South Africa is a beautiful country with diverse cultures, wildlife, and some breathtaking landscapes. However beautiful, South Africa is today considered the most unequal country in the world.
Stats SA reports that South Africa’s Gini Coefficient is typically above 0,6. The high unemployment rate is the biggest contributing factor to this issue which then leads to income inequality. While the high inequality levels remain a problem for government to solve, it also presents an opportunity for organisations to look at and analyse their payroll information and remuneration policies.
A well thought out pay equity analysis is a step in the right direction and plays an important role in developing economic equity.
The process of a pay equity analysis is threefold.
The first pillar is for an organisation to have a clear and in-depth understanding of its current remuneration policy. This pillar is important because whatever pay equity challenges an organisation faces, mostly stems from the current remuneration policy. Once this has been covered an organisation can determine the scope of the analysis with clarity.
Now that an organisation is equipped with an understanding of its remuneration policy, the second pillar of gathering data can begin. Typically, an organisation would include information on job title, job grades, gender, race, tenure, performance score and other important information. The goal of the data gathering process is for the data to accurately represent the pay structure through varied analysis lenses. Once the data has been collected the analysis can begin. The analysis aims to determine the discrepancies in pay between employees. Below are some measures an organisation can use to determine discrepancies:
- The wage gap and the calculation provide the organisation with the ratio of how many times higher the CEO’s pay is from the median employee pay.
- Different types of ratios used in macroeconomics can be applied to pay equity analysis such as the 10-10 Ratio (the sum of the highest 10% of employees pay divided by the sum of the lowest 10% employees pay), 5-5 Ratio (the sum of the highest 5% of employees pay divided by the sum of the lowest 5% employees pay), Palma ratio (the ratio of the richest 10% of the organisations share of pay divided by the lowest 40%’s share), Lorenz Curve is a graphical illustration of the distribution of pay (from lowest to highest) and the Gini coefficient is a measure of inequality that describes how equal or unequal income is distributed within an organisation.
- Internal equity is a calculation of the range of pay within a job (or grade) that is often used as a means of testing whether there is inequality within jobs or grades.
- Pay discrepancy by grade versus race and gender are significant measures that require organisations to pay close attention to the median pay of each group. The calculation looks at the median by grade of each race (or gender) group, compared with the overall median by grade within the organisation. This will provide a robust way of testing for pay equity by race or gender within an organisation. For example, the median by grade for the organisation could be R350 000 while the median by grade for the black male could be R250 000, the further away the median pay of the black male is from the median pay of the organisation the larger the pay discrepancy (The median is the value separating the lower half of the sample the higher half of the sample. This is a good value to measure against as it is not easily distorted by the extremes within the data)
- Organisations can then compare their ratios to that of the national and industry ratios, although we suggest caution in this regard if comparison is made to organisations that are structured very differently to your own.
- The ideal test of improvement is for an organisation to test and report on their own ratios and improvement year on year.
The third pillar is about organisations being intentional in the way they plan to improve pay equity. This could be done by implementing a monitoring and evaluation pay equity plan, to minimise the identified discrepancies on an annual basis.
21st Century, with its vast expertise in benchmarking and internal equity audits, has conducted many remuneration audits in the last 5 years, assisting organisations to unpack their own reality of equal pay for work of equal value.
An equal pay analysis will highlight patterns of internal inequity, reveal the causes, and give the organisation the focus areas to address these issues. This will not only ensure that organisations are compliant with labour laws but will also promote a culture of fairness, where employee relations will be strengthened, and the overall image of the organisation is enhanced. This is also important for the long-term sustainability of the business and the economy at large.
- By Tebogo Sethabela – Senior Reward Analyst at 21st Century; Didintle Kgasi – Senior Reward Analyst at 21st Century and Mpumelelo Mbense – Reward Analyst at 21st Century