Co-authored by Heather Smith, Lead Sustainability Research Analyst, Pax World
In August the Trump Administration did what many expected: halted a proposed rule issued by the Obama Administration that would have required larger companies to report on pay by race and gender. That proposed rule, according to the Office of Management and Budget (OMB) lacked practical utility and was “unnecessarily burdensome.”
All reporting, including financial reporting, is burdensome, but there are times when it’s worth the burden. Financial reporting was not required prior to the Great Depression, but when that event rendered nearly half the new securities offered to the public worthless, Congress and the Administration hastened to put in place a system to acquaint investors with the financial conditions of the companies and projects they invested in. Burden alone is not a good reason not to require reporting.
What about the assertion that reporting on pay by gender and race lacks practical utility? There is a gender and racial pay gap in America, and it’s both longstanding and deeply rooted. Equliar noted that there is an executive pay gap at S&P 500 companies in every sector. How do they know that? Because companies are required to report on the compensation of the five most highly compensated executives, or Named Executive Officers.
Without that reporting, we might not know about the pay gap, especially since what companies say (when they’re not required to say anything) and what is aren’t always the same. When companies do report on pay levels (voluntarily, at least in the U.S.), the refrain we are most likely to hear is that there’s no pay gap: men and women are paid equally for equal work, skill and experience. And yet there’s this pay gap that shows up in the aggregate data, including Census data. The fact that many companies believe they’re paying men and women equitably doesn’t necessarily reflect deception: a lot of bias is unconscious, and in test after test, people show that when race and or/gender is not known, the preference for whiteness and maleness tends to disappear.
When two executives at Salesforce first brought the idea of examining pay equity between men and women at the company to CEO Marc Benioff, he was reportedly skeptical that a gap existed. Nonetheless, the company moved forward with the analysis, found a gap and ultimately adjusted the pay of 6% of employees (both men and women) and spent about $3 million to close the gap. In 2017, Salesforce expanded its analysis to include both bonuses and salaries, as well as race and ethnicity. The result? A second adjustment for 11% of employees, again at a cost of approximately $3 million. Salesforce noted that the second adjustment illustrates that pay equity “is a moving target, especially for growing companies in competitive industries. It must be consistently monitored and addressed.” Salesforce recognizes that pay equity is a key component of its overall diversity efforts, and Mr. Benioff has become a champion for equal pay, calling on other CEOs to take action.
In 2016, SAP undertook a pay analysis for its U.S. employees, spending $1 million to close a gap identified for just under 1% of its workforce. The biggest surprise for Jennifer Morgan, president of SAP SE’s North America division? That inequities were found for both women and men, illustrating how important it is for both men and women to be part of the conversation. Another key takeaway? “We are a growing, dynamic organization and even small inequities can crop up over time, so this is something we have to be constantly vigilant on.”
Yet, transparency by companies like Salesforce, SAP and a handful of others continues to be the exception rather than the norm. Companies that believe their policies are fair may simply not know they have a pay gap until they measure it. And there’s no way to know if they measure it completely or fairly unless they tell us how they measured it, and better yet, disclose the results of their pay audits.
But so what? How would having reporting be useful, or “have utility,” to quote OMB? For society, there’s a simple answer: because we have a law preventing employers from paying one group less than another simply as a result of their demographics. For investors, there’s another case to be made as well: the business case.
Investors recognize that transparency can help eliminate gender pay gaps and that pay discrimination presents litigation, regulatory and reputational risk. Investment consultant Mercer has found that active management of pay equity is a crucial driver of gender diversity and gender diversity has been correlated with superior financial performance over the long term. Mercer's research also indicates that a compensation and benefits philosophy that has gender equality as a core element is positively linked to better future outcomes for female representation. It’s clear that all companies would be well served by proactively analyzing their pay structures by gender, race and ethnicity as they seek to attract and retain talented and motivated employees.
Even if employers remain silent on the topic of pay levels by demographic group and employment category, people are remarkably good at finding the information anyway. A study from Organization Science provides one example, noting that pay disparities within top management groups diminished collaboration, which can be costly for technologically intensive companies, where collaboration among managers is particularly important to company performance.
Another example comes from an article published last year by several researchers from Columbia University, showing that workers care about their pay relative to the pay of coworkers. When workers find out what their relative pay is, inequalities in pay hurt productivity on the part of those who are paid less, without improving the productivity of their better-paid coworkers. The poorly-paid workers reduced output by 52%, and were 13% less likely to come to work. Finally, the paper notes that “While our results indicate that relative pay concerns can affect output at large magnitudes, they also suggest that negative morale effects can be mitigated when the justification for differential pay is extremely transparent.”
That’s a one-two punch. Not reporting doesn’t keep people from comparing their pay to that of others, but reporting can help to address the morale problems created by differentials.
If people believe they’re being discriminated against, they’re unlikely to give their best efforts to their employer. And even those who aren’t discriminated against suffer the morale problems of having to work with those who feel that they are. There is a business case not only for equality—which we have laws to protect, in the form of equal opportunity employment, fair pay, and non-discrimination—but for transparency, too.