Understanding ‘Equal Pay’ and How to Achieve It

In late August, the White House rolled back an Obama-era rule meant to shrink the gender wage gap by requiring large companies to report what they pay employees by gender and race. Despite this change, pay equity remains a hot topic at the forefront of CEOs’ minds. A Forbes review conducted in 2017 found that 72 large, publicly traded companies—including Intel, Amazon, Delta, and Salesforce—have committed to conduct pay equity analyses, and have established a policy to drive diversity and equal opportunity. Companies and shareholders are increasingly seeing pay equity as a strategic business imperative—one that drives access to diverse talent, and subsequently, innovation and growth. A surge in pressure from shareholders along with strong state and, in some countries, national regulations (such as those imposed in Iceland) have also been effective in compelling companies to identify and correct pay disparities.

But what does “equal pay” mean? And how do we know when it’s been achieved? By understanding the different interpretations of “equal pay” and by taking a closer look at how companies can mitigate the gender pay gap, we can: 1) start to use the term more accurately, and 2) more effectively unpack what companies and other stakeholders need to do to tackle the gap.

First, Some Context

Women today make up nearly half of the workforce in the United States, yet continue to earn much less than men. In 2016, the US Census Bureau reported that the female-to-male earnings ratio (based on the median earnings of men and women in 2015) is 0.8 (or 80 cents to the dollar). Even when women perform the same jobs as men, and after controlling for observable variables, women earn 93-95 cents to the dollar of their male counterparts.

This gender pay gap adds up to tens of thousands—if not hundreds of thousands—of dollars lost over a woman’s lifetime. Inequality in the workplace also results in trillions of missed GDP dollars: A 2015 McKinsey study estimates that by 2025, gender equality in the labor market could boost US GDP by 10 to 12 percent compared to the business as usual scenario, and it could boost global GDP by up to $28 trillion.

At the current rate, women will not see equal pay in the United States until 2059. For women of color, the rate is slower, with black women having to wait until 2124 and Hispanic women having to wait until 2248.

Defining “Equal Pay”

There are several ways to look at “equal pay” within an organization:

• Organizational pay gap analysis compares the average salary of men with that of women across an organization. This calculation results in the largest estimate of pay disparity, as many companies have a disproportionate number of men in higher-paying managerial and leadership roles.
• By-level pay gap analysis looks at average female and male pay at each level in the organizational hierarchy (analyst, manager, etc.) to identify pay gaps within each management tier, regardless of functional division. While it accounts for some of the leadership representation gap, it doesn’t account for the fact that there are a disproportionately high number of women in back-end or support positions, as opposed to profit and loss positions.
• Like-for-like analysis (equal pay for work of equal or comparable value) examines the difference in salary that men and women earn in similar occupations.

The gender pay gap is caused both by explained (measurable) and unexplained (often difficult to measure) components. Measurable factors other than type and level of work include age, tenure in position, number of subordinates, and geography. Even when all measurable factors are taken into account, an unexplained gender pay gap persists. This unexplained gap reflects discrimination, implicit bias, social gender norms, and other difficult-to-measure factors—such as tendencies in negotiation that differ among men and women.

Companies often measure pay at the like-for-like level, while controlling for measurable factors. Equal pay at the like-for-like level shows that unexplained factors, particularly unconscious bias, in setting and administering pay are minimal. However, this level of analysis does not take into account the systemic challenges perpetuating the gender pay gap at the organizational level, such as occupational segregation by way of academic sorting, social expectations applied to those with caretaking responsibilities, and “in-group favoritism.” Factors like these inhibit women from rising in the ranks to leadership roles and entering certain industries that are higher paying. Companies also often hide gender pay inequity in non-reported bonuses, equity, and stock options.

Exploring Lessons in Achieving Pay Equity

In a recent case study conducted through the Haas School of Business at UC Berkeley, we took an in-depth look at how Gap Inc.’s company culture, practices, and policies have paved the way for pay equity at the like-for-like level and equal pay at the organizational level. We found that the company:

1. Has embedded principles of equality stemming from its co-founders, Don and Doris Fisher
2. Maintains female representation from entry-level through leadership positions (43 percent of Gap Inc.’s leadership team are women, compared to the retail sector’s 13 percent average)  
3. Has high-ranking women who serve as role models for women throughout the company
4. Nurtures a culture of mentorship and sponsorship
5. Integrates family-friendly policies, particularly flexible work policies
6. Combats unconscious bias in pay decisions through a robust pay equity process that empowers managers with pay data and market information

While Gap has demonstrated that it is a leader in this space, it and other companies have plenty of room to grow. To mitigate like-for-like pay gaps, pay transparency is important for employees to understand where they stand and why they are paid a certain amount versus what others are paid. Also, holding managers accountable for merit pay and having formal remediation protocols for pay disparities can ensure that manager discretion doesn’t promote inequality.

Best practices for mitigating the gender pay gap at the organizational level will increasingly include offering paid, non-transferable paternity leave. It will also include training managers on unconscious bias related to maternity and paternity leave, including parents returning to work. Companies are also increasingly offering programs that provide support and guidance for parents returning to work. Accenture, for example, has a Maternity Returners Program that provides career guidance to newly returning mothers and helps them transition back into their roles.

Additional promising practices include increased childcare support for working parents, especially mothers. Google, for example, has on-campus childcare and mother’s rooms. Patagonia, long recognized as a leader in on-site childcare, has found that in the past five years, 100 percent of moms have returned to work. This may not be an option for every company, but Patagonia has made the business case for on-site childcare through tax benefits, increased employee engagement, and employee retention.

Bridging the Gap

For companies seeking to address pay inequities at the like-for-like level, it’s important to start with a pay equity process that includes consistent monitoring, robust statistical analysis, providing managers with pay information, and remediation protocols. To address the gender pay gap at the organizational level, companies need to institute policies and programs to recruit, retain, and promote women, including addressing unpaid care needs, and enabling managers to combat unconscious biases and contribute to equitable workplaces. Government and civil society should support women in entering and growing their careers, particularly in non-traditional, higher-paying fields and jobs. Removing social barriers for girls and women and supporting STEM education are also important to creating meaningful social change that will positively impact business and economic growth. Ultimately, equal pay—and gender equality more broadly—is an ongoing process that requires steadfast commitment, collaboration, and a willingness to step up.

Read more stories by Kellie McElhaney & Genevieve Smith.