Salary banding: The road to gender pay parity or bad business sense?

Transparency is increasingly seen as the answer to eradicating the gender pay gap. Will salary banding play a role?

In March this year, federal parliamentarians went back and forth on the need for better reforms on gender pay. The Closing the Gender Pay Gap Bill provided the occasion and, it seems, the central goal urged by proponents of the bill was pay transparency.

Member for Higgins, Dr Michelle Ananda-Rajah, for example, accused Australian workplaces of hiding a “dark, dirty secret…that, when a man and a woman go for the same job, the chances are that the man is going to get paid a little bit more than the woman.”

Among the changes proposed under the Bill, was a new requirement for employers of more than 100 employees to report on their gender pay gap. The idea – based on similar transparency reforms in the UK – is that when exposed to daylight and the attendant reputational damage in cases of bad pay distribution, employers will be more likely to act in a meaningful way.

Today we’re following this thought – the idea that greater transparency means greater pay equality - and applying it to the practice of salary banding.

Salary banding

Salary band, sometimes called pay bands, are pay ranges established by individual organisations for specific roles. Based on market value and internal value, they define the value of each role in an organisation and are often implemented for more effective pay management. More, many consider salary bands to be an effective salve against gender pay disparity.

A study by compensation management platform Figures found that pay transparency is, on average, correlated with having a lower gender pay gap: “Our data shows that the more transparent a company is, the more likely it is to have a non-existent gender pay gap among employees holding the same role.”

By consolidating, and making known, the precise pay expectations of any given role, it is far more difficult for employers to keep unequal pay systems secret.

While, on average, men earn 3.5 per cent more than women in the same roles, the gap disappears in companies with complete pay transparency (i.e., companies that report on their compensation policy and principles, their salary ranges/grid, and their individual salaries).

Similarly, by creating a rigid set of salary brackets, there is less room for bias and unequal distribution of pay – which often contribute to gender pay disparity.

“Without clearly defined salary bands, salary decisions are often made on an ad-hoc basis by individual leaders — which can lead to inequity and unfairness,” wrote Figures.

That said, not all employers look at salary banding the same way. In a recent episode of The HR Leader, co-founder and chief operations officer at Sidekicker Jacqui Bull shared her “mixed feelings” about the practice.

The drawbacks

Though the gender pay benefits of salary banding are clear, questions around its viability for many employers persist.

“When you’re talking about promotions and pay rises and gender pay gaps, I know some companies are quite transparent about their salary bands to their employees, which can serve a purpose,” said Ms Bull.

“We don’t do that at Sidekicker because I think it probably can make people a little bit narrow-minded in terms of being very specific about where they sit within a salary band – it can distract a little,” she said.

Indeed, salary bands are often criticised for their inability to reward individual performance. Many point to the rigidity of salary banding as a drawback for industries that prize having greater flexibility in employment.

As noted by Ms Bull: “Just because someone might be due for a salary increase doesn’t necessarily mean the business can afford it at that time.”

“You have to take into account other considerations and then there might be other perks or benefits or other factors that play into it. If you’re too structured and rigid in your bands, it can probably have a negative effect and distract people,” added Ms Bull.

Certain industries need to be more responsive to market fluctuations. For example, salaries in high-tech industries often fluctuate at a faster rate, meaning that employers tend to value flexibility in pay distribution. “If you built your salary bands 11 months ago, you might miss out on a top candidate today simply because the market has changed,” explained Figures.

Crucially, the viability of salary banding will depend on a range of subjective factors. A major one being company size: “It depends on the size of the company you’re operating,” said Ms Bull, “if you’re just a small company it’s difficult because there’s probably not much duplication of roles.”

Larger companies, on the other hand, often value the economies of scale and streamlining of administrative processes afforded by salary banding. Having a formalised set of pay standards can also simplify internal communications around pay.

As noted by Figures: “instead of having to go to great lengths to justify each pay decision to employees, managers can simply point to the clearly set-out framework by way of explanation.”

The transcript of this podcast episode was slightly edited for publishing purposes. To listen to the full conversation with Jacqui Bull, click below: