From Risk to Opportunity: How Employers Can Turn Pay Data Reporting into a Better Business

Workforce data is the fuel that powers engines of innovation and growth in the 21st century. Just as crude oil must be distilled in order to make gasoline, workforce data must be wrangled, segmented, and cleaned in order to maximize their impact. More and more, organizations are required to turn over their workforce data to regulators in their raw form, with little guidance for how this data could be analyzed. Such reporting requirements are increasingly focused on pay data, including wages, employee demographics, and hours worked. This article identifies key challenges companies face in tracking and reporting pay data, as well as strategies for transforming these challenges into opportunities for stronger, more equitable, and sustainable business practices.

Brief Overview of Pay Data Reporting

Pay data reporting builds momentum from year to year, both at home and abroad. Effective 2017, employers in the United Kingdom are required to submit data concerning the gender wage gap to the government on an annual basis. These gender wage gap reports are publicly available online. Since 2018, many Icelandic companies must proactively demonstrate gender pay equity or face governmental fines. In 2019, a federal judge temporarily reinstated the pay and hours worked reporting obligation known as “EEO-1 Component 2” for U.S.-based companies after the National Women’s Law Center sued the Trump Administration. Last year (2020) in Switzerland, an amendment to the national equal pay law became effective mandating publicly traded companies conduct an “equal pay analysis” and provide the results to shareholders. The pay data reporting trend continues into 2021 with the passage of California’s sweeping new law, Senate Bill 973.

California Senate Bill 973 is worth expanding on because of its scope–many organizations could be affected and not realize it. This law applies to private organizations 1) with 100 or more employees, 2) are required to file the federal Employer Information Report (EEO-1), and 3) have at least one California-based employee. Importantly, this includes remote workers reporting to a California location! The reports include data points for number of employees, annual pay, employee gender and race/ethnicity, location, job type, and annual hours worked. California regulators are clear that they will use the pay data reports to enforce equal pay and anti-discrimination laws.   

Looking at this trend in context, it is clear that pay data reporting is increasingly a C-suite issue because of the risks and opportunities embedded within employers’ data.

Risks Inherent in Pay Data Reports

Turning over sensitive information to government agencies without a strategy is risky. Perhaps the most salient risk is enforcement. As noted above, regulators use pay data reports to enforce anti-discrimination laws. How might they do this? This first component of California pay data reports includes  employee counts by location, job type, gender, and race/ethnicity. Regulators could use this data to examine the distribution of workers across gender and race/ethnicity in each job type. If women and racial/ethnic minorities are concentrated at lower tiers in the company hierarchy, this could be a red flag.  

Enforcement is not the only type of concern involved in reporting pay data. Investors could pass on companies after reviewing pay data obtained through shareholder resolutions, a strategy described by Arjuna Capital, an investment firm. Brand and reputational damage could be risk factors as well. The British news source The Independent publishes a list of companies with the worst gender pay gaps. Additionally, the impact of unfavorable reports on employee recruitment and retention strategies is a risk factor to consider. Nonetheless, these risks can be minimized by adopting a proactive approach to pay data reporting.            

Opportunities for Growth Involved in Pay Data Reporting

The global pay data reporting trend does not necessarily spell compliance doom and gloom. Pay data reporting obligations could be the spark that lights the way to better corporate health. The essential tool for turning risk into opportunity is a comprehensive pay equity audit. A pay equity audit, sometimes called an equal pay audit or a wage equity audit, is an analytical tool that seeks to explain internal pay differences in terms of justifiable business factors using statistical models. Such audits will typically involve multiple linear regression and other methods to properly identify unlawful pay gaps, isolating pay differences based on legitimate factors such as education and experience in the process. 

Doing a deep dive into pay data can also provide the right roadmap for improving recruitment, retention, and employee engagement concerns discussed above.  In his article, The 10 Commitments Companies Must Make to Advance Racial Justice, Mark R. Kramer highlights pay audits as an essential step toward combating policies or practices that lead to the devaluation of workers of color. “There is no longer any excuse for disparities in the wages paid to people of color and especially to women of color whose pay is twice discounted,” Kramer writes. “Conduct a wage equity audit, and make the adjustments needed to achieve fair and equitable pay.” Using pay equity audits, organizations can both reduce legal liability and improve employee and public engagement prior to submitting pay data reports. 

When to Seek Outside Support

Employers should seek expert assistance with their pay data reporting obligations in several situations. First, employers may have multiple human resource information systems (HRIS) housing required data in separate silos. Wrangling this data can be a significant challenge for management teams with limited IT experience or personnel. Without expertise in data science, organizations could make inadvertent disclosures in the reporting process, including “over-disclosing.” Second, statistical expertise is a necessity for conducting pay equity audits prior to reporting in order to identify which compensation practices are working, and which need to be properly remediated. Finally meeting key DEI goals requires a strong regulatory background, including expertise in the overlapping federal and state anti-discrimination and equal pay laws. In each of these scenarios, appropriate outside support ensures that risks are minimized and opportunities are maximized. In these ways, outside experts ensure the engines of innovation and growth are powered by the most efficient fuel source.   

Download and read our free California Pay Data Reporting White Paper to learn about what the law entails, who it affects, and how employers must respond.