Pay Equity and Shareholder Value: What’s the Connection?

Pay equity is a hot topic in the workforce today. As Salary.com defines it, it is equal pay for comparable jobs that is internally equitable, externally competitive, and transparently communicated. Why is everyone invested in this now? Because it has both ethical and business-related benefits.

One such benefit is employee productivity. When your employees are happy, they can deliver better results and increase company revenue. That revenue goes towards increasing shareholder value. Let’s dive deeper.

How Employee Productivity Impacts Shareholder Value

Shareholder value is the value given to equity owners as a direct result of sales and earnings. This value depends on decisions made by directors and management. These decisions involve investments and returns, but employee productivity also plays a major role.

Leadership expert Simon Sinek says, “Executives who prioritize the shareholder are like a coach who puts the desires of fair-weather fans before the needs of the players on the team.” If you want to turn a profit and keep your shareholders happy, you need to keep your employees happy. How do you achieve that? Pay equity is a good start.

Pay equity is defining how organizations approach their relationship with their employees, radically altering how we foster workplace culture and engagement. When you pay your employees equally for comparable jobs, you’re showing them that you value them. This appreciation will increase satisfaction rates and, in turn, productivity and innovation. The result? Profitability.

The Relationship Between Company Branding & Profits

The internet has made it significantly easier to market your brand. With just a few clicks, your product or service can be viewed and purchased by millions. This also means that a lot of people are criticizing your values and sharing their opinions on the matter.

An Adobe survey found that 38% of respondents were more likely to consume products and services from brands that show diversity in their ads. 34% have boycotted a company or brand because they didn’t feel their identities were represented well. Another survey conducted by The Global Marketing Trends Executive found 94% of Gen Z expect companies to take a stand on important social issues.

These practices should go beyond marketing. It isn’t enough to have diversity in your commercials. If you’re not practicing equity and fairness in your workplace, this information will surface and can jeopardize profits. Fewer profits mean lower shareholder value and unhappy equity owners.

Long-Term Effects of Pay Equity on Shareholder Value

When you practice pay equity and foster a healthy working environment, you increase profitability. Investing in your people really goes a long way. The business valuation professional Dave Bookbinder says, “The value of a business is a function of how well the financial capital and the intellectual capital are managed by the human capital. You’d better get the human capital part right.”

Short-term management is not the right strategy. Focusing on long-term goals is the way to see shareholder value grow. The Human Capital Management Coalition urged a petition for companies to disclose information on how they manage their human capital. They noted, “Greater transparency would allow investors to more efficiently direct capital to its highest value use, thus lowering the cost of capital for well managed companies.” This is a clear example of the value of investing in your employees.

The problem may arise that shareholders expect more value returns in shorter periods. Don’t undercut your employees to meet these expectations. The way to combat this is to create a clear pay philosophy that explains the equitable approach your company is choosing. Have a well-established pitch that defines pay equity and what that means to your organization.

How Avoiding Pay Equity Can Reduce Shareholder Value

If you choose to ignore the importance of pay equity, you could even find yourself losing out. Unfair treatment at work is a sure way of increasing turnover. Unhappy employees are less likely to stick around and, if they feel they’ve been treated inequitably, could file discrimination complaints.

In 2017, Employee Benefits News reported replacing an employee can cost 33% of a worker’s annual salary. This adds up when you consider the knowledge lost, time and money spent finding a replacement, and the required training of new hires. Hiring for a job vacancy is a grueling process that takes precious time and funding away from company revenue.

Stephen King, CEO of GrowthForce says, “It takes 8-12 weeks to replace a knowledge worker, and then another month or two before the replacement gets to full productivity mode.” That’s a quarter of the revenue that that team member usually brings in lost to turnover and replacement.

If an employee decides to complain about pay discrimination, that could cost your company a whole lot more. The moral of the story is – pay equity issues come with great costs. Those costs reduce overall revenue and profit, therefore decreasing shareholder value.

Take Home Message

Practicing pay equity demonstrates that you value your workers. Employees who feel more valued will be more engaged and deliver better results and profitability. Investing in the people who come to your workplace every day and complete the work that brings in revenue is your route to maximizing shareholder value.