Merit Analytics Group has given a lot of thought to the role of performance ratings in pay equity analysis. So, it didn't surprise us when we saw this question asked by multiple participants at WorldatWork's pay equity webinar, which we sponsored, on March 14th.

While the question came in varying forms, it fundamentally focused on whether performance reviews should be taken into account in pay equity analysis. Our experience suggests the answer is almost always “yes”, and here are the top reasons why:

TOP REASONS PERFORMANCE RATINGS MATTER
IN PAY EQUITY ANALYSIS

Limits bias in reward determination - There is potential for bias not only in the assignment of the rating, but also in the determination of the reward paired to that rating. Including ratings in the analysis ensures that the latter bias is countered—that pay outcomes are ultimately aligned to performance ratings equivalently for all groups. We have seen on past projects that, while women are often rated better than men, they are not coming out on top because they are less well rewarded for their ratings! Even if a group is less likely to be highly rated, that group would be penalized a second time if the pay review allowed its highly-rated individuals to be less well rewarded.

Limits bias that would favor poor performers - If performance ratings are not taken into account, identified “outliers” and recommended pay changes will be biased in favor of poor performers. This phenomenon has two impacts. The first is that the pay equity process, in cases where ratings are fairly assigned, becomes a vehicle to shift dollars to those who are, at best, not excelling and who are, at worst, bad matches for the role or the organization. We have seen this play out strongly in cases where we have run the analysis “both ways” (i.e., both controlling for and not controlling for performance rating) and compared the outcomes. The second impact is that the pay equity process itself will be threatened, as the credibility of recommended pay adjustments will be questioned by managers based on real performance differences.

Limits reasons for manager resistance - Even where ratings are omitted from the analysis, organizations, looking to limit manager resistance, will not generally process adjustments for poor performers. The impact of the work then would be limited relative to intent, as planned for adjustment dollars would not be spent.

Aligns with pay-for-performance culture - For many firms, pay for performance is not just the norm, it is the overarching philosophy. To not include performance, particularly in the analysis of incentives, would reduce the ability to explain the variance in pay and might, therefore, be associated with spurious pay gaps.

PROCEED WITH CAUTION

While we believe pay equity analysis should account for performance reviews, we do recommend that the performance process itself be assessed as well. Where there are differences in outcomes found, managers should be asked to review the ratings to ensure the process itself rewards the desired behaviors and is unbiased.

An important point to keep in mind is that, even when performance ratings are biased, the performance process can serve to limit the overall extent of bias. For example, within organizations, we have seen that those groups with greater objectivity attached to performance ratings have reduced bias (Levine and Chen, “Abandon Performance Ratings with Caution”, Workspan, June 2016). Objectivity can be promoted where the organization has hard performance measures or where the organization provides clear guideposts for what it means to be a “high,” “average” or “low” performer. Having such discipline attached to ratings, limits the potential for bias in other workplace outcomes (e.g., pay and promotion). Further, bias in performance ratings can be limited through provision of unconscious bias training to managers in close proximity to the allocation of ratings (Levine and Chen). Note though that the differences reemerge when training “goes stale”, making it clear that a root cause of inequity is innate bias and, therefore, that solutions need to include more than guidance and rules, but also back-end review of managerial decisions.

For more insights from Merit on pay equity, join us for our presentation at the upcoming WorldatWork Total Rewards conference in June 2023.