How to Avoid the Pay Equity Trap
Meet Sally. A successful bank executive, she has worked in her industry for fifteen years. She is currently tasked with opening a new branch and finding the right candidate to fill its managerial role. After conducting extensive interviews, Sally decides to extend an offer to a young man who looks excellent on paper and is even better in person.
The only question remains: what salary should Sally offer?
The answer is not so easy. With the current job market tight, the renumeration must be competitive. But there’s another catch: Sally also has another branch situated a few miles away. This one employs a female manager earning an annual salary of $85,000.
Sally is stressed. She worries if she offers her candidate the same $85,000, it may not be enticing enough for him in a market favoring employees. He may go elsewhere. However, if Sally offers a substantially higher salary, say $95,000, then her female manager at the other location may have cause to sue for wage discrimination under the 2015 California Fair Pay Act.
What is Sally to do?
This story concerns a bank, but the challenge it poses concerns something called pay equity, an issue all companies doing business in California and an increasing number of other states must face. In 2015, California passed the California Fair Pay Act which “prohibits an employer from paying its employees less than employees of the opposite sex, or of another race, or of another ethnicity for substantially similar work.” Since then, the Walt Disney Company has been involved in one of the highest profile cases related to the law. In 2019 several women filed a suit against the Mouse for discriminating against females by paying them less than their male peers.
Though this laudable law is crucial to maintaining fair compensation practices, there are ways companies can pay employees who occupy the same position differently so long as the reasons aren’t related to the aforementioned protected classes of sex, race, or age. These include:
Seniority System.
If a company, as a matter of policy, favors workers who have been loyal employees for long periods of time, this is legally permitted. For instance, a man who has been with a company for a decade could earn more for doing the same work as a woman who has only been there for two years. Or vice versa.
Merit Systems.
Companies can reward employees with higher pay and benefits for outstanding work. (Again, if such a reward system is established policy.)
Systems Measuring Quality or Quantity of Production.
Higher pay or bonuses may be used as a reward for achieving production quotas, sales goals, customer rating averages, or other performance objectives.
Any other “bona fide factor”
These may include, but aren’t limited to, matters such as educational level, training, or relevant experience.
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Now that we have considered the validity of potential exceptions, I wish to emphasize when it comes to maintaining pay compliance, the key to avoiding, or minimizing, regulatory fines or litigation is documentation. Criteria must be established in writing and be readily available to all. Also, each employee’s performance must be carefully measured and recorded with regularity and consistency.
Still worried you might be in danger of noncompliance? Here are 3 ways to avoid falling into the pay equity trap:
1. Evaluate employee performance honestly. Like us all, employers prefer avoiding confrontation. As a result, they often default to making positive annual evaluations. However, performance inflation can come back to bite the company if/when the underperformer must report to a less forgiving manager, the manager decides to terminate the underperformer, and/or the underperformer sues, pointing to a history of nothing but positive evaluations. It’s better for managers to be honest from the beginning.
2. Don’t use inaccurate performance reviews to glean “merit” when comparing pay for the same or similar positions. If performance ratings are inflated ― or too low ― using inaccurate ratings to create a pay equity analysis can become a slippery slope. Organizational and human resources leadership must ensure performance ratings do not include large amounts of Rater Bias, (managers who uniformly overrate or underrate their people), Recency Bias (ratings mostly based on recent behavior/results, not historical data), Halo/Horns Effect Bias (allowing one positive or negative trait to override others), and/or other types of leadership bias.
3. Document, document, document! Many companies have begun eliminating annual performance reviews. While the case for ongoing coaching without an annual review can be compelling, it is imperative managers with direct reports still take copious notes regarding employee performance. The need for a robust written record of what workers have done well, and where they can improve, is still very real. Plus, personnel deserve a reminder of what was stated in coaching sessions. Also, if litigation occurs, the “paper-trail” will become critical.
Need Help with California Fair Pay Act Compliance?
Recently, Forbes interviewed me to discuss this issue in connection with AI-based automation in the workplace. In addition, my company Conover Consulting has performed CA Fair Pay Act Audits for clients to ensure compliance, and partners with expert economists and statisticians at Rule 26 on larger projects. With our team performing your Fair Pay Act audit, along with the oversight of qualified employment counsel, your company can be sure it is complying with the law. To learn more now, contact me for assistance or visit my website.