Viewpoint: Rethinking the Way to Gender Pay Equity

Take an in-depth look at compensation policies and practices

By Joseph Kelly, Wendy Mellk and Matthew Thompson May 14, 2020
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Viewpoint: Rethinking the Way to Gender Pay Equity

The ongoing pay gap between men and women has spurred legislative action at the federal, state and local levels, creating a complex web of employment law for corporations to navigate. Here's a roadmap that companies can use to identify pay gaps and mitigate pay equity litigation risk.

Overcome the Legacy of Prior Salaries

Setting starting pay rate based on prior salary may perpetuate pay discrimination, specifically surrounding the gender pay gap. According to the Bureau of Labor Statistics, on average, women made 80 percent of what men did in the fourth quarter of 2018. When pay data firm PayScale examined the "controlled" pay gap, a comparison of pay for men and women with the same experience and education doing the same job in the same geographic location, it found women earn 98 cents for every dollar earned by men. While that difference may seem small, when a 2 percent difference in pay is compounded over the course of a career, it adds up to women taking home significantly less pay than their male peers. Moreover, significantly fewer women were promoted into higher-level management jobs in the first place.

To overcome the legacy of gender discrimination, many advocates have sought prohibitions on requesting or relying on prior salary information during the hiring process. Forty-eight states now have separate laws addressing pay equity in the workplace, with more expected to follow. In almost every instance, these laws provide much greater protections for employees than the Federal Equal Pay Act, with many including a provision that restricts employers from asking about prior salary history.

For employers, this means a need to revisit long-standing practices around pay-setting decisions.

What's an Employer to Do?

Many employers have decided to end the practice of requesting applicants' prior salary information or using the information to set starting pay. However, that is not a complete solution. Employers also should consider exploring whether there are any existing pay disparities that were created by the historical use of applicants' prior salary information in setting starting pay rates.

Here are some additional best practices for employers:

  • Remove salary history inquiries from applications.
  • Train recruiters and talent acquisition teams not to ask about salary history.
  • Implement written guidelines for establishing starting pay.
  • Train those involved in pay-setting decisions to set pay without reliance on prior pay.
  • Conduct an internal review of pay of others in similar positions for equity.
  • Document the reasons for pay differences, particularly in starting pay rates.
  • Under attorney-client privilege, consider conducting a broader pay equity analysis to determine if reliance on prior salary history has perpetuated wage gaps in the organization and, if so, take remedial steps to address any issues.

Taking proactive measures to eliminate the use of prior salary as a factor in pay-setting decisions is an effective first step in mitigating pay equity litigation risk and enhancing your company's reputation among current and prospective employees.

[SHRM members-only toolkit: managing pay equity]

Get Proactive with Pay Equity Audits

Pulling together compensation data to meet Equal Employment Opportunity Commission (EEOC) requirements for compensation data may have been a challenge for companies and their HR professionals. Despite the painstaking collection process, the aggregate data itself provides no information to assess whether an organization has potential pay equity issues based on gender or race/ethnicity. However, the aggregate data could be used by the EEOC or a private litigator to identify potential organizations or individuals to investigate.

To gain true insight into pay equity, the data collection process must be accompanied by an in-depth look at compensation policies and practices. A comprehensive compensation audit that takes into consideration the specific state and local laws that apply to your workforce can illuminate litigation exposure.

In addition to helping organizations better understand potential risk to a government investigation or a private lawsuit, compensation audits—also called pay equity reviews—can improve employee retention and morale. A compensation audit may also enhance a company's reputation among current and prospective employees, positioning the company as a caring, progressive employer.

Audit Best Practices

A detailed understanding of how compensation is determined within the organization is critical when conducting a pay equity audit. Factors that dictate what data needs to be collected include:

  • Who is responsible for setting compensation?
  • What employee-related factors influence how much an employee is paid?
  • What is the outside market for a particular skill?

This process can determine if there are potential differences among similarly situated employee groups.

When employee groups are sufficiently large, compensation analyses are typically conducted using a statistical method known as a regression analysis. This method allows the researcher to estimate potential differences between employee groups after accounting for pay-related characteristics (e.g., job seniority) to identify areas requiring further examination.

For smaller populations where a regression is not possible, the analysis would focus on cohorts to identify any potential areas of concern. With either of these approaches, it is critical to identify employee groups for whom you expect compensation to be similar; and it's essential for the data on which your analyses are based to be complete and accurate. Deficiencies in either of these areas could lead to poor decisions based on the outcomes of the analyses.

Additional tips for employers when considering a pay audit include:

  • Expand the pay groupings beyond job title and compare jobs that share similar functions. New state laws are breaking away from the idea that relatively minor job-related distinctions should command different pay. Accordingly, employers will need to broaden their ideas of comparable tasks and roles.
  • Evaluate pay groupings in multiple ways to see where potential issues may exist. Then, focus on ensuring that those issues are defensible in the relevant jurisdiction.
  • Audit job descriptions and the actual job duties of employees. Look at skills, efforts and responsibilities to ensure that pay analyses will compare the "right" employees and identify actual legal risk for the jurisdiction.
  • Consider retaining counsel to perform the audit. While the underlying information collected in the audit may be public, the analysis and advice obtained should be kept under attorney/client privilege.

Act on Your Results

If your compensation audit shows areas of concern that need to be addressed, there are several things to consider before making any compensation adjustments:

  • Develop a plan. Determine target employee groups and how aggressive you will be in your adjustments.
  • Set a budget for the adjustments. Note that salary adjustments will have an ongoing cost.
  • Determine who within the targeted groups should be adjusted. Consider performance, equity and legal concerns associated with these adjustments.
  • Get "buy-in" from direct managers and decision-makers. Their support will be needed to support the adjustments.

Plan Follow-Up Monitoring

Compensation is a product of multiple employment decisions, including starting pay, career advancement and merit raises. In addition, hiring, promotion and termination decisions can affect pay differences among employee groups.

Monitor these activities to ensure pay equity in the future.

Joseph Kelly is a Chicago-based senior vice president and leader of the U.S. employment practices liability team at Sompo International, a specialty provider of property and casualty insurance and reinsurance. Wendy Mellk is a principal at the New York City office of law firm Jackson Lewis P.C., where she counsels employers on workplace issues including wage and hour compliance. Matthew Thompson is vice president and practice leader for labor and employment at consulting firm Charles River Associates in Tallahassee, Fla., where he works extensively with HR professionals in analyzing labor-related issues.

The contents and recommendations of this material are provided for information purposes only and as a resource to be used together with advice from professional insurance advisors. Sompo International assumes no liability by reason of the information within this material. Sompo International does not make any representations or warranties as to the technical accuracy or compliance with any law or professional standards. We recommend retaining experienced counsel knowledgeable about engagement letters and ethical standards, your firm, and the laws of the jurisdiction where you practice.

Visit SHRM's resource page on pay equity


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