A practical guide to implementing pay equity in engineering

This is a part of a series of posts on improving equity at your company.

Pay disparities are an awful experience

A friend of mine became the first woman VP of Engineering at her company. We’ll call her Graciela.

After Graciela was promoted from Director 3 to VP of Engineering, she needed to backfill her old position. She opened the position for a Director 1 position (three levels below her new level).

When they found a person for the role, they were negotiating the salary. Graciela asked People Ops what to offer to the new white guy who would be reporting to her. She was horrified to learn their response. They recommended paying him more than her own salary. Which was three levels above his!

People from underrepresented backgrounds tell stories like this all the time. It can be a source of considerable anxiety. “Am I being paid fairly?” Often, the answer is no.

People from underrepresented backgrounds also get penalized more for negotiating hard on salary. I’ve heard stories of people having their offers yanked. This is often bias — a person from an underrepresented background negotiating harder often comes across as pushy, instead of assertive.

Pay is a source of anxiety and stress for many. Most people feel a ton of anxiety around negotiating salary, and feel terrible if they find out other people are getting paid more than them.

Pay equity is a way to stand out

Nowadays, people routinely crowd-source salary information. If your salary system isn’t rock-solid, it will burn trust. Your employees will go elsewhere. On the other hand, if you want to have people knocking on the door to work at your company, you can implement pay equity. It’s by far the most effective method I’ve seen to encourage a diverse, healthy workplace.

What is nice about pay equity is that it eliminates a source of bias. I’ve reviewed the pay of every organization I’ve been a part of, and almost every time, I see evidence of bias. Because there is usually a higher bar for promotions than for giving people raises, you’ll automatically have a more objective, less bias prone system. Eliminating manager discretion on pay removes bias.

How pay equity works

Most companies have bands for salaries. This allows managers to have discretion on how much of a raise people get, or where in the band people sit. Pay equity is paying everyone at a certain level the same amount.

The easiest way to implement it is to set a midpoint of the previous bands, and make that the default and only salary for that band. Move everyone up to the midpoint if they are below the midpoint (and you can afford it). All future promotions go up to the next midpoint level.

Depending on where your company is at, it may be as easy as that (although there are some complications, see below).

If you have a newer engineering organization, you may not have pay scales, or standard engineering levels. You can do this in stages (one per quarter if you want!). Here are the stages:

Q1: Create engineering levels.

See my post on creating engineering levels.

Q2: Create standard salaries for each level.

1. For each engineering level, you’ll need to determine a salary. Work with HR to develop these. First start by looking at where you’ve placed people, and what their current salaries are. HR may have a salary tool you can use. In my experience, these tools are still sources of bias, because you can fiddle with the tool until you get the results you want. But they can be useful to baseline.
2. Make sure you have a way to update the salary over time. You have to maintain this over time, so you need to have an ability to update compensation periodically (once a year is fine).
3. I like having about $US10K bumps in salary for every level. This leads to more frequent promotions, which makes the promotions less high-stakes. I’ve seen some evidence from an analysis at a previous company that suggest that high-stakes promotions go more poorly for under represented minorities (but don’t have the reference handy, unfortunately). Having more frequent promotions can help eliminate that. I’ve also heard many horror stories from big tech companies with high-stakes promotions. These have shaped my thinking so that I believe you should optimize for more promotions, with smaller bumps. But you want the raise to feel meaningful, so there is a minimum amount.
4. Review the salary bands until you’re comfortable using them to hire people.
5. Decide if you’re going to adjust salary by the location of the employee (a “geo-adjustment”) or not. You’ll also need to decide if you will have differences between different types of engineering roles (DevOps vs UI engineer vs Data engineer for example). I generally think it’s best to minimize these type of adjustments, but there are reasonable arguments to be made on both sides. (This is probably a good topic for a future blog post)
6. Now do a compensation check, and see if you notice any egregious disparities in people’s salaries. Make corrections by moving people up, not moving them down. Although I have heard of cases where people agreed to a salary reduction, the way I’ve always done it is to freeze someone at the rate they are at until they get their next promotion. An alternate way to do it is to have a much lower cost of living adjustment rate until they hit the standard pay scale. So for example, they may only get a 2% raise until they are at band. In general, you want to adjust this quickly, not over years, so the simplest way to do it is to freeze raises until they’re promoted, or to do a cost of living adjustment that gets everyone below band to the mid-point.
7. For all future promotions, make the promotion be to the next salary level.
8. If you’re at a startup, you’ll probably want to think about equity as well.
   1. This gets complicated really fast, but I recommend working with your finance person and HR person on this. Typically, the earlier you join the company, the more equity you get. So what I’ve done is go through and keep track of what stage of funding each employee came in at.
   2. Ask your finance person if they can create equity tables for your salary bands, so you have a standard equity package you offer. Equitable equity FTW.
   3. The best example of this I’ve seen is from Daryl Allen’s writeup on the “implied value” method for equity distribution.
9. Communicate the details clearly to the team, and give them ample opportunities to ask questions, including an anonymous option. Everyone needs to understand the motivations for the changes, and how it works.

Q3: Define a promotion process and evaluate people periodically.

1. I’m not going to go into details of how that should work here, but may post about it later.
2. Just make sure you promote people into the standard mid-point for the higher each time.
3. One complication you may find is that some people are paid so well with the old screwed up system that they wouldn’t get a salary bump at all. I’ve usually resolved that by giving them a much smaller salary bump, but still giving them something. Generally, there is enough of a mess in your salary tables that your goal should be to make it equitable as quickly as you can, over time, and for all new people.

Q4: Add pay transparency

1. If you have some confidence in your pay system, you can now add pay transparency. Publish your salary tables, and an explanation of how the system works. You could even publish everyone’s level and salary. Make sure you have a way to note people who are high because of historical reasons or mistakes.

Obstacles and issues implementing pay equity:

Pay equity ties your hands for negotiation during hiring. Candidates don’t expect a system like this. They will try to negotiate salary. The way to work around that is to be really upfront with people about the hiring process and how pay works at your company. At Gremlin we’ve put it in our candidate packet, so people know about it during the hiring process (this can also be a chance to explain what’s great about your company, and the philosophy behind these choices). People are often relieved or impressed when they find that they don’t have to worry about being paid fairly.

This does make assessing the level of someone incredibly important. But I think that puts the pressure in the right place. You’re assessing the amount of impact this person will have on the company, and paying them fairly for that. One trick here can be to have a VP take on the job of leveling people. When a hiring manager is pitching to hire a candidate, they should have to justify that person’s level versus other people in the organization at that level.

You’ll sometimes face internal pressures from the hiring manager, or especially with recruiters. “This person seems great, and they have another offer that is 10K higher than what we offer. Can’t we match it?”. People really like the flexibility of being able to offer more to get the candidate they perceive as highly valuable. It can be difficult to resist this. You can sometimes use signing bonuses to work around objections here, but mostly you just need to stick to your guns.

A better approach is to use your rejected offers as a signal. If you start seeing that your offers are getting turned down, you can use that now as a signal your salary bands need revisiting. Approach it systematically.

This is only eventually fair. Unless you’re able to move everyone to the midpoint salary point, you’re going to have an unfair system for a while. What you’ve done is made it eventually fair. If you have a standard of living raise, you can try to use that to bring people to the new salary levels.

Sometimes history is complicated. There can be an employee who got a lot of shares but a low salary. How do you treat them fairly? In the worst case, you can special case them, but I’ve not had to do that so far. The equity article I mention above has a novel and effective way for being fair with equity, so I would argue you should use that method, and then normalize their salary to the new bands.

It can be difficult to implement for some roles. You’ll find pay equity easiest to implement if you have a lot of people in those roles. If you only have a single person in that role, it’s much harder to design a fair system, and it may not be the best use of time. Decide on a threshold for when you’ll implement pay equity, and stick to it.

Your organizational politics matter. You’ll need to work closely with People Operations / HR to implement these practices. You may find they’re enthusiastic supporters of it, or they may be reluctant. Ideally this is done throughout the company, but if you don’t have strong enough support to do so, don’t let that stop you — I’ve seen a number of engineering organizations do this even without strong support from People Operations.

If you have experience implementing pay equity, please reach out to me, as I’m interested in networking with other individuals who have experience with it. I’m also available to help organizations that want to make these changes, as an advisor.

Thank you

Thank you to Mike Cen (mcen on Rands) for suggesting the importance of communication, making sure you have a process for compensation updates, and leaving levels empty. Thank you to my friend for sharing her story. And thanks to the leaders who made pay equity possible at companies I worked at before. I don’t really know who to most credit there.

Image credit: Workandpix