Matt Bahl is VP and head of workplace financial health at Financial Health Network. Opinions are the author's own.
For those in HR, pay fairness has been a hot topic for decades. The last several years — and especially 2020 — shined a spotlight on the importance of this topic for not just HR professionals but for workers and the public at large. In many ways, wage fairness is more important and complicated than ever.
As a recovering lawyer, I can attest that defining "fairness" is not nearly as easy as it might sound, and HR leaders have wrestled with this fundamental challenge for a long time. As more frameworks and approaches are developed to help employers navigate this terrain, the critical question remains: Fair relative to what?
The compensation ratios of CEO-to-frontline workers get a lot of attention and are, in many circles, the standard measure. Similarly, market-based compensation surveys often guide employers in setting compensation bands. But relying on these metrics alone may blur the larger point. Namely, workers should be able to put in a 40-hour workweek and make ends meet.
As employers continue to wrestle with wage fairness issues, here are three considerations that may help them rethink their compensation approach:
- Don't assess compensation in a vacuum. The paycheck is the most basic building block of financial health but too often compensation is set by looking at relatively narrow parameters. A first step organizations can take is to measure compensation relative to the broader financial health and wellbeing of its workforce. A broad assessment can help shed light on the real and actual financial lives of employees and help businesses better understand how far that basic building block of financial health (the paycheck) actually goes. In all likelihood employers will need to use multiple levers — such as base pay, benefits, retirement contributions, premium cost structure, equity interest, scheduling and leave policies — to truly make work pay.
- Set the right floor. In 2020 more than 73 million workers age 16 and older were paid on an hourly basis. According to the U.S. Bureau of Labor Statistics, approximately 247,000 of those workers made the federal minimum wage of $7.25 per hour — that's $15,080 per year with a 40-hour work week — with close to 865,000 having wages below the federal minimum. (Hourly rates were self-reported and did not include overtime pay, tips or commissions.) Clearly, the minimum wage is insufficient to help any worker meet their basic needs, let alone the needs of any dependents. The next rung up is the "living wage"; the average for a family of four is $16.54 per hour for two working adults, which comes to slightly more than $68,800 (before taxes) per year, according to an MIT living wage calculator. The living wage varies by geographic location, with some of the most expensive and populous areas having a living wage north of $90,000 per year for a family of four. The living wage standard generally only accounts for what it will take to meet basic needs, and does not include factors such as having enough left over to save for even a modest retirement. To add a final data point to this picture: the overall median household income in the U.S. is $68,703, according to the most recent data from the Federal Reserve Bank of St. Louis, which is slightly below the national living wage standard. Is it any surprise, therefore, our research shows that close to 70% of Americans may be financially unhealthy? How employers set the floor on wages can have a big impact on whether employees earn enough to meet their basic needs, let alone satisfy the additional financial health needs (e.g., retirement) that we know workers of all incomes face. Perhaps it is time for employers to evolve the criteria they use to set minimum compensation bands to account for broader financial health considerations.
- Remember that communication is king. Wage fairness — or any fairness issue in the workplace — requires clear and transparent communication. Proactively sharing your approach and philosophy helps set expectations and demonstrate the value of a program. Failing to do this — even if you have a wage fairness approach — means that individual employees are left to piece together their own version which may or may not reflect the actual truth.
Ultimately, wage fairness is a complicated issue. However, aligning your approach around a broader understanding of your employees' financial health can be an essential first step in understanding the actual adequacy of your compensation program. Using that insight plus additional compensation measures and approaches can help you set a compensation floor that more than meets the very basic needs of your workforce. And last, be proud of your compensation program and ensure that employees understand how your organization defines wage fairness.