We Have a “Pay Gap” Problem – What Do We Do Now?

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Q: We have a “pay gap” problem – what do we do now?

A: Compensation differences between protected groups (e.g., gender, race) have long been of interest to organizations and enforcement agencies in the U.S. dating back to the 1960s[1]. In fact, the U.S. Census bureau has been tracking the gender pay gap for decades (see Figure 1). Recent analysis of 2023 census data shows that this gap has widened to 83% in 2023, compared to 84% in 2022. On the surface, it may appear that we have rampant pay discrimination in the U.S.! Before moving too quickly on that assumption, let’s get an understanding of what a pay gap really tells you and how it might differ from pay equity. The solution to the pay gap problem can be very different than the solution for a pay equity problem. Hint: pay gap problems can mostly be attributed to factors other than pay!

Figure 1. U.S. Census Bureau from 1960 to 2021

Source: https://www.census.gov/newsroom/stories/equal-pay-day.html

Defining Pay Gap

Broadly speaking, there are two types of pay gaps – unadjusted and adjusted. An unadjusted pay gap is commonly computed in a similar manner to what the U.S. Census Bureau reports: Step 1) find the average (typically median) pay of male and female employees within your organization, Step 2) divide the female average by the male average. This type of calculation will most often reveal a large gap, typically disadvantaging the female and/or racial minority groups within an organization. So, is this pay discrimination, or something else? And how do we fix this issue? One more refined way to compute a pay gap is to adjust for relevant factors that might affect pay, most notably the jobs employees are performing. Take for example the hypothetical organization below in Figure 2, showing a table of the average pay and headcount by gender for each job.

Figure 2. Hypothetical Organization – Adjusted and Unadjusted Pay Gap

In the above organization, the unadjusted pay gap is .83 (divide $72,644 / 87,107). The result suggests females are earning 83% of what males are earning. The adjusted pay gap accounting for the jobs people hold, however, reveals a very different picture. The pay gaps are calculated for each job, then averaged across all jobs to compute the adjusted pay gap, which is 1.00. Put another way, when taking into account the jobs performed, females are earning virtually the same amount as their male colleagues in the same job. In fact, the “Pay Gap by Job” column in Figure 2 shows that at a job level, females are earning the same or more than their male counterparts in all but one job (Manager).

The above example is fairly typical in the U.S. Clearly, this example does not appear to be rampant pay discrimination. The large unadjusted pay gap typically observed in organizations reflects labor market differences in job by gender and race. In other words, men tend to hold higher-paying jobs than women (see the “N” column in Figure 2 above – men outnumber women in higher paying job and women outnumber men in lower paying jobs).

Pay gap is not necessarily a “Pay Equity” issue. Why? Pay Equity is concerned with employees that are similarly situated (apples-to-apples comparisons) and differences in their pay after accounting for relevant factors that influence pay decisions (e.g., tenure, experience, location, etc.). To be clear, pay equity and pay gap are fundamentally different concepts. Pay gap methodology ignores labor market differences in gender and race availability, and other reasons, such as worker choice or family care responsibilities, that impact labor market availability. Should this problem be rectified? Absolutely! Is it an issue of pay discrimination? Not usually! Unfortunately, pay gap and pay equity are often conflated and attempts to reduce the unadjusted pay gap result in pay equity issues at a job level. So how do employers close the pay gap?

Solving for the Pay Gap Problem

Given the pay gap issue is primarily caused by differences in labor market availability for higher and lower paying jobs, a great first step in evaluating your pay gap would be to compare your workforce composition to that of the available labor market in your area. This analysis will inform whether an organization is overutilizing female and minorities in lower paying roles and overutilizing males and whites in higher paying roles, and vice versa. Digging deeper, employers can evaluate the composition of feeder pools for higher paying jobs to determine if they are adequate to support future utilization in the higher levels. These analyses will identify whether there are any barriers to promotion and upward mobility in the organization. Broadening recruitment practices to bring in diverse, qualified applicants, eliminating hiring requirements that are unnecessary or not job related, and offering training and development opportunities that facilitate career development will pay dividends in closing the pay gap.

If you have questions or are looking for more information about reconciling pay issues, please email us at bai@berkshireassociates.com or submit the form below.

[1] The United States Equal Pay Act was signed in 1963, protecting pay discrimination on the basis of sex.