Most employers are blind to the equity of equity compensation

Seventy-five percent of employers now conduct regular pay equity audits, according to research from the Society for Human Resource Management. Most are keeping their eyes peeled for unwanted pay disparities related to gender, race/ethnicity, age, and other demographic characteristics. Despite their vigilance, the majority of employers still have one glaring blind spot: failing to examine the equity of their equity compensation. 

Focusing solely on the equity of base pay is entirely appropriate for organizations that don’t offer employees some form of variable compensation (equity like stocks or options, bonuses, commission, etc.). But for those that do, it’s crucial to analyze the equity of these forms of compensation as well.

These inequities can develop because organizations that do offer equity largely focus on base pay when analyzing their pay equity. In fact, among companies with an ongoing pay equity process in place, just 30% are examining the equity of their equity compensation.

4 tips for analyzing equity compensation

Every organization’s journey to pay equity is unique, but every organization that offers equity compensation eventually needs to answer the same question: Has the time come to conduct a pay equity analysis of our equity compensation?

The answer is definitely “yes” if equity compensation is an important factor in your organization’s overall compensation strategy. That might mean if equity compensation isn’t limited to your senior executives, and if your managers have some degree of discretion in making equity compensation decisions (i.e., your equity compensation decisions aren’t wholly formulaic). Of course, you don’t need to wait to meet all of those conditions to begin incorporating equity compensation into your pay equity journey. The sooner you take action, the less likely that pay gaps will sneak into your equity compensation.

Here are four essential tips for analyzing the equity of your equity compensation:

• Examine proposed equity awards and make adjustments before finalizing them. Because base pay is cumulative, adjustments can be made at any time to fix pay gaps. Adjusting equity awards after they’ve been granted can be both arduous and embarrassing. Therefore, it’s ideal to analyze and adjust proposed equity awards prior to finalizing them. This can be challenging from a timing perspective. You need to conduct a pay equity analysis of proposed equity awards and then make decisions and adjustments—all of which needs to happen between the time managers make their entries and the annual compensation review’s official close date. This could mean extending the review’s timeline, at least during the first year of this initiative.

• Focus on the value of equity awards on their grant date. This maintains consistency and accuracy in several key ways. First, it reflects your managers’ original intent in rewarding employees. Second, it maintains alignment to your company’s overall compensation philosophy. (Example: if you have a strong pay-for-performance philosophy, you might grant equity of a specific value for hitting specific targets. Focusing on the value of equity awards on their grant dates keeps the values tied to performance targets no matter how the value fluctuates afterward.) Third, equity awards have a known value on their grant dates, so focusing on this makes analysis fairly straightforward.

• Analyze each type of equity award separately. If you offer more than one type of equity award, analyzing relevant metrics will vary by award type. For restricted stock and performance shares, the primary metric to focus on is the value of the awards on the grant dates. For other types of awards, the primary metric might be a number (the number of stock options granted, for example). This is why it’s best to analyze each type of award separately. The same is true if you offer different categories of equity awards (e.g., new hire equity, annual/refresher awards, retention awards, etc.).

These four tips are really just the tip of the equity iceberg. There are also specific considerations for other types of equity awards, concerns about bias even in formulaic equity awards, and how to go about closing pay gaps properly (which isn’t always as obvious as you might think).

It’s also imperative to think carefully about the value and benefits of using specialized software from a trustworthy external source. Software like PayParity from my company, Trusaic, helps analyze your organization’s pay equity, resolve unwanted gaps, and monitor your situation on an ongoing basis. Internally developed software and tools often aren’t quite as sophisticated as they need to be to get the job done effectively—and they can carry your organization’s unconscious biases and oversights, which only perpetuates pay gap inequities.

Indeed, choosing a trustworthy pay equity partner/vendor is more important than ever, given the EEOC’s 2023 technical assistance document and President Biden’s recently issued executive order. Both items charge employers with ultimate responsibility for ensuring that the AI-based tools and tech they use in hiring and pay-related activities contain no embedded biases, refrain from causing potential disparate or adverse impacts to individuals, and do not violate longstanding employment laws.

Although the equity of equity compensation is currently a blind spot for many employers, addressing it is also a golden opportunity to strengthen organizational fairness and the ability to attract and retain great talent.

Robert Sheen is CEO of Trusaic.