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February 15, 2020

Overview

The idea that employees performing substantially equal work should be paid equally is not new. In fact, efforts to address pay discrepancies in the workplace, and specifically the gender pay gap, have been ongoing since before the passage of the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964. While significant progress has been made, research shows that gender-based pay disparities continue to be a problem which cannot and should not be ignored by employers.

Impact to Organizations

Companies should be invested in ensuring equitable pay practices for a variety of reasons. Not only is paying employees equally for equal work performed and addressing any biases related to pay generally regarded as the “right” thing to do, it can also protect the company from severe financial and legal ramifications associated with inequitable or discriminatory pay practices. Additionally, as more focus is placed on pay equity (as is evidenced by recent state legislation, social activism, and proactive action by industry-leading companies), there are several internal and external factors that can be negatively affected by unfair pay practices.

Current and Potential Employees

In this incredibly competitive environment for top talent, recruiting and retaining quality employees is a significant challenge for most companies. By fostering an inclusive environment through equitable pay, employers can help bring in top talent from a variety of sources and cultivate a diverse employee population. By providing an equal pay environment, this will help with retention of this talent once they have been recruited. The combination of these factors in turn drives innovation and positive employee morale.

Investors

Investors are increasingly considering social issues, such as a company’s handling of gender pay equality, in their investment decisions. Thanks to enhanced reporting tools, like the Bloomberg Gender-Equality Index, investors can easily access pay and policy information relating to gender equality. As a result, some activist investors are pushing for companies to address and disclose gender-based pay disparities within their organization.

Mergers and Acquisitions

The due diligence phase of merger or acquisition activity involves an intensive investigation into each companies’ operations. Everything, including pay practices, is subject to close scrutiny during this process. Diligence is essential because it can help reveal deficiencies or liabilities that will be absorbed with the merging or acquired entity, such as existing gender pay disparity across one or more groups of employees. Even if each entity separately pays employees equitably, inconsistent pay practices could result in disparities in the combined employee population. Careful compensation analysis should be performed prior to integration to avoid demoralizing employees and inviting legal issues in the future. Performing this investigation prior to completing the transaction will help ensure a smoother integration for affected groups or possibly reflect cultural incompatibilities between the organizations.

Legal Considerations

In the United States, a lack of legislation at the federal level has resulted in an inconsistent patchwork of varying state regulations, making equitable pay compliance difficult for organizations with employees in multiple states. Both California and New York, for example, have recently passed legislation to update the previous laws related to equal pay, closing loopholes used by companies to justify gender-based pay discrimination and clarifying acceptable justifications for pay disparities (such as seniority or merit systems, or education). Additionally, a number of states have passed regulations discouraging employers from tying future pay to a candidate’s salary history (which may have been previously affected by bias) – for example, in New York it is now illegal for potential employers to inquire about a candidate’s compensation at a current or previous employer during the hiring process.

Companies with international employees may have additional requirements with which they must comply. For example, in 2018 the United Kingdom imposed a rule that requires companies with more than 250 employees to report information about the gender pay gap in their organization. France implemented a similar rule that requires organizations with more than 50 employees to disclose information related to the gender pay gap, as well as any corrective measures taken to address the issue. The French legislation goes further in that companies receive an equal pay rating, and those with ratings below a certain threshold must take corrective action. Companies who consistently rate below the threshold are required to pay a penalty. Many countries, such as Portugal, have similar reporting requirements, and many more (such as Ireland and Iceland) are considering new legislation.

The recent legislation has brought attention to the issue, and employees are taking action against employers. On Equal Pay Day this April, a class action lawsuit was filed against Disney alleging that the company’s pay practices have resulted in unequal pay for male and female employees. Many other high-profile companies such as Oracle and Google have been the subject of similar litigation, as well as suits by the Department of Labor. These companies, as well as several other big names such as Salesforce, now undergo a gender pay equity analysis on an annual basis to identify any potential issues and have become thought leaders in this emerging area.

Given the difficulty in complying with the various laws designed to enforce pay equity and the potential for litigation if employees feel they are paid unfairly, companies must be proactive to ensure compliance.

Gender Pay Analysis

In order to get ahead of this issue, it is imperative that all employers take a close look at their pay practices and identify any pay discrepancies that are present within their company. Once an employer has identified a discrepancy, they must reflect on any policies and/or practices that may be causing the issue and determine how to best correct existing disparities. Employer policies should be updated to ensure equal pay going forward.

Data Analysis

Companies should perform a thorough analysis of their current employee data for pay disparities. This process involves identifying groups of “similarly situated” employees and performing a statistical comparison of the average or median pay for female employees to the same metric for male employees. A comprehensive analysis should start with a full employee census that includes indicative data as well as base salary and bonus/incentive compensation for each employee. One potential cause of gender pay disparity is discretionary elements of compensation which could be impacted by unconscious bias. A variety of different groupings should be considered, and any additional explanatory information should be included in the analysis (such as time in position, performance rating, etc.)

Several questions need to be answered to perform the analysis:

  • What are “similarly situated” employees?

“Similarly situated” employees are those employees with some commonality. The most common grouping is employees with the same job title. A more comprehensive analysis should also look at location, management chain (i.e., all employees directly or indirectly reporting to a certain manager), business unit, etc.

  • What constitutes a significant pay disparity?

In a statistical analysis, it is understood that some discrepancies in data are to be expected and may occur randomly. Certain statistical tests can be performed to determine whether the discrepancy is significant – requiring further analysis – or insignificant, assuming a standard “tolerance” for random disparities. Significance will depend on the size of the dataset and the metric being used. Companies may also wish to perform the test using a lower than standard tolerance level to identify as many potential issues as possible.

  • What is causing the issue, and what can we do to address it?

Once the issue has been identified, it can sometimes be challenging to understand why the issue occurred. In some cases, there may be mitigating factors – for example, if a program was initiated to hire female interns, there may be an influx of entry-level female employees in some jobs that not only explains the discrepancy but also demonstrates a commitment to diversity in the workforce. In other cases, unconscious bias may be playing a role and training may be required. Regardless of the root issue, companies should be committed to understanding these issues and, if necessary, creating a plan to rectify pay discrepancies.

Gender pay equity has become a business issue and is garnering the attention of compensation committees and even the broader board. Management needs to be prepared to answer to its board on whether an issue exists and if one does, what it is doing to resolve it. Many companies are probably appropriately paying their employees, but there is no way to know if you are one of them unless a thorough and objective analysis is undertaken.

How We Can Help

We have heard from many of our clients that they are interested in ensuring pay equity within their organizations, but do not have the internal resources to perform the analysis or would prefer an outside third-party conduct the analysis to ensure the results are viewed as objective. Some organizations may be concerned at the potential results of the analysis. It is important to keep in mind that the requirement to pay employees equitably exists regardless of whether an organization is aware of a problem, and that it is much safer to rectify any issues before they are compounded over years and years. Now is the time for organizations to identify and rectify any pay equity issues that they may be experiencing.