With thanks to Barbara Klementz for authoring this post.
Gender pay gap and pay equity are big discussion topics for companies around the world as more and more countries enact laws intended to close the gender pay gap and as case law develops involving discrimination claims related to pay equity. Beyond strictly legal obligations, many companies also face shareholder and employee pressure for increased transparency around diversity and gender pay.
The Gender Pay Gap vs. Pay Equity
In brief, the gender pay gap relates to the average difference in pay between men and women within an organization. By contrast, pay equity or equal pay relates to the question of whether men and women are paid equally for equal work and whether any disparity in pay for equal work is discriminatory. Many organizations have a gender pay gap; this is typically influenced by a variety of issues, but particularly by the lack of women at senior levels of the organization. A gap does not necessarily mean there is discrimination either in relation to pay or progression, but identifying and analyzing unexplained differentials can be the first step in furthering a company’s diversity and inclusion goals.
Most countries have legislation prohibiting discrimination in respect of employment decisions and requiring equal pay for equal work. But the gender pay gap has been slow to close, prompting a number of countries to introduce more stringent rules. These range from requiring at least some employers (usually if their employee headcount exceeds certain thresholds) to report publicly on their gender pay gap to more aggressive regulation such as disclosure of compensation paid to peers and bans on requiring job applicants to disclose their previous salary. EU countries and some US states are at the forefront of these efforts, but it is expected other countries around the world will follow suit (if they have not already).
Companies are well advised to get in front of these issues by assessing their own (potential) gender pay gaps and any risks related to discrimination claims for lack of pay equity. This usually involves a pay audit at least in the countries in which gender pay gap reporting is required or expected to be required. It is advisable to engage legal counsel to keep the audit under legal privilege since pay audits (even where voluntary and confidential) may otherwise be disclosable to would-be claimants in litigation.
When conducting an audit and/or preparing for (public) gender pay gap reporting requirements, an important question is how to determine the items of compensation that need to be factored in to determine “pay.”
Share-based compensation does, in many cases, comprise a big (if not the biggest) element of an employee’s total compensation. Therefore, it does make sense that many countries that mandate gender pay gap reporting require (either expressly or implicitly) that share-based compensation be included when determining (and reporting) an employee’s pay. For instance, the UK’s 2017 Regulations require covered employers to report the difference in mean bonus pay between male and female employees. “Bonus pay” is defined to include shares, share options or restricted shares, among other things. (For more on the UK Regulations, please see here.)
How to Calculate the Value of Share-Based Compensation
However, what is not always clear (or consistent) is how to calculate or value share-based compensation. Different approaches include:
- Using the fair value of any share-based award at the time of grant (i.e., equal to the accounting expense for such award),
- The amount included in the employee’s taxable income (usually at the time of issuance of the shares after meeting vesting conditions), or
- The intrinsic value of all outstanding awards in any particular year.
Any of these alternatives arguably do not represent a “fair” representation of the value of the share-based award. The fair value at grant or the intrinsic value in any given year could be misleading because employees may never actually benefit from the award if vesting conditions are not met. On the other hand, relying on the taxable income could differ from country to country depending on local tax laws (e.g., some countries view vesting/exercise of an award as the income tax event, while others allow deferral of tax until sale of the shares) and, at least in the case of options, employees decide when to exercise the options so the income could vary significantly from year to year.
We are far from reaching a global consensus on how to value share-based compensation for pay equity or reporting purposes, and in some countries, further clarifications (and possibly case law) will be required to determine how share-based compensation is to be valued.
Whatever the approach on the calculation of share-based compensation, companies will need to be ready to report share-based compensation as part of the gender pay gap reporting requirements. This may entail working with a plan broker to share relevant data with local entities that must comply with local reporting requirements (keeping in mind data privacy restrictions, which may differ from country to country).
As you can see from the above, although gender pay gap and pay equity considerations are a reality for almost all multinational companies, the details of compliance are complicated and will almost certainly remain in flux for years to come.
To assess your company’s potential exposure for gender pay gap compliance and discrimination claims related to pay equity, working with legal counsel to conduct a pay audit is an important first step. For more information on how we can assist, please see here.