*The views expressed in this article do not represent the views of Santa Clara University.
Credit: Nick Youngson CC BY-SA 3.0 Pix4free
Despite federal regulations like the Equal Pay Act and widespread recognition of the issue, the wage gap in America continues to persist. As of this year, African American men reported earning 87 cents for every dollar that white men make, while Hispanic men make 91 cents, and API men make 95 cents. Some researchers believe that the wage gap between men is driven by factors such as employee referrals, bias in performance reviews and unemployment penalties. Other considerations such as hiring discrimination and unemployment penalties in interviews can drive unemployment for people of color. Race has been shown to impact job callbacks and interviews as well.
This is not an issue that uniquely affects the wage gap between men, however. In 2014, the uncontrolled wage gap between women and men was 73 cents for every dollar. That number improved to 81 cents by the start of the pandemic, but it has remained stagnant, sitting at 82 cents for white women today and showing few signs of improvement. That number remains even lower for African American, API and hispanic women at around 79 cents. Research shows that there are three main factors behind the pay gap between men and women: (1) women face pervasive gender and racial discrimination; (2) women are overrepresented in low-wage jobs and under-represented in high paying jobs; and (3) women bear the brunt of home and caregiving responsibilities. Some scholars also argue that the wage gap’s persistence is due partly to ineffectiveness of civil rights laws. For example, in order to prove a violation of Title VII or the Equal Pay Act, women must be able to meet hard to prove standards. They must show either: (1) evidence that a specific employer intentionally discriminated against them in terms of pay (disparate treatment); or (2) that a specific employer’s actions disproportionately affected her by showing statistical differences in pay between men and women (disparate impact). Providing evidence of unequal pay, or proving disparate treatment or impact by specific employers, is a difficult burden to meet. Such a standard is made more difficult to attain when employers prohibit employees from sharing data on salaries, the government does not collect salary data, and when employers are not required to disclose salary information. While the gender wage gap has improved over time, up almost 10 cents from 2000, progress has slowed today. The tiring progression of such efforts has led to efforts at the state and federal level.
In August of this year, the lack of progress led the SEC to adopt a set of final pay versus performance disclosure rules. These rules aim to standardize existing information related to the relationship between executive pay and company performance for investors. In doing so, the disclosure rules build upon the Obama Administration’s 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, improve transparency within the financial system, and provide stakeholders with easier access to public companys’ decision-making process. Set to take effect after December 16, 2022, the rules may pose a new and significant burden on some companies as they will be required to make three new disclosures.
A table disclosing the compensation of the CEO, the average compensation of the other NEOs, and three performance measures (Total Shareholder Return (TSR), net income, and a measure that each company chooses) for each year over the preceding five years.
A description of the relationship between the amounts “actually paid” to the company’s NEOs, and the three performance measures for each year over the last five years.
A tabular list of three to seven financial performance measures that, in the company’s assessment, represent the most important financial performance measures used to link compensation “actually paid” to the NEOs for the most recent year to the company’s performance.
The disclosure rules first require registrants to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years, or as many years as they have been in operation if less than five. Second, with respect to the measures of performance, a registrant will be required to report its TSR, the TSR of companies in the registrant's peer group, its net income, and a financial performance measure chosen by the registrant. Using the information provided, registrants must describe the relationships between the executive compensation actually paid and each of the performance measures selected, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group. Third, registrants will be required to provide a list of 3-7 financial performance measures that it determines are its most important performance measures for linking executive compensation actually paid to company performance.
While it may be a small step forward, the disclosure rules serve to better illuminate some of the pay dynamics inside American companies. Similar efforts at the state level demonstrate the widespread attention wage transparency has garnered at all levels, and the depth at which parties desire to remedy it.
A recent bill passed by California’s legislature could impose game-changing requirements on businesses within the state. Under this bill, which will be decided by Governor Newsom by Friday, September 30, 2022, all employers with 15 or more employees must include a pay scale. Scales must supply a reasonable estimate of the salary or hourly wage an employer would expect to pay for a given position in their job postings, even if done through a third party.
The bill also extends requirements in California’s Equal Pay Act by obligating employers, regardless of company size, to disclose their pay scale to any employee or applicant who request it. Previously, under the Equal Pay Act, this information was only provided to applicants, not current employees of a company.
Among the various other requirements imposed by the CA bill, SB 1162, the most notable, would obligate private employers with over 100 employees to compile and submit annual pay data reports. Within these reports, employers must include the number of employees by race, ethnicity, and sex in specified job categories. Beyond that, employers must also disclose which number of those employees fall within the pay band set by the US Bureau of Labor Statistics, as well as report the median and mean hourly rate of those employees “in each job category for each combination of race, ethnicity, and sex.” This portion of the bill would be the first of its kind to be implemented in any state within the US if the bill goes into effect. However, one issue that the bill has failed to discuss is whether it will apply to positions which could be performed remotely, whether that is done within or outside of the state of California.
On top of the requirements imposed by SB 1162, the bill also outlines penalties for companies that fail to comply. Failure to comply with the pay scale disclosure requirements of the bill will result in fines ranging from $100 to $10,000 per violation and failure to submit pay data reports will result in fines of up to $200 per employee. In an effort to give flexibility to companies attempting to implement these policies, the bill provides the caveat that an employer’s initial violation of the pay scale disclosure will not be subject to penalties, given they update job postings to comply with the requirement. Policymakers are not so generous in regards to the pay data reports, as employers will still be subject to a penalty for failing to properly submit pay data reports. However, initial failure to comply will result in a lower fine of only $100 per employee.
Supporters argue that SB1162 would “address pay equity from all fronts” by tackling issues of discrimination in pay for equivalent work, furnishing employees with greater bargaining power through knowledge of standard pay, barring consideration of previous salary earnings in the pay and hiring decision, and utilizing objective metrics to assess ways in which certain groups are inhibited from moving into higher paying positions. Critics of the bill, however, strongly label it a “job killer” and argue that it will lead to a “narrowing gap between pay for new employees and seasoned employees,” which ultimately ignores the factors considered in pay differences, such as years of experience or education. Additionally, employers assert that applicants’ lack of knowledge of the compensation philosophy of a business lead them to take a simplified view of the payment policies, as opposed to fully understanding the complexity of how compensation is configured, such as inclusion of benefits like health insurance, vacation days, and bonuses.
This movement towards stricter pay transparency will ultimately lead many companies, such as those within the tech industry with a strong presence in California, to direct extensive efforts to implement these policies prior to May 10, 2023, when the first reports would be due. Executives will need to expedite workplace solutions in order to focus attention on compliance through compilation and review of essential data that will allow companies to target weak policy areas that may leave the company vulnerable to fines once the bill is passed. Moreover, attorneys warn that bills such as this will inevitably lead to more litigation, as companies’ biased pay policies are brought to light and challenged through discrimination claims. The majority of companies within California, including big corporate names such as Apple, Google, and Oracle, will be among those which will need to reassess their compensation policies in order to comply with the proposed bill. While California’s Governor Newsom has until September 30 to sign the bill or veto, should the bill go through, it will go into effect on January 1, 2023. However, California companies are not alone in this brave new world.
In an effort to shift the equilibrium in the labor market, Colorado took the initiative to increase job-seeker bargaining power by passing the Equal Pay for Equal Work Act. Effective as of January 2021, the new law targets job postings requiring employers to disclose salary ranges in good faith. Given it’s still in its early stages, the effects of this law are still unclear. However, early study results have shown that tipping the scales may have led to increased labor force participation with a corresponding decline in overall job postings by employers.
COVID-19 has led to a mass exodus of jobs which some researchers have called the Great Resignation. Amidst the widespread labor shortage, incentivizing job-seekers to participate in the workforce through better pay, benefits, and work conditions is necessary.
Employers seeking to fill more than 11 million open positions have struggled to do so as they are limited to a shallow pool of only 6 million unemployed workers. On its face, it appears that Colorado’s transparency law seeks to instill job searchers with confidence such that it might energize and promote participation. Statistical comparisons using a state like Utah (similar demographic and economic conditions) are helpful in measuring the new law's effects. Utilizing the Labor Force Participation Rate (LFPR), a comparative analysis of Colorado (blue) and Utah (red) from 2020 to 2022 shows a strong correlation between the passing of the transparency law in 2021 and a spike in Colorado's LFPR. Similarly, research by Recruitonomics finds that Colorado’s LFPR increased 1.5% relative to Utah’s LFPR over the same period. The question remains, however, on whether the law has had a true impact on wages. An analysis of Colorado's average hourly wages from January 2021 to May 2022 shows that wages have grown 11.5%, significantly outpacing the U.S. national average of 6.5%. Although the data looks promising, it would be challenging to show an actual causal relationship between the passing of the law and the impacts on increased workforce participation and wages.
To no surprise, Colorado’s new transparency law has been met with resistance by employers. Using publicly available data via Indeed, Colorado job listings fell by 8.2% relative to Utah from early 2020 to late 2021. While COVID-19 made remote work more acceptable, the additional burden of disclosing salary information has led employers to “carve-out” or exclude Coloradans in job postings, including caveats such as: “This role can be performed remotely anywhere in the United States with the exception of Colorado.” These exclusions have been documented closely triggering software engineer Aaron Batilo to build the site coloradoexcluded.com with the intention of exposing the employers in question. Seeking to reassure job-seekers, analysis by the Colorado Department of Labor and Employment shows that 99% of remote job listings do not in fact snub Coloradans.
As one of the first states to pass such a law, Colorado has paved the way for other states, like California to enact similar legislation. Researcher Andrew Flowers hypothesizes that: “[a]s more states and cities adopt similar transparency laws, [...] companies will have a harder time of restricting their hiring markets in order to skirt compliance.” In fact, transparency laws currently pending in Washington, New York, and California may just be the tipping point to enacting real change on the wage gap front from employers.
At the federal and state levels, efforts to promote transparency at all ranks of the corporate world are promulgating transparency amongst stakeholders and empowering employees. The multifaceted aim behind these efforts is being set upon closing wage gaps, helping stakeholders receive the consistent, comparable, and decision-useful information necessary to evaluating corporate compensation expenditures, as well as improving employee and applicant standing.