how to implement pay parity. Nick Gallimore is the director of talent transformation at performance management start-up Clear Review.

He points out that inequity is often baked into the structures of organizations – as HR teams compete to attract talent, they may offer somebody a higher salary than a person already in a comparable role on lower pay.

“When you’re transparent on pay you will quickly uncover historic issues that companies have created for themselves,” Gallimore says. “Correcting those issues can be extremely expensive for large organizations.”

Gallimore adds that some US states have adopted regulations that prohibit employees from requesting salary history information for job applicants. He argues that such practices can help to avoid carrying discriminatory pay bands across companies.

The future of pay parity

Gallimore also believes that pay parity cannot exist without pay transparency, and that both are vital to boost employee performance.

“We know how important transparency is from an employee engagement perspective,” he says.

“How much you’re paid isn’t necessarily a motivator, but feeling like you are being paid unfairly is a huge demotivator. In order to not have a demotivating force over the company people need to feel and understand that they are being paid fairly and in line with other people in the organization.”

With increased amounts of legislation around pay gaps and transparency, pay parity seems sure to remain a key issue for HR teams over the next few years. Yet for many companies – such as Apple, which recently banned a pay equity Slack channel – pay and how it is distributed remains an opaque and contentious issue.

For companies considering how they can implement pay parity in a way that motivates its employees, Trehan suggests starting with openness and engagement.

“The companies that attract the most skilled and productive staff are those with transparent pay,” she says. “The starting point should be a consultation. Companies should gauge the general morale of their staff before looking at pay parity, and then aim to provide specific, tailored solutions.

“The key is to work with your staff for their benefit, but also to recognize the long-term advantages of transparency. This isn’t a stick to beat the company with, but an opportunity for collective growth and alignment.”