February 1, 2022

Conversations about pay gaps have raged for decades and they look likely to continue for many years to come. The biggest part of this discussion is the disparity between men and women, as well as that between white people and people of color in the US and other developed countries.

Today, working women in the United States earn just $0.86 for every $1 a man earns, according to new findings from the American Association of University Women. At the rate the gap has been closing, women will not achieve pay equity with men until 2059. In a recent study by STATISTA, looking at gender and ethnicity combined, all groups except Asian men lagged behind white men in terms of median hourly earnings. Hispanic and Latino women had the lowest median weekly pay at $705.

But all these numbers about pay gaps lack one important aspect: they don’t contain any performance data, assuming that all employees at the same positions perform equally and equally well. In reality, we can all probably agree that different individuals perform differently. Even the two employees at the same level and position in the same company with the same demographics can easily vary substantially in terms of their results.

So, if there are no two comparable equally-performing employees in the world, why are we comparing their pay according to gender, race, age, or any other factor?

The reason why this conversation is still going on is that we live in a world dominated by fixed salary systems. When an individual is hired, employers assume that they will perform at a certain level, based on their track record, career growth, and achievements—and, as it too often happens, the decision-maker’s biases about gender, race, age, and other demographic features. As a result, most employers today pay employees for what they think that person should be doing, not what that individual is actually doing.

While it may seem expedient to base a salary or wage on an assumption of what is expected from an employee, this practice does not seem to be leading to any big change.

In an ideal world, your salary would be directly correlated to your results. But in the real world, it’s not quite that simple. The lack of effective performance evaluation systems allows the corporate world to continue operating on the basis of biases and assumptions, instead of fair pay for fair work—and this keeps the pay gap debate going.

In the corporate world, traditional performance appraisal systems often reflect not an employee’s actual performance but the subjective opinion of their boss. Most employees are paid a monthly salary, plus an annual bonus, typically determined by their boss or a few senior managers with no transparency or clearly-stated formula. That is the case in most major corporations, including the Big 3—Google, Apple and Amazon—, the Big 4 consultancies, and so on. As a result, most employees treat their one-time bonus more as a corporate Christmas gift than as fair compensation for their actual performance.

So, what should corporations change in order to link salaries and performance more closely?

First, evaluations need to be done more often than once a year, ideally with the same frequency as employees are paid for their work.

Second, in addition to a text document describing the employee’s achievements and failures, the evaluation should result in a score that can then become a factor directly affecting their pay, based on a transparent formula. The score should be a cumulative result combining objective data like sales, profit, production volume, customer feedback or else with evaluations of the direct supervisor, teammates and collaborators, based on established criteria and bias-free questions.

Easier said than done. Of course, devising evaluation methodology for every position at a corporation with 10,000 employees could be an enormous challenge. However, due to technological progress it is easier now than ever to measure so many aspects of people’s performance, which makes it irrational to pay just for their time spent at work. Of course, setting up a new mode can take some time, involving trial periods, pilot projects and test drives on individual departments, then gradual scaling to the entire company. But if the new system allows a company to take employee performance and work satisfaction to a new level, while at the same time increasing the company’s bottom line, won’t the results be worth the effort?

The new salary systems based on actual performance evaluations rather than initial assumptions will inevitably end the pay gap conversation once and for all. If, as it turns out, every individual performs differently, regardless of race or gender, why should salaries ever be compared?