Pay equity and human capital risk


Stakeholders of businesses have developed elevated expectations that their organizations demonstrate more transparency when sharing information about human resources and workplace programs. The spread of COVID-19 required businesses to respond with unprecedented speed to the urgent needs of its people, clients and communities. But while this happened, other events in 2020 shaped businesses in new ways, including an intense period of national reckoning on diversity, equity and inclusion.



Impact of new human capital disclosures

The upcoming spring proxy season will likely elevate the importance of equity and fairness, especially considering the types of executive compensation decisions made because of COVID-19-related workforce actions. Other new information will also be available as a result of the SEC’s recent move to modernize the human capital disclosure requirements to assist investors. Certain industries will be natural leaders in the level and type of information that is shared while others will lag, since human capital may not be material to understanding the business across all industry sectors.

Evaluating human capital measurement and workforce analytics capabilities •  What measures are material to understanding the business (not the HR function’s performance)?
•  What measures can be reliably and consistently produced?
•  What information has been shared by peers or people competitors within adjacent industries?
•  How can analytical results better inform more effective workforce management?

One consequence of this trend is the need for organizations to evaluate what human capital measures are currently in place and what gaps should be addressed. These disclosures will also help private companies, non-profits and public entities evaluate opportunities that are available to achieve a competitive advantage in the market. Finally, the richness of this new information will create an opportunity for human resources and financial leaders to quantify and refine the use of human capital measures that can help manage the business.



Broad-based employee compensation

Compensation programs are essential to achieve the strategic goals of businesses and attract and retain the talent necessary in today’s competitive business environment. Conducting regular reviews of broad-based employee compensation arrangements improves alignment to longer-term objectives and identifies potential human capital risks. For example, publicly reported instances of financial services industry compensation programs “motivating” questionable behaviors and activities produced a backlash and other unintended consequences, including financial, reputational and regulatory harm. Nonetheless, many companies still do not appropriately evaluate the risks associated with their compensation programs.

Unadjusted Pay Gap




Enter pay equity.


When business leaders and their human resources teams discuss the linkage between broad-based employee compensation programs and their goals of diversity, equity and inclusion, many refer to the unadjusted pay differences that exist between men and women. Data reported by the Bureau of Labor Statistics is used as a credible source to illustrate the national pay gap that exists across market sectors and occupational classifications. For example, the most recent fourth quarter of 2020 weekly earnings report indicates that women received 83.4% of the median weekly earnings of men for that period. The Unadjusted Pay Gap table reflects the women-to-men earnings ratio across selected occupations. This earnings ratio also varies by race and ethnicity, with women of all comparison groups earning between 75% to 96% as much median weekly earnings as their male counterparts.

Significant variations in pay equity regulations exist from state to state, creating a troubling environment for many employers to navigate. For example, starting Jan. 1, 2021, Colorado’s Equal Pay for Equal Work Act will prohibit all employers from discriminating because of sex (including gender identity) — alone or with another protected status — by paying less for substantially similar work in terms of skill, effort and responsibility. Every employer with any employees in the state will have to comply with the law. Other states have already adopted similar regulations, including limiting employers from requesting salary history from prospective job candidates or preventing employees from discussing their own compensation information with other employees.

Some form of a pay-equity ratio measure is likely to be voluntarily reported in public company disclosures this year as one of the measures adopted to meet the SEC’s requirements, as well as increased use by nonprofits where public scrutiny is high. By taking a proactive response, employers can avoid the impacts that the CEO pay ratio disclosure had when it required the total compensation of CEOs to be compared to the median employee’s compensation under the Dodd-Frank Act of 2010.

This national pay gap is not new. However, similar to other fairness and equity movements, we are likely at a breaking point with legacy compensation and human capital practices. The business and social environment has elevated the need for employers to review their human resources business processes, including the impacts of COVID-19-related workforce decisions and the opportunities employers have to restructure jobs to add value, not just reduce cost.



Pay equity reviews


At a high level, pay equity reviews help management evaluate potential contributors to pay inequities and the compounding impact of business processes that create pay disparities. Pay equity reviews will be an important planning item for 2021 as business seek to respond to support workforce diversity, effectively compete for talent and minimize potential liabilities. We encourage business leaders to begin this process by reviewing their broad-based employee compensation programs and identifying those individual, external and organizational factors they believe drive pay differences.

Once these initial conversations take place, business executives and their human resources leaders can use the information gathered to determine a process and timeline to conduct a pay equity review and strategies to close gaps and strengthen legacy practices.


Eric Gonzaga

Eric Gonzaga is a Principal and practice leader for the Human Capital Services (HCS) group in Minneapolis.

Minneapolis, Minnesota

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