It was 58 years ago, in 1963, when U.S. President John F. Kennedy signed the Equal Pay Act into law. With limited exceptions, it prohibited employers from discriminating between employees based on gender when the jobs they perform require equal skill, effort and responsibility and are performed under similar working conditions. For global organizations concerned with pay equity, the next sweeping law with significant impact came in 2017 in the U.K with the passage of the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017. This requires companies to be more transparent about their pay practices by publishing their overall gender pay gap figures annually. Several other countries (e.g., France) have passed similar legislation.
Since those early days, much has been written about the gender pay gap. Almost everyone in the U.S. has seen statistics on this gap in the popular press. Recently, Barroso & Brown (2021) looked at median hourly earnings for both full and part time workers in the U.S. which showed that women made 84% of what men earned in 2020. Some progress is being made. When they parsed the data further by age, they found that workers between the ages of 25-34 were doing better than this: women made 93% of what men earned. Additionally, for all workers (aged 16+), the gap has consistently narrowed from 36 cents in 1980 to 16 cents in 2020.
These commonly quoted statistics have led to misunderstanding among employees and employers alike with respect to the state of the world regarding gender and pay. One of the causes of this misunderstanding is the propensity of the popular press to write about topics that catch our attention and evoke an emotional response. Another cause is a lack of clear definitions and understanding of the terminology we use. The terms, “gender pay gap,” “equal pay,” and “pay equity” are often understood to be the same and are used interchangeably.
Let’s Start with Definitions
Equal pay refers to men and women in the same workplace being given equal pay for equal work (EEOC, n.d.). Pay includes not only base salary or wages, but all forms of pay, including overtime and bonuses and even what many organizations would consider benefits, such as vacation and life insurance. The U.S. Department of Labor further clarifies that jobs do not have to be identical, but rather “substantially equal” in terms of skills, effort, responsibility and working conditions. These comparisons are done based on “establishment,” which the Department of Labor describes as a “distinct physical place of business,” and not necessarily an entire business organization. This allows for differences based on labor market differences in geographies, for example.
Gender pay gap refers to the overall difference in average pay between groups in a population – for example, the average earnings of all working women in the U.S. vs. the average earnings of all working men in the U.S. This is the figure that is typically quoted in the popular press. It does not consider the jobs that are done by women vs. men or other factors that may affect the overall average wages. For example, the World Economic Forum (2019) interviewed Laura Tyson, an economist from the University of California Berkeley about what factors account for the persistent gender pay gap that is commonly reported. These factors include: (1) women choose different occupations than men; (2) women more frequently work on a part-time basis than men; (3) women who are mothers tend to earn less than men; and (4) women still have primary responsibility for raising children and caring for the household. These last two factors likely contribute to the pay gap because women are less willing or able to take on more demanding roles or to work the hours that may be required to achieve higher pay.
Gender pay equity is similar to equal pay in that it encompasses the idea of fairness and refers to paying different groups similarly for similar work factors. These work factors are things that the company’s pay philosophy considers when determining pay. Operationally, when a company conducts a gender pay equity analysis, it compares pay across genders based on factors that can legitimately lead to differences in pay, like overall work experience, geographic location, role or function, level, performance ratings, whether they manage others, etc. The intent is to control these factors such that any remaining differences in pay cannot be explained by them and may be attributable to the effects of gender. These are called “adjusted pay gaps.”
Process and Decisions in Pay Equity Analysis
As a practical matter, most HR departments will be focused on conducting pay equity analyses (sometimes called pay equity audits) to determine whether they are paying groups fairly based on similarity in the legitimate drivers of pay. Many organizations will conduct these analyses not only to look at potential gender differences, but also to see if they are paying fairly based on race and ethnicity. You can think of getting started on pay equity analysis as a series of decisions.
- Do we have the knowledge and skills necessary to complete the analysis? To start, recognize that conducting these analyses requires deep knowledge in compensation, law, project management and data analytics, which suggests a cross-functional effort. Some organizations may not have the data analytics expertise in-house, in which case partnering with an external consultant to conduct the data analysis is required. Even in the case where the organization has internal data analytics capabilities, it might be advantageous to get the perspective of an outside expert that specializes in this work. In-house law departments also may choose to use external counsel for additional expertise.
- On what basis do we pay our employees? The process begins by identifying and agreeing on what the legitimate drivers of pay are for your organization. They may be like those used by other organizations, but it is important to confirm them based on your specific pay philosophy and strategy. You will also want to identify different pay schemes, such as sales incentives, bonuses, and long-term incentives that exist across your employee base.
- Who will we include in the analyses? Determining the scope of your analysis is also necessary. If you are a global organization there are practical decisions: will you cover all countries? Do you have enough people working in each country to conduct an analysis? Do the compensation schemes vary by country? Note that while gender pay equity analyses are relevant across the globe, race or ethnicity is more difficult (if not impossible in some locations) to conduct outside of the U.S. There is also the matter of whether you include front-line employees, particularly if they are covered by a collective bargaining agreement that strictly determines rates of pay.
- How will you segment the employee base to establish relevant comparisons? This decision can be more complex than it seems. While the obvious decision is that employees should be segmented based on function, geography and level, sometimes sub-functions can influence how employees are paid, and you may want to include that level of detail in your analysis. For example, data scientists within HR may command higher salaries than HR generalists because of their level of education and expertise as well as their value in the labor market. If you do not segment them from the larger HR population (by level, geography, etc.) you run the risk of overestimating the expected pay for HR generalists and underestimating the expected pay for data scientists working in HR.
- What constitutes pay equity for you? This may seem like an odd question, but you should think about what the answer to this question is before conducting the analyses. Explaining complicated statistics to executives is not an easy task, and they will inevitably ask you to interpret the results for them. They will want to know how “well” the organization is doing. If there is a 1% differential between what women and men are paid is that OK? What if it is 5%? Can we ever declare victory? There is no legal answer to this question nor even a professional consensus. It is worth thinking about what “good” is at the beginning of the process.
- How will we address identified adjusted pay gaps? After your analyses are completed, there will likely be some employee segments that show significant differences in pay levels between groups. You will need to determine on what basis you will perform remediation and what the overall cost to the organization will be. As an HR practitioner it should come as no surprise that there is generally not a pool of money that is allocated to these pay adjustments, particularly the first time you conduct a pay equity analysis. Decisions will need to be made about implementing pay adjustments over time, which can be done based on groups (e.g., some get remediation now and some later) or amount (e.g., everyone in the group gets some level of remediation now). The other decision with respect to remediation is timing and communication. Are adjustments made during the annual cycle or off-cycle? What is communicated to the employees receiving the adjustment? One additional note: you should address this as “pay equity for all” and address any pay gaps, even if they are where men are paid less as a group than women.
- What will you communicate about your pay equity analysis to others? The level of transparency about the pay equity process is another decision point that will require conversations with organizational leaders. The first audience to consider is the overall employee body and what and how pay equity should be communicated. Beyond that, you may want to address the issue outside the organization. This can be a positive for your employer brand but must be managed carefully; it can lead to requests for more detailed information than you are prepared to share.
- What can you do beyond remediation to address the issue? Pay equity analysis is not a one-and-done process, partly because it is unlikely that you will address all the adjusted gaps in the first year, but also because the employee base is dynamic: people are constantly being hired, promoted, and leaving the organization. Consider addressing the root causes of pay inequities, by conducting analyses of hiring salaries, annual merit increases, promotional raises, and performance ratings. A more extensive look at pay philosophy and strategy may even be in order.
Future Trends to Consider
There are several areas impacting HR that practitioners conducting pay equity analyses should keep on their radar.
- Tracking the impact of the pandemic. According to the World Economic Forum (2021), 4.2% of women lost employment vs. 3% of men globally. While men’s employment is expected to recover to 2019 levels, women’s employment is expected to remain well below 2019 levels. Additionally, whether organizations return to the office post-pandemic will have profound implications for the workplace in general (Cappelli, 2021), but if women disproportionately work remotely and organizations decide to pay less to those who work remotely, there may be negative impacts on pay equity. Additionally, there could be negative long-term implications for women if remote work negatively impacts career progression.
- An increasing focus on skills. With a focus on upskilling and reskilling workforces to accommodate increasingly digital work, many organizations are looking to develop skills taxonomies that will allow them to hire, develop, promote, and compensate workers more effectively. This trend will mean a shift in evaluating the legitimate drivers of pay to include skills.
- Expansion of designations in gender and race/ethnicity globally. In many organizations, employee data on gender includes two options, but an increasing number of employees identify as non-binary. While no laws exist requiring non-binary gender reporting, the EEOC issued guidance in 2019 allowing (but not requiring) companies who file EEO-1 reports to include comments explaining if any employees identify as non-binary (Evans, 2020). Recently, the U.K.’s Commission on Race and Ethnic Diversity recommended (but did not require) that companies report on their racial and ethnic pay gaps (Shepherd, 2021). These trends will undoubtedly continue and will require practitioners to incorporate them into their pay equity analyses.
As HR practitioners, it is our obligation to be knowledgeable about what pay equity is (and is not), how the process works, the decisions that need to be made when conducting these analyses and to be aware of the evolving global landscape of regulatory and legislative actions.
Barroso, A. and Brown, A. (2021, May 25). Gender pay gap in the U.S. held steady in 2020. Pew Research Center. https://www.pewresearch.org/fact-tank/2021/05/25/gender-pay-gap-facts/
Cappelli, P. (2021). The future of the office: Work from home, remote work and the hard choices we all face. Wharton School Press.
Evans, K. (2020, July 2). An update on non-binary gender designations in the workplace. Fisher Phillips. https://www.fisherphillips.com/news-insights/an-update-on-nonbinary-gender-designations-in-the-workplace.html
Levine, B. Chen, L., and Grecu, A. (2018). Achieving pay equity: How analytics has evolved to support true progress. Mercer. https://www.imercer.com/content/common/images/knowledge-center/pdfs/achieving-pay-equity.pdf
Shepherd, L. (2021, June 3). Reporting ethnicity pay gaps recommended for U.K. employers. SHRM. https://www.shrm.org/resourcesandtools/hr-topics/global-hr/pages/uk-reporting-ethnicity-pay-gaps-recommended.aspx
Tyson, L.D. and Parker, C. (2019, March 8). An economist explains why women are paid less. World Economic Forum. https://www.weforum.org/agenda/2019/03/an-economist-explains-why-women-get-paid-less/
U.S. Equal Employment Opportunity Commission (n.d.). Equal Pay/Compensation Discrimination. https://www.eeoc.gov/equal-paycompensation-discrimination
World Economic Forum (2021, July 24). This is how COVID-19 hit women’s employment. World Economic Forum. https://www.weforum.org/agenda/2021/07/covid-19-women-employment-gender-jobs/