Balancing Pay Equity and Pay for Performance: A Strategic Approach

One of the most challenging dilemmas People leaders face today is finding the right balance between pay equity and pay for performance. While both concepts are crucial in modern compensation strategies, they often pull in different directions.

Below, we explore two strategies to balance these seemingly conflicting principles, drawing from Assemble’s expertise and experience with customers.

Understanding the Core Conflict

Pay equity reflects an organization's commitment to fairness, ensuring all employees are compensated equitably, without biases like gender or race. Pay for performance focuses on rewarding employees based on their individual impact, contribution, and value to the company.

This creates tension. When a company prioritizes pay for performance, disparities may arise, leading to perceived or actual inequities across the organization. Conversely, a rigid focus on pay equity could demotivate high performers, limiting the organization's ability to reward excellence.

Strategy 1: Fixed Salaries with Performance-Based Bonuses

A practical solution that many organizations adopt is to maintain fixed salary structures while using performance-based bonuses to differentiate high performers. This approach addresses both pay equity and performance recognition. Here’s how it works:

• Fixed Salaries: Salaries remain constant for employees in the same role, minimizing disparities and ensuring equity across the organization. Everyone performing similar roles is paid the same base amount.
• Performance Bonuses: Performance incentives come in the form of annual or quarterly bonuses, rewarding those who go above and beyond. This allows high performers to feel recognized for their contributions without disrupting the salary equity framework.

However, this solution places greater weight on performance evaluations. Ensuring consistent, fair, and transparent evaluations is critical to avoid employee dissatisfaction or perceptions of favoritism.

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Strategy 2: Formulaic Compensation Bands

Another approach is using compensation bands tied directly to performance. This is a more structured way of aligning pay for performance while still maintaining an equitable approach within each compensation level.

Each compensation band can have three tiers:

• Developing: For employees who are still growing in their role, placed in the lowest third of the band.
• Meeting Expectations: Employees who meet job requirements would fall within the middle of the band.
• Exceeding Expectations: Top performers are placed in the highest third of the band.

By using this formula, companies can offer flexibility in pay while still adhering to an equity structure. However, it’s critical to limit or even avoid band overlap. For instance, if an employee is promoted from one level to the next, the pay structure should ensure they receive a meaningful increase (e.g., 7%+) to avoid confusion or the perception that they are being underpaid despite their promotion.

Need help building compensation bands? Check out our guide to building bands

The Key to Success: A Robust Performance Evaluation Program

For either strategy to succeed, a solid performance evaluation framework is essential. Here are some tips to ensure its effectiveness:

1. Clear Criteria: Establish transparent, well-defined criteria for performance that are understood by both managers and employees.
2. Consistent Application: Ensure that performance standards are applied consistently across departments and teams.
3. Training for Managers: Provide managers with the necessary tools and training to conduct fair and objective evaluations (check out our guide on manager enablement here)
4. Feedback Mechanisms: Incorporate continuous feedback loops that allow employees to know where they stand and what they need to do to improve.

Conclusion

Balancing pay equity and pay for performance isn’t easy, but by utilizing fixed salary structures alongside performance bonuses or implementing compensation bands, organizations can strike a balance. Success depends on a strong performance management framework, transparency, and continuous monitoring to ensure both fairness and motivation are maintained.

Balancing these two factors will lead to a more motivated, fair, and engaged workforce, where employees feel valued both for their equity and their performance.

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