Discussions about pay equity and the pay gap have been in the media spotlight for some time. In recent years, however, the focus on pay equity has shifted to legislatures, governments, employees, consumers, and — perhaps most importantly and necessarily — boards and senior executives.
As the topic of pay equity reaches more board meetings and C-suite agendas, legal, human resources and compensation teams often are called upon for quick answers. But reacting or jumping into a solution without a clear strategy and proper planning can lead to serious ramifications for companies and their governing executives, especially if the company gets this important issue wrong.
What Factors Have Led to an Increase in Pay Equity Focus?
In the United States, there have been pay discrimination laws on the books at the federal level and in most states for decades. But, in recent years, numerous state and local governments have passed new laws specifically aimed at closing the pay gap, with new laws being introduced in nearly every state. Currently, there are three different types of laws that have been enacted in an effort to reduce the gap in pay:
- Enhanced pay equity laws, which increase the requirements for achieving fair pay and raise the potential penalties for noncompliance
- Salary history bans, which limit companies' ability to request or inquire about the salary history of applicants
- Wage transparency requirements, which mandate that salary ranges and other information be disclosed on job postings and limit employers' ability to prevent employees from talking about their pay
At the same time, regulators from the European Union, the Asia-Pacific region and South America are increasingly adopting laws intended to close existing pay gaps and foster greater pay transparency. All of these measures have increasingly placed new, multi-jurisdictional compliance burdens on employers and the boards and executives who govern them.
The Challenges and Risks of Pay Equity Law Compliance
As fiduciaries of their organizations, boards and members of the C-suite play an important role in identifying the challenges and risks of — and getting their organization to address — any pay inequities that may exist domestically and internationally in the workplace.
Most boards and senior executives will task their legal, human resources or compensation teams to figure out how the organization can best comply with all the legal requirements around pay equity. But there is a risk in relying on just one silo of the organization to achieve compliance with pay equity requirements, as working toward equitable pay is and must be a team effort. Indeed, while the legal team is essential to understanding and ensuring compliance with the law, the human resources team must work with legal to understand and help conform the organization's policies and practices to legal requirements. Similarly, the compensation team and its input regarding how jobs are treated and compensated within the organization both vertically and across the organizational structure is critical to how compensation is managed within the organization. But those teams cannot work in a vacuum and must work together to ensure the organization focuses on and implements measures that result in it paying its employees fairly.
Even when all teams within an organization are aligned and working toward pay equity, compliance starts with the organization's overall compensation philosophy. That philosophy defines the organization's approach to compensation and its framework for attracting, retaining and rewarding talent. Such philosophy necessarily comes from the top and requires the buy-in of and oversight by the board and senior executives to make sure the compensation philosophy of the organization fits with its culture, size and resources; reflects the organization's mission and values; and supports its overall strategic objectives.
But pay equity within an organization does not happen by magic, as pay equity compliance is incredibly nuanced and can be complicated. As a result, to ensure the organization's compensation philosophy actually produces pay decisions that are fair and equitable, boards and senior executives should confirm their organization is conducting audits periodically. Such audits consider what factors drive an organization's decisions around pay — i.e., look at the factors built into the compensation philosophy — and determine whether those factors are producing differences in compensation that are fair and equitable or, alternatively, whether any differences unfairly correspond to demographic characteristics like age, gender or race/ethnicity. An audit will not just identify those employees in need of a pay adjustment to correct any differences based on demographic characteristics. It will also identify any policies or practices within the organization that are creating such pay differences so those policies or practices can be changed.
Most importantly, all the above tasks should be undertaken in a privileged context, under the direction and advice of counsel. Indeed, while there currently is a movement toward greater transparency with respect to pay at all levels, achieving pay equity within an organization requires a complex mix of business decisions and legal considerations. Boards and senior executives need access to information and data to consider such decisions without creating a body of evidence that could be used against the organization during an agency investigation or in future litigation.
Pay equity compliance takes time and effort, as well as vigilance. Only when all levels of the organization work together can an ongoing commitment to pay equity by your organization be achieved.