This article first appeared on HBR.org. You can access the original article by clicking here.
Pay equity regulation and compliance efforts have been steadily growing across Europe and Canada. Their evolution is a sign of what may be ahead for U.S. businesses. This new reality highlights the important role pay equity audit, or PEAs, will play as a tool to address increasingly stringent pay equity regulation.
Take the U.K., for example. Pay discrimination has been illegal in the U.S. and the U.K. for decades. However, only recently, with the 2017 issuance of Gender Pay Gap reporting regulations, have U.K. companies become more aggressive in identifying and addressing gender pay gaps. Following the implementation of the new law, our recent survey with Harvard Business Review Analytic Services found that 86% of U.K. respondents said their company had undertaken a PEA.
U.K. respondents’ widespread use of PEAs seems rooted in the demands of the stricter reporting regime they must now follow, especially when compared with their American counterparts. Fifty-four percent of U.K. respondents cite pay reporting requirements from national and regional governments as external drivers for them to perform pay equity analyses, versus only 28% of their U.S. counterparts reporting the same. And the U.K. law is having an effect. U.K. officials reported a reduction in the gender pay gap by 8.6% from 2017 to 2018.
The U.S. is catching up to the U.K. Federal reporting requirements have been expanded, and many states and localities are changing their laws to fill in gaps in federal regulatory enforcement. This growing tapestry of federal, state, and local regulations will pose challenges to organizations as they are required to address gender and ethnic/racial pay gaps in the U.S. Increased use of PEAs byU.S. businesses will be a critical part of achieving compliance as these pay equity regulations become more prevalent across the country.
While PEAs provide a first defense to federal, state, and local pay equity regulations, businesses also are embracing them preemptively rather than waiting until regulations force their use. A PEA is an analytical tool that seeks to explain internal differences in pay across the workforce in terms of justifiable business factors, usually involving regression analysis of an organization’s pay groups. By providing employers with a granular view of the consequences of their pay practices, PEAs help to evaluate whether those practices best support the organization’s priorities. That is, PEAs provide opportunities to reexamine whether pay practices are best practices.
Additionally, regularly conducting PEAs and communicating their results can reduce both the risk of a pay discrimination lawsuit and the financial exposure in the event such a lawsuit is filed. These returns accrue through two mechanisms.
First, PEAs improve perceptions of the legitimacy of observed pay differences. PEAs can show that legitimate business factors explain the vast majority of pay differences. Perceptions of discriminatory pay rates fall from 48% among respondents at organizations that have not conducted PEAs to 29% among respondents at organizations that have done PEAs. Conversely, pay differences are more often attributed to factors such as prior compensation (rising from 48% to 61%), job performance (rising from 15% to 23%), and job-related abilities (rising from 21% to 26%) when PEAs are conducted. These business factors gain importance among respondents who have conducted PEAs.
Second, PEAs provide opportunities to address any remaining pay disparities pro-actively, thereby further reducing litigation exposure.
Such PEA-grounded pay adjustments not only further reduce litigation exposure, but they also enhance the organizations’ reputation of being committed to equitable pay. These reputation effects offer three additional dividends in terms of hiring and retention, customer acquisition and loyalty, and providing the organization with a more credible voice in shaping the evolving regulatory landscape through legislative means.
For these reasons, U.S. employers that have still not done so might want to start scrutinizing their pay and advancement practices right away. Those employers who have started taking a closer look at their pay practices may want to assess whether those efforts are sufficient. Many companies believe they are conducting PEAs, but most are falling short both in the rigor of their analyses and in their ability to clean and consolidate their data sufficiently to ensure accurate results.
Our survey found that for many respondents, concerns about their data quality are one reason they don’t pursue PEAs more vigorously. Assembling complete workforce data can be a major barrier when there is missing information about job and employee characteristics, such as working conditions, direct and/or indirect reports, key performance indicators, benefits information, education, certifications, and experience.
Many U.S. companies are ill prepared to conduct pay equity analysis, with only half of respondents, at best, compiling data on every employee’s performance, job characteristics or employee characteristics. Getting better organized with data is the only way to accurately move forward.
To learn more about the survey, please read the full report, which can be found here.