What is Pay Equity?
The Equal Pay Act of 1963 protects against wage discrimination based on sex and requires that men and women be given equal pay for equal work, known as pay equity. While jobs and titles need not be identical to establish a basis for equal pay, the work performed in a particular position should be substantially the same. Except in certain situations, the five elements that determine whether work is substantially the same are:
- Skill: The experience or abilities required to perform the work
- Effort: The required mental or physical effort to perform the job
- Responsibility: The level of accountability given to the worker
- Working Conditions: Physical surroundings and potential hazards
- Establishment: A specific physical location, i.e., the Denver office of a national firm
Furthermore, additional protections have been put in place to prevent other forms of pay discrimination. Additionally, Title VII of the Civil Rights Act of 1964 prevents pay discrimination based on color, race, national origin, religion, or sex. Additionally, The Age Discrimination in Employment Act of 1967 prevents pay discrimination against workers based on their age. Finally, the Americans with Disabilities Act prevents pay discrimination based on both mental and physical medical conditions.
Companies’ compliance with these acts yields pay equity. Non-compliance results in pay disparity. This article will focus on how and where to report recommended disclosures relating to pay equity.
Where to Report on Pay Equity
In August 2020, the Securities and Exchange Commission (SEC) made several amendments to Regulation S-K, which outlines material qualitative information that businesses should disclose in SEC filings, particularly 10-Ks. Item 101(c), a subsection of Regulation S-K, was amended to require companies to “include, as a disclosure topic, a description of the registrant’s human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business.”
At this time, companies have broad flexibility in identifying which objectives or measures to disclose. PwC highlights diversity, equity, and inclusion (DEI) as an important issue of corporate responsibility. Pay equity is an important aspect of DEI, which companies should consider in their disclosure decisions to comply with the amended Regulation S-K. Companies should consider two sets of recommended disclosures related to pay equity: disclosures from the Workforce Disclosure Initiative and disclosures from the Global Reporting Initiative. Companies currently reporting on pay equity use these two sets of recommended disclosures in their SEC filings.
Recommended Pay Equity Disclosures
Workforce Disclosure Initiative
The Workforce Disclosure Initiative (WDI) is a platform that aims to enable companies to disclose workforce data involving direct business operations and supply chains. The WDI provides a survey to help companies show stakeholders more information regarding ESG issues. A section of this survey is titled “Workforce Wage Levels and Pay Gaps.” It outlines three recommended disclosures related to pay equity.
These disclosures are:
- Provide the company’s median gender pay gap for the company’s domestic operations
- Provide the company’s median ethnicity pay gap for the company’s domestic operations
- What action has the company taken, or intends to take, to reduce pay ratios and gaps? State any KPIs and progress towards these, as applicable.
The first and second disclosures are simple quantitative disclosures on any gaps between pay for men and women and between different ethnic groups. Accordingly, companies should explain the methodology used to gather the data on pay for men, women, and different ethnic groups. Companies should also explain how the ratios are calculated, for example, where mean hourly pay was used across the company. Finally, companies should also disclose whether the median pay gap relates to domestic operations, foreign operations, or both.
The third disclosure is a qualitative disclosure describing what a company is doing to reduce gaps in pay if they exist. Companies should explain their understanding of why gaps existed in the first place and what targets they have set to achieve pay equity. If this has been achieved, companies should specifically disclose what actions they will take to maintain that status.
Global Reporting Initiative
The Global Reporting Initiative (GRI) is an independent standards organization that focuses on helping organizations report on ESG-related issues. The GRI has released numerous standards for various ESG topics to help companies determine what information they should disclose to shareholders. In 2016, the GRI released “GRI 405: Diversity and Equal Opportunity,” which includes its recommended disclosure for pay equity.
The GRI’s recommended disclosure includes the following two items:
- Ratio of the basic salary and remuneration of women to men for each employee category, by significant locations of operation.
- The definition used for ‘significant locations of operation’.
The GRI explicitly focuses on pay equity between men and women and ignores racial pay gaps. According to the GRI, companies should disclose the quantitative difference between pay for men and women. These disclosures should include the average pay per gender for each employee category, offering a more granular approach to where a company’s pay equity efforts may be lagging. The GRI requires companies to report this information based on significant locations of operation. However, the standards give no information on what a significant area of operation is and require companies to disclose the criteria they chose to determine significance.
The amendments to Regulation S-K and continued stakeholder concern exert increasing pressure on companies to disclose relevant pay information. For companies seeking to understand how and where to report pay equity disclosures, both the WDI and the GRI provide several recommendations for these disclosures to include in SEC filings.