Equal Pay for the Sexes

By Janet Stites May 1, 2005
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HR Magazine, May 2005High-profile lawsuits make the case for investigating gender pay and promotion equity at your organization.

Last summer, Morgan Stanley settled a sex discrimination suit filed by the Equal Employment Opportunity Commission (EEOC) for $54 million. The lead plaintiff, Allison Schieffelin, claimed that—for reasons relating to her gender—the investment firm discriminated against her, withholding opportunities for promotions and higher pay. Schieffelin received $12 million in the settlement; an additional $40 million was set aside for current or former female employees who make similar claims.

The remaining $2 million was targeted for a new diversity program that the firm said in a statement is “designed to enhance the compensation and promotional opportunities for female employees within Morgan Stanley.” The firm denied the sex discrimination allegations.

The Morgan Stanley settlement came after a ruling that allowed a class-action suit to proceed against Wal-Mart Stores Inc. The company is accused of discriminating against women, including gender pay inequity. The suit covers approximately 1.6 million current and former employees, making it the largest workplace bias lawsuit in U.S. history.

These two high-profile cases illustrate how costly gender inequity suits can be. At least 24,000 sex discrimination complaints have been filed with the EEOC each year since 1998, and the dollar figure for settlements during the same time period has nearly doubled.

In 2004 alone, the EEOC resolved more than 10,000 sex discrimination complaints in favor of the charging party and recovered $100.8 million in monetary benefits for charging parties and other aggrieved individuals (not including monetary benefits obtained through litigation).

To avoid becoming a part of these statistics, it may be time to ask: Is your company systematically paying women less than men for the same jobs? Is your organization providing equal access to promotions? If not, can you justify discrepancies with legitimate business reasons, such as tenure, experience or skills?

If you don’t know the answers to those questions, you may find yourself—and the EEOC—asking: Can your compensation and promotion practices stand up to a sex discrimination complaint?

Legal Matters

The crux of the matter for HR professionals is ensuring pay equity within their organizations for jobs that are substantially equal and for employees who have similar work experience and education.

If there is a discrepancy, HR must determine why—and whether the reasons are legitimate. This is the intent of the Equal Pay Act of 1963, which mandates that employers give men and women equal pay for equal work in the same establishment. (For more information on the laws governing equal pay, see “Equal Pay Legislation”.)

For federal contractors, equal pay is also mandated under guidelines enforced by the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP). Proposed self-auditing guidelines would require more rigorous analysis and self-evaluation of compensation practices for federal contractors. (For more information, see “New Pay Rules”.)

Causes of the Gap

Before companies can remedy pay inequity, they must understand how it can develop. Sometimes, inequities crop up when a company grows so fast or gets involved in mergers and acquistions too rapidly that it fails to adequately monitor its employment data.

Home Depot found itself in this quandary in the mid-1990s when female employees and applicants for sales positions brought a class action against the company’s western region. At the time, the retailer was opening stores at a brisk pace, and management was not adequately tracking compensation practices, according to plaintiffs’ attorney Barry Goldstein, a partner in the Oakland, Calif.-based law firm of Goldstein, Demchak, Baller, Borgen and Dardarian. The case was settled for $87.5 million and, according to Goldstein, continues to positively influence how Home Depot operates.

Another possible cause of gender pay inequity comes when companies do not have a corporatewide system for addressing compensation. In such cases, individual managers are left to their own devices—with potentially disastrous consequences.

“Sometimes managers simply shoot from the hip and make decisions without knowing the legal limitations involved in wage and selection decisions,” notes Gundars Kaupins, SPHR, HR management professor at Idaho’s Boise State University and a member of the Society for Human Resource Management’s Ethics Panel.

In fact, one reason Wal-Mart was sued over sex discrimination may be the result of regional managers making decisions about pay and promotions without corporate oversight, according to Selling Women Short: The Landmark Battle for Workers’ Rights at Wal-Mart (Basic Books, 2004) by Liza Featherstone. “The company has centralized technology and centralized finance,” Featherstone notes. “Still, they have not centralized their HR effort, but left it at the regional level.”

Plaintiffs’ attorney Goldstein agrees that lack of centralized control was an issue for the company. “Wal-Mart didn’t have a clear plan about how to select people for promotions or for entry- level management positions,” which can keep certain segments of the workforce from attaining higher-paying jobs, he argues.

(Wal-Mart disputes the allegations of the sex discrimination suit, which at press time was stalled in appeals over the class-action status.)

Finally, when companies lack clear, organizationwide guidelines regarding pay, women may be ineffectively negotiating salaries. That is the premise that Carnegie Mellon economist Ellen Babcock and co-author journalist Sara Laschever put forth in their book Women Don’t Ask: Negotiation and the Gender Divide (Princeton University Press, 2004), which argues that women collectively leave millions of dollars in compensation on the table by not negotiating salaries.

But even if women are determining their own pay fates, companies are not absolved of liability, says Matthew Halpern, a partner in the Melville, N.Y., office of law firm Jackson Lewis. “The EEO agencies believe that the vigilant employer, aware of its EEO obligations, will make sure that its compensation system is determining salary, rather than aggressive candidates and passive hiring managers.”

That women may not negotiate well highlights a conundrum for HR professionals. Part of their job, after all, is to get the most talent for the least money. But Laschever notes that “the costs of underpaying people are pretty clear: damaged morale, lower productivity and higher rates of attrition, all of which are costly—especially attrition.”

HR’s Role

HR, then, has both legal and practical reasons to ensure proper wage parity between the sexes.

To achieve this, Kaupins stresses having a clear performance evaluation strategy that is implemented consistently and is supported by documentation. “HR professionals should document employee performance as much as company policy allows,” he says. “Documents should include sales and financial data, performance appraisals, and any grievances associated with the performance appraisals.”

Halpern advises his clients to establish factors for how people are being paid, including bonus and incentive awards. “You’d be surprised how many are unable to produce accurate compensation data, much less provide a coherent explanation about how they are paying their employees,” he says.

Halpern also suggests that companies:

  • Develop a lock-step program for compensation levels based on tenure with the company, work experience and education level. ›
  • Review all written materials describing the compensation system for accuracy.
  • Look for less-obvious factors that may affect compensation, such as premiums paid for hard-to-fill or highly technical jobs.
  • Include bonuses and other cash incentives when analyzing compensation.
  • Develop a program for compensating individuals based on measurable job-related factors.

As important as it is to pay employees equitably, it is as important to give them equal access to promotions.

Goldstein recommends that all jobs be posted internally so that current employees can seek higher positions. He emphasizes the need for a clear plan for recruitment practices, including how hiring and promotion decisions are made.

But having a plan is useful only if it is followed. Goldstein says companies sometimes make the mistake of failing to incorporate a written plan into the company culture. Then, “if you make an adverse decision on a selection, it’s almost impossible to defend,” he says.

That’s what happened in the Lucky Stores sex discrimination case that Goldstein Demchak brought to trial in California in 1992. “An officer testified that the store had a plan, but it wasn’t implemented,” Goldstein says. “You can imagine what an impression that scenario can make on a judge and jury. It makes it seem the plan is just for show.”

The case was settled for $80 million.

Monitoring

Once a company has processes in place to ensure fair pay and equal promotion opportunities, HR should continually review them by conducting frequent salary surveys and educating managers about compensation and promotion processes. To make sure that the system is being implemented fairly, HR should review managers’ salary increase and promotion decisions. And it should educate employees on how their salaries are determined and what their rights are if they believe they’re victims of sex discrimination by managers.

Goldstein says companies should provide a way for employees to circumvent their supervisors to file complaints, perhaps by creating a toll-free number employees can call or identifying an HR person to whom employees can complain without fear of retaliation.

Complaints should be investigated quickly, and the results should be reported to the employee. If managers have made misguided decisions, they should be disciplined immediately. Failure to do so can create a culture where discrimination is condoned, and where employees feel powerless to make complaints internally and therefore feel the need to seek outside counsel.

What organizations don’t want is a lawsuit where settlement terms not only cost the company monetarily but also require an outside third party to determine and monitor these systems. That’s what happened in the Morgan Stanley settlement, where the firm agreed to appoint an internal ombudsperson and an external monitor, perform promotion and compensation analyses, maintain a complaint database, and implement programs to address the promotion and retention of women.

Afraid To Look?

HR professionals may fear that looking into their pay and promotions procedures will unnecessarily cause problems. To alleviate this fear, Goldstein suggests that companies hire knowledgeable attorneys to review their compensation systems. “If you hire an attorney, anything you discover will be covered under attorney/client privilege,” he says, adding that this is also true if the attorneys hire an outside consulting firm for assistance.

When discrepancies have been found, Goldstein Demchak sometimes has avoided litigation by giving the company a win/win proposal: settling on the aggrieved party’s behalf while offering to identify the company’s missteps, hence helping to prevent future complaints.

And there are times when discrepancies in pay yield no action—because there are legitimate reasons for the differences. When confronted with a potential pay inequity issue, Kaupins suggests that HR isolate what “affirmative” factors have affected the difference between the male’s and female’s pay. “Before jumping to conclusions that discrimination has taken place, a manager needs to check employment patterns of men and women in the company, such as tenure, extended leaves such as maternity, performance appraisal ratings and education levels,” he says.

Perhaps the best reason to close the gender gap relates to the relationship between human capital and the bottom line. “When people with a large knowledge base about a company walk out the door,” Laschever says, “it’s expensive to replace them and rebuild that knowledge base.”

Janet Stites is a New York-based freelance writer and director of publications and research at Business Development Institute.
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