A report from the ADP Research Institute found that women entering jobs at lower pay than their male peers may find their career advancement limited.
The reason? Companies fear that promoting these women employees may reveal a pattern of significant disparity in total compensation when compared to their more highly compensated male peers.
The report, Rethinking Gender Pay Inequity in a More Transparent World, tracked the base pay, incentive pay, and average total income of an anonymous sample of 11,000 men and women from when they were hired into exempt salaried positions in the third quarter of 2010 through December 2016 to determine what disparities might result across the U.S. labor market. The workers in the study sample worked continuously for the same company during the course of the study.
ADP said an important focus of its study was the effect of incentive pay – such as performance bonuses – on overall compensation. “Unfortunately, many employers focus their internal studies of gender pay equity on base salary alone, because base salary can be easily captured from an HR system of record,” said the report. “As a result, employers are often not aware of gender pay disparities that may arise from incentive pay practices.”
The report found “a consistent pattern in initial salary distribution for males and females.” A disproportionately higher number of women were hired at lower pay when compared to men. The report found that this average pay gap would continue for the foreseeable future because once an employee started with a lower salary, it exacerbated a gap in incentive pay between men and women. The report noted that “incentive compensation is often negotiated separately from salary and may be subject to greater hiring manager discretion and less oversight.”
The report summed up the situation this way:
“Considering all the new hires from the 3rd Quarter of 2010 who stayed with the same job until 2016, women were hired at a base salary which was only 82 percent of that of men. Though the annual average growth in base was marginally higher for women, it was inconsequential in closing the gap in base salary after six years. Women fared even worse in the incentive pay arena since the average bonus-to-base percentage was only 83 percent when compared to men. In fact, average earnings for women over six years was worse than what they started with — going from 82 percent of men’s starting base to 81 percent of average total earnings of men.”
The study also found: “The average bonus amount for women was less than two-thirds of the amount paid to men who had equivalent base pay, age, and tenure. This incentive pay disparity was observed across all age, salary, and industry groups from the moment of hire and persisted throughout the six-year study window.”
This pay gap can have far reaching influence on who gets promoted within organizations, the report concluded. “As men and women establish proficiency in their current roles, the lower incentive pay assigned to a female may create a natural barrier to promotion, while higher incentive pay may confer a natural advantage to the male co-worker,” said the report. “However, the promotion of the underpaid candidate may bring unwanted visibility to systemically unfair pay practices that may have occurred over several years. It’s a natural question to ask, ‘If I am the better candidate for promotion, why has my co-worker received larger bonuses than me for the past five years?’ For some employers, the best way to avoid this uncomfortable question is simply to promote the employee with higher incentive compensation. ADP RI research clearly shows that in most cases, that employee will be male.”
Many employers want to work towards achieving pay equity and pay transparency. Among the ways to address the issue, according to the report, is for companies to perform a pay equity audit that looks at base pay, incentive pay and total compensation. The report also encourages organizations to review recruiting practices and guidelines, examine promotion decisions, create an HR technology ecosystem and improve communications “to help ensure employees and supervisors have a clear understanding of fair pay practices.”
Knowing the pay disparities that may exist within an organization is the first step in remediating the problem. In some states, the information obtained from a proactive pay equity audit may be used to stave off regulatory enforcement actions or can be used in defense of litigation in the event a claim is filed by an employee.
Employers unsure of where to begin with conducting a proactive pay audit should consult third-party experts who specialize in data consolidation, have regulatory knowledge, and the analytics to identify and remediate, if necessary, any pay disparities that may exist.
When it comes to addressing issues of pay equity, employers should err on the side of being proactive rather than being reactive to avoid costly regulatory penalties and litigation.
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