The Gender Pay Gap: Can You Explain Your Salary Differentials?

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May 1, 2014

There is a gender pay gap. The attention to the issue by the media is fully warranted.

Academics are arguing over the size of the gap but it exists in virtually every occupation, even those like teaching and nursing where women far outnumber men.

But, HR is one of the rare fields where there is no differential.

Managers should be able to explain

The reasons for the gap have been debated in numerous reports and articles. The pressure to close the gap will almost certainly increase. Government is now asking if there is “a legitimate explanation for the difference” in compensation for women (as well as other protected class members).

That’s a legitimate question. Managers should be able to explain differences in pay. In this era of increasing transparency and openness, all employees are likely to be interested in that answer.

Government’s shift in focus is in line with changes in society and in the culture of our organizations. That is best illustrated by recent articles in prominent business publications.

A 2013 article in The Wall Street Journal says it all: Workers Share Their Salary Secrets: Office Taboo Fades as Younger Staffers Openly Compare Pay; Wanting to Know ‘Have I Settled?”. It concludes with advice on “How to Discuss Pay at Work.” A year earlier, Forbes carried a column by the prominent pay expert Ed Lawler titled, Pay Secrecy: Why Bother?

The concern with the gender gap is global. The Organization for Economic Cooperation and Development (OECD) in Paris has addressed the issue in several reports (including one that I authored). The focus on the gap stretches back to the late 1970s.

Pay secrecy policies violate the NLRA

Not too many years ago, employers maintained complete secrecy; employees could be fired and were for discussing pay. Those policies still exist but are obviously contrary to the values and behavior of young workers.

The Journal article opens with a comment by a new hire at Apple who was told not to discuss pay. Not surprisingly, that triggered his curiosity and prompted him to ask co-workers what they were paid.

(Note that secrecy policies violate the National Labor Relations Act. The NLRA gives workers the right to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” That protects discussions of pay and other work practices – and is not limited to union members.)

In the past, secrecy enabled employers to hide poor salary management. Culpability exists at all levels – from employees overstating job responsibilities to favoritism and discrimination by managers to inadequate oversight by HR. Salary increase budgets force managers to compromise. Widely used practices make it possible to favor friends or hold down the pay of employees they dislike.

The fact is that salaries are more closely aligned with tenure than individual contribution — despite the rhetoric about rewarding performance.

It’s tough to catch up

Prior to the recession, very few employees were denied an annual increase. The result with compounding is that the longest tenured employees commonly have the highest salaries. That standard practice means starting salary is a factor throughout an employee’s career.

Employees, both male and female, who start at lower pay levels often never catch up, regardless of performance. Starting salary is the single best predictor of career earnings.

Going forward, the problem could get worse. Salary increase budgets have rebounded; recent surveys show employers are budgeting 3 percent or so. But there is increased focus now on rewarding the outstanding performers – the “A Players.”

Employers are also responding to competitive pressure to allocate increase dollars to high demand occupations in technology, engineering and the sciences. That more than likely will mean reduced funds for job families dominated by women.

The problem is compounded by media attention to pay issues as well as the increased availability of pay information on the Internet. Workers who may not have seen meaningful increases through the recession should be expected to pay attention to those reports.

Secrecy is never a good HR policy

Glassdoor, the prominent jobs and career site, now posts company reviews, including anonymously contributed job-specific pay information, on 500,000 companies. As this was written, a private equity firm recently agreed to invest up to $100 million in another of the companies in the business of providing pay and benefit information. Several startup companies now compete in this changing market with the firms that conduct conventional benchmark job surveys.

In today’s climate, secrecy is never a good HR policy, especially when the goal is winning the trust and commitment needed for high performance.

The reaction of employees if salaries are posted will always be an unknown. There will be disgruntled employees and potential law suits but with necessary adjustments the company should expect to move quickly past this. It can be a time to recommit to defensible practices. Companies like Whole Foods have made employee salaries public and are convinced it was the right decision.

For several reasons this is not an issue that will be dropped by advocates in the near future. It warrants attention.

3 steps you can take

To conclude, let me suggest three steps:

  • Review salaries for employees in similar jobs and for groups that work together regularly. Also review recent increases and performance ratings for possible discrimination and bias. Conduct a statistical analysis comparable to that a federal agency might complete. If problems are found, make commitments to the employees to make necessary adjustments.
  • Review communications practices. With this issue employees want – need – to understand how their pay is determined. Focus groups would be useful to identify misunderstandings and deleterious rumors. Consider town hall meetings to update employees.
  • Review manager training programs on salary management and performance management. Survey employees on how well managers handle these duties. Provide coaches. Reward those who are most effective. Consider creating a calibration committee to review future increases.

If pay differentials cannot be explained, it could be a costly problem. That’s especially true for federal contractors where a recent Presidential Order will increase transparency.

My experience in consulting and as a compensation manager tells me every company has pay problems buried in pockets across the organization.

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