At this point, most people in the U.S. and everyone in the human resources profession are familiar with the statistic that says women make 80% of the pay that men do. Without debating the accuracy of that statistic or its causes, we want to provide a refresher on the legislative and regulatory environment for compensation professionals and the role, responsibilities, and scope of effectiveness for the compensation function itself. This is a big issue today with far-reaching public policy considerations. Our goal is to help our colleagues in the compensation field keep perspective so they can make the best possible decisions.
The Equal Pay Act of 1963 Overview
It is and has been illegal to pay women less than men for substantially the same work since 1963. Signed into law by President Kennedy on June 10th, the Equal Pay Act of 1963 (EPA) is still the primary legislation concerning gender pay equity. The EPA amended the Fair Labor Standards Act with the intent of abolishing wage disparity based on gender.
Summarized, the law provides that no covered employer may discriminate in pay based on gender for equal work on jobs requiring essentially equal skill, effort, and responsibility and which are performed under similar working conditions, the exceptions being those in which pay is differentiated pursuant to a seniority system, a merit system, a system that measures earnings by quantity or quality of production, and/or a differential based on any factor other than sex.
At the time of its enactment, Congress had specific policy goals in mind related to gender-based pay discrimination and noted that sex discrimination:
- Depresses wages and living standards for employees necessary for their health and efficiency;
- Prevents the maximum utilization of the available labor resources;
- Tends to cause labor disputes, thereby burdening, affecting, and obstructing commerce;
- Burdens commerce and the free flow of goods in commerce; and
- Constitutes an unfair method of competition.
At least partially because of this policy perspective, the Supreme Court has broadly construed the EPA to achieve Congress’ goal of remedying sexual discrimination. The Supreme Court believed that Congress passed the EPA to end the “outmoded belief that a man, because of his role in society, should be paid more than a woman."
A compensable factor is any factor used to provide a basis for judging job value to create a job worth hierarchy (job evaluation). Job evaluation and the use of compensable factors began well before the EPA, but the EPA codified the four permissible compensable factors as skill, effort, responsibility, and working conditions. Each factor is often further defined by degree or level required. Compensable factors apply to the job – not the position incumbent.
- Skill is the type and level of knowledge and ability required to perform the job at minimum acceptable standards. The factor and subfactor relied on most are level and type of education and experience, but other subfactors also exist, such as technical skills or interpersonal skills.
- Effort is the measure of the physical and mental exertion needed to perform the job at minimum acceptable standards. Subsets include complexity or diversity of duties, creativity of thinking, problem solving, physical exertion, assistance available, etc.
- Responsibility is the minimum acceptable depth and breadth of the extent to which the employer depends on the employee to perform the job to minimum acceptable standards. It is typically measured in terms of such subfactors as decision-making authority, scope of organization under control, impact of decisions, discretion, supervision received, etc.
- Working conditions are generally what you would expect: the conditions that would require you to pay more to find employees willing to perform the job. They include physical surroundings and hazards, danger involved, and discomfort due to environmental surroundings, as well as less obvious factors such as travel requirements.
At about the same time as the EPA, the Civil Rights Act of 1964 was enacted, which prohibited discrimination based on race, color, religion, sex, or national origin. Title VII specifically prohibits employment discrimination on this same basis. The Civil Rights Act was groundbreaking for many reasons, but we want to focus on the concepts of two distinct types of employment/pay discrimination: disparate treatment and disparate impact.
Disparate treatment is when an individual of a protected group is treated less favorably than others similarly situated. This is the most obvious and direct form of discrimination and applies to specific individuals.
Disparate impact refers to policies, practices, or systems that adversely affect one protected group of employees. The disparate impact theory under Title VII, which also applies to the EPA and gender-based pay discrimination, prohibits employers "from using a facially neutral employment practice that has an unjustified adverse impact on members of a protected class. A facially neutral employment practice is one that does not appear to be discriminatory on its face; rather it is one that is discriminatory in its application or effect."
Adverse impact is an element of disparate impact theory that measures the effect an employment practice has on the treatment of a protected group. Adverse impact does not mean that an individual in a majority group is given preference over a minority group; however, having an adverse impact does mean that there is the potential for discrimination, and it could warrant investigation. Disparate impact is usually unintentional and is not illegal in and of itself – it only becomes illegal if the employer cannot justify the employment practice as bona fide business necessity.
We suggest reading or refreshing yourself on Griggs v. Duke Power from 1971 because of how the case defined legal compliance and employment practice today.
Areas of Particular Focus for the Compensation Function
With that brief legislative recap, we can now focus our attention on the elements of a compensation system under the purview of compensation professionals and human resources team members with responsibility for program creation and administration. We say “compensation system” because the compensation function is much less focused on the pay of one employee than it is about all employees or all employees in a particular job. Referring back to our descriptions of discrimination types, the compensation function is generally more focused on eliminating disparate or adverse impact than it is about disparate treatment.
So, what is the compensation function’s role then?
Job Design and Job Descriptions
Job design and subsequent documentation is probably the single largest area where employers seem to systemically run afoul. Regardless of what seems to be common across organizations, there is a science, technical discipline, and basic system of job analysis and job descriptions. A job is a defined organizational unit and differs from a position – a position is incumbent-based while a job may be comprised of multiple positions – and is the basic unit about which compensation systems are concerned. Job descriptions are not the same as job postings.
In terms of helping ensure the system does not have an adverse impact, the organization should develop job descriptions that focus solely on jobs’ essential functions and specifications and eliminate the fluff that always seems to creep in. The specifications should be defined and use terminology aligned with compensable factors, particularly where levels of proficiency with respect to a factor are concerned. In addition, the specifications on the job description must be required for an incumbent to perform the job to minimum acceptable standards. It is generally good business practice to not overuse limiting requirements because that naturally reduces the number of potential employees and candidates from which you could chose, but there is clearly legal precedent to ensure any requirement is required by the job or otherwise by a bona fide occupational qualification (BFOQ). Griggs v. Duke Power set the precedent in 1970-1971 – you cannot establish a high school degree requirement for a job if that degree is not demonstrably required to perform the job. This same concern certainly exists today where jobs are defined to require a college degree without job-relatedness or some other BFOQ.
Of similar concern for potential adverse impact because it is difficult to know potential effects on a protected group are the requirements for professional certifications or licensure. Just as an example, we regularly see internal Accounting Manager jobs require a Certified Public Accountant (CPA) when there is no job requirement or BFOQ to support it. A CPA is a specific type of licensure required to prepare or sign off on audited financial statements, although any qualified accountant can prepare a compiled financial statement. This Accounting Manager job is not required to audit financial statements for the public, but organizations use the CPA as a proxy for a level of knowledge. This seems to make sense – you would think a CPA knows their stuff – but what is unknown and therefore potentially discriminatory is the process for getting the CPA itself. Maybe the CPA testing series is designed to be much easier for men than women – who knows? The point is that the Accounting Manager job does not require it, so you should not use it as a basis for candidate selection. Simply utilize another basis for determining professional competency.
Job Evaluation and Job Grading
Most base pay programs use a combination of job evaluation and market pricing to determine the pay opportunity organizations are willing to provide incumbents in job. Traditionally this pay opportunity is communicated in the form of a pay grade and range, but it is also communicated as a pay band and zone or some other similar approach. To help ensure gender pay equity, the compensation function should make sure the process of determining a job’s pay opportunity is compliant with the EPA and systemically supports gender pay equity.
The first area of focus is probably obvious – only use EPA-defined compensable factors when determining differences among jobs. The application of this can get a bit hazy but making a defined link between EPA compensable factors and how you define a job’s proficiency requirements or how you define levels within job families is critical to supporting gender pay equity. It is also important to focus your level descriptions and job specifications on a performance-neutral basis – remember that compensable factors are job based and competencies are person based. Leave text that speaks to levels of performance to your talent management systems rather than your job descriptions. So, you can include “smile at the customer” as part of a job duty, but do not include “smile broadly at the customer.” This is a bit tongue in cheek, but the simple term “broadly” requires some subjective definition and, in other cases, could lead to an adverse impact on a protected group.
In addition, most base pay systems today are market based and pay opportunity is heavily influenced by “going rates” in the market. The only way to ensure the validity of the argument that your pay system is based on the labor market in which your organization competes is to make sure the market data itself is valid and representative – not just from the perspective of job matching, although that is certainly important, but also that the data itself represents your markets. If asked, you should be able to list the participants in the surveys you use. This is tricky today because firms like ERI, Pay Scale, and others rely heavily on algorithms that predict market rates rather than summarize data reported for a specific job in a specific market. In most instances, it is impossible to see the actual data participants and, therefore, impossible to definitively say it represents your labor market(s). It may work fine for most of your pay administration needs, but it may not be precise or robust enough to defend a disparate impact claim.
Pay delivery in the context we use here is simply the process and policy you use to determine employees’ actual base pay, whether for new hires or incumbents. In addition to the compensable factors that affect pay opportunity, the EPA provides three specific exceptions: a seniority system, a merit system, and a system that measures earnings by quantity or quality of production – as well as a catch-all exception of “any factor other than sex.”
The compensation function is directly responsible for recommending pay opportunity, and it is possible for the compensation professionals to further describe pay ranges using pay range definitions to help establish an objective basis for determining where in the range incumbents should be paid or what new hires offer rates should be. For example, the base pay range for Julie’s job is $50,000 to $75,000 but where in that range should Julie be paid? Regardless of how much she actually makes, how much should she make? By defining compensation factors and competency proficiency levels and applying these levels to parts of a pay range, the compensation function can help a manager determine where in the range an employee should be paid. Rather than worrying about how much Julie is making at her current employer, the offer rate should conform to your system, which is based on your objective proficiency definitions and actual employee data.
For current incumbents, it is very common for organizations to use some form of system that provides relatively smaller or larger pay increases based on organization performance determination. For the compensation function, the challenge today is really about ensuring that the increases that vary based on differences in performance are consistent and objective. This means that the current trend of moving away from performance ratings and letting managers determine increases is very unstable unless you install some other form of centralized guidance or practice. Even under traditional systems with overall performance ratings, implicit bias is very real and influences manager determinations, so even less definitive guidance does little to help ensure gender pay equity.
There are also more subtle ways the compensation function can impact gender-based pay equity, such as over-grading. While this practice is really about job grading, we include it under pay delivery because it can bring your pay delivery policy into direct conflict with how you actually pay. When you over-grade a job, you put it into a higher grade and pay range (band, etc.) than your job evaluation system would suggest. If you employ a market-based system, then this suggests that your pay range is over your defined market. In addition to the risk associated with a disconnect in your job evaluation/grading process, a more subtle challenge arises if you do not strictly adhere to your pay delivery policy and ensure that incumbents are paid fully within the pay range. It would not be surprising to see a group of employees paid at the lower end of the range if their job was over-graded.
This discussion may seem to be about legal compliance, and it is to a great extent, but it is really more about good business practice and different functions and understanding how they each impact complex issues. The job of the compensation function is systemic and is expected to design and deliver an objective job-based framework with which the organization can manage pay in the context of its culture and philosophy. The compensation function can provide advice and counsel to HR colleagues and management, but the compensation function does not control job creation or make hiring decisions. Therefore, our final suggestion is to design a good system and educate others about its use through all means at your disposal. It will be a never-ending but impactful job.