A Point of View
By Stefan Gaertner, Gail Greenfield, Brian Levine
Pay equity — the notion that pay levels should be equitable for all employees regardless of their demographic background, including race and gender — is top of mind for many executives. In fact, interest in this topic has reached new levels, as exemplified in previously unimaginable efforts by large organizations (for example, Amazon, Apple, Gap, Salesforce, and UBS) to publicly discuss and disclose their pay information and existing processes. Investors are pressing for this information – and leading companies are looking to get out ahead of such demands. The World Economic Forum holds sessions to discuss equal pay for equal work and, in its 2015 Global Gender Gap report, projected that it may take 118 years globally to achieve equal pay for equal work between men and women. In the US, celebrities such as Patricia Arquette and Reese Witherspoon are activists for the “cause”; a new documentary, “Equal Means Equal,” investigates pay inequity as the cornerstone of the broader struggle for women’s rights; and legislators have launched a series of efforts to monitor and regulate comparative pay levels.
Although regulatory and cultural pressures certainly have played a role in focusing executives on this topic, organizations globally have strategic reasons to be concerned. Consumer product companies — broadly defined— notice that their products may not optimally serve all of their clients equally well if their product developers are predominately white men.
In fact, talent shortages in traditionally male occupations have also led to reevaluation of historically narrow workforce strategies. In all, business needs combine with regulatory and societal pressures to evaluate all processes to attract, retain, and motivate a diverse workforce — and data play a key role in managing this evaluation.
In this overview, we discuss some of the new regulations that concern US employers and then dig deeper into proactive steps you can take to protect your organization and ensure fair pay among your employees. Although the discussion focuses on the US, similar regulations exist around the world and, thus, similar approaches can be deployed in other countries to understand and address pay gaps. We fully advocate a global focus on this issue. Without fair pay for equal or similar work, efforts to hire or promote a diverse workforce will fail, owing to the importance of rewards in signaling appreciation for the work performed.
REGIONAL FOCUS: PAY EQUITY POLICIES IN NORTH AMERICA
Recent pay equity regulatory activity in the US
Recent regulations aim to speed up change in two ways: by making it easier for plaintiffs to sue successfully and by raising awareness in the broadest sense, including monitoring pay data through standard reporting.
The California Fair Pay Act (2015) is probably the best example of a law that strengthens the ability of plaintiffs to successfully sue for pay discrimination, and it is considered the most aggressive equal pay law in the US. To understand this, consider the key reason it is generally difficult for plaintiffs to win pay equity court cases. Many organizations have hundreds of job titles, each with its own job description. Defendants often argue that pay levels are unique by job, making it difficult to establish a meaningful employee pool for pay comparisons. Statistics to detect pay differences require a fairly large number of employees within a pool, making a strategy of employee “fragmentation” a successful defense strategy.
The California Fair Pay Act (2015) has quite a few provisions, but the key one — in our view — addresses the point above. The definition of a relevant employee pool for comparison has been broadened to include employees performing substantially similar work based on a composite of skill, effort, and responsibility. No longer can analyses be conducted only at the level of the job. The law covers only gender-based pay differences but has relevance for any organization with a workforce in the state of California. In all, the law clearly demonstrates that pay equity is a key concern to the state. Employers are advised to look at their data to be prepared.
Other US states are drafting their own laws to advance fairness in pay. New York, for example, amended its equal pay law (Labor Law Section 194) effective January 1, 2016. Similar to the California law, it broadens the potential basis of comparison – to cross both jobs and geographies.
In both states, employers can no longer justify pay discrepancies by relying on “any factor other than gender.” The new provisions now clearly state that any factor used to justify pay differences must be job-related — examples outlined in the New York law include education, training, and experience. The burden is now on the employer to explain pay gaps using legitimate business reasons.
On the federal level, President Obama announced several legislative actions on January 29, 2016, to further advance equal pay for all workers in the US. Among the provisions is a new requirement for all employers with 100 or more employees to report summary data on paid wages in their EEO-1 form. Employers need to be ready to tell their stories – to explain the proactive work that they are undertaking and the scope of issues they are working to address, and to make clear that the reality of the “pay gap” cannot be captured in such aggregate statistics. The White House also announced a summit on the United State of Women, which is likely to generate additional initiatives to advance employment and other women’s rights.
More aggressive regulation for pay equity is clearly a trend. We believe this represents a stern call to action for employers to review their job and pay structures as well as analyze pay differentials to ensure that they understand their data, with a focus on pay gaps and business-related factors that may or may not explain them. Employers also need to rectify any issues identified. We find that the all-too-common “wait and see” approach is not effective — once a plaintiff knocks on the door, it is too late to craft a story or actually address gaps in an orderly fashion. So … what can you do today?
What your organization can do to address pay equity
- Regular Assessment -- First and foremost, you can start to assess internal pay equity on a regular basis — at least annually. Do not go for a simple average-pay-by-group approach, as it is not meaningful and is irrelevant when it comes to actual lawsuits. Instead, we recommend a robust statistical approach — such as multiple regression — to ensure that legitimate differences in pay are accounted for in the assessment. Pay equity does not mean that all people in an organization should be paid the same amount, but an organization needs to ensure that observed pay differences are due to legitimate factors, such as job-related skills, performance/productivity, company tenure, prior work experience, salary grade, work location, and education. Using a robust statistical approach will enable your organization to spend its limited compensation dollars wisely by ensuring that internal equity adjustments are focused on groups with unexplained pay gaps (that is, pay gaps that cannot be explained by the legitimate factors accounted for in the assessment). Mercer’s most recent When Women Thrive, Businesses Thrive (WWT) global research study shows that only 35% of organizations have a pay equity process that is built on a robust statistical approach.
- Group Employees for Comparisons -- Second, as part of a robust statistical approach, ensure that you can group employees into meaningful pools for comparison purposes — not too narrow and not too broad. We believe that the provisions in the California Fair Pay Act are a good starting point. Few states and courts will continue to uphold a narrow “equal work” stance when evaluating pay gaps; a relaxation of this standard toward “substantially similar work” is likely to occur. For some organizations, this might mean that they have to conduct or renew a formal job evaluation.
REGIONAL FOCUS: PAY REMEDIATION PROCESS IN ASIA
- Implement Formal Remediation Processes -- Third, have a dedicated team responsible for assessing pay equity and implement a formal remediation process. This team should conduct (or oversee) the pay equity assessment, identify groups with unexplained pay gaps, conduct targeted research on specific employees potentially requiring a pay adjustment, document explanations for making or not making adjustments, and ensure that adjustments are being made. Ideally, this remediation process would be tied to your organization’s year-end compensation process. According to Mercer’s WWT research, 34% of organizations have a formalized remediation process. The figure is highest in the US/Canada (40%), followed by Latin America (37%), Australia/New Zealand (33%), Europe (28%), and Asia (25%). Notably, Mercer’s research shows that having a team responsible for pay equity, coupled with a process that relies on a robust statistical approach, is linked to improved gender diversity outcomes.
REGIONAL FOCUS: PAY EQUITY ADJUSTMENT AS PART OF ANNUAL REVIEWS IN EUROPE
- Consider policies and practices that will help prevent pay equity problems from arising – One such practice is to reduce your organization’s reliance on salary history (or salary expectation) in setting starting pay for new hires. Another practice is to rely less on negotiation in setting starting pay. Another step would be to ensure that employees taking leave are not inadvertently penalized in year-end pay decisions. Still, a third powerful step is to consider the unique strengths of women – identified in Mercer’s aforementioned When Women Thrive study as collaborating, connecting, and managing employees – and ensure that they are associated with commensurate pay and opportunity. Perhaps most impactful is to apply a broad lens. Pay differences within job are dwarfed by the differences in pay that occur as women and men – and people of color and those who are white – progress at different rates; proactively ensure diverse slates as positions are filled.
REGIONAL FOCUS: PERFORMANCE RATINGS REVIEW BY GENDER IN LATIN AMERICA
Stefan Gaertner, PhD, is Principal in Mercer’s Workforce Strategy and Analytics practice (firstname.lastname@example.org).
Gail Greenfield, PhD, is Principal in Mercer's Workforce Strategy and Analytics practice (email@example.com).
Brian Levine, PhD, is Partner in Mercer’s Workforce Strategy and Analytics practice (firstname.lastname@example.org).