Equal pay is moving to the forefront of regulators’ and decision makers’ focus globally. While some countries have already imposed equal pay legislations, others are just now putting new legislations into effect. Starting this year, Swiss companies with more than 100 employees are obliged to conduct an equal pay analysis and report on the results. In Switzerland, the pay difference between female and male employees in similar positions is still significant amounting up to about 19% in 2019.
The issue of pay equality is also a predominant topic on Board of Directors’ agendas. Firstly, equal pay relates to the principles of fairness and no discrimination and is therefore part of most companies’ codes of conduct and compensation strategy. Boards are to be informed on the roots of inequalities and remediation activities pursued. Secondly, there is raising investors’ interest on ESG topics related to equal pay, including employees’ satisfaction and diversity. A company needs to work on its positioning and develop an ESG strategy. Thirdly, emphasizing equal pay acts as a signal for current and potential future employees regarding a company’s talent strategy and may positively affect its reputation
Many companies have recognized that pay gaps are often also related to low female representation on senior management levels. At the same time, there is consensus in academics and the economy that not only more women in senior positions but diversity in general correlates with higher performance. Specifically, diversity can foster profitability and innovation, enable stronger governance and better problem-solving abilities. Studies have shown that revenues are 19% higher in firms with more diverse leadership teams. In terms of long-term value creation, companies which actively support gender diversity on senior management levels have a 27% higher chance to outperform their peers.
Notwithstanding the above, current statistics for the Board of Directors level show that there is still room for improvement regarding female representation on senior management levels worldwide. In Europe 27% of Board of Directors of the largest publicly listed companies are female on average with France topping the list with 44%.
In Switzerland, the share of female Board members has increased over the past years but is still below global median levels of 31%. Looking at SMI and SMIM companies, women represented 11% of Board of Directors members in 2014, 18% in 2018 and 24% in 2019.3 Within the pending revision of the Swiss stock corporation law, listed companies will be required to have at least 30% female Board members and 20% female members on the Executive Committee. In case of non-compliance a company will have to report on the background (“comply or explain“).4 Form the point of entry into force of the new law, firms will be given five years to implement the changes.
Bearing this in mind, the need for action is clear, as currently a mere of two of the 20 SMI firms comply with the targeted ratios. There is a considerable welfare impact. Based on estimations, closing the gender gap could add USD 28 trillion value to the global economy by 2025, which represents a 26% increase in global GDP.6 This viewpoint puts an emphasis on how companies can leverage initiatives around equal pay within their talent management strategy to embed a culture of diversity and inclusion and thereby increase the company’s performance and long-term value.
Globally, legislations are increasingly requiring equal pay for equal work. The approaches and development of such regulations differ a lot between countries. For example, since 2018 the German “Entgelttransparenzgesetz” requires companies with more than 500 employees to compile an assessment and subsequently file a report on their pay gap. Further, in smaller companies with a minimum staff of 200, employees can request information on how much their colleagues in similar positions earn.
In the US, the “Equal Pay Act” (EPA) already came into force in 1963. Although pay differences are not persecuted, employees with a claim can contact the Civil Rights Center to investigate the cause. However, companies are not required to assess and report on equal pay. As a result, in 2019 only 65 of the largest 890 companies reviewed and disclosed information regarding the gender pay gap.8 This lack of transparency makes it difficult to detect pay inequalities and holds back the convergence of female and male pay in the US labor market.
In UK law, equal pay is incorporated and set out in the “Equality Act” since 2010. Based on this regulation, the gender equality clause is automatically included in all employment contracts. For companies with more than 250 employees, a legislation introduced in 2017 requires the annual online publishing of the gender pay gap data for total pay and variable pay separately with a voluntary explanation.9 Nonetheless, in 2019 the pay gap among all employees was still 17.3% in 2019 although it decreased from 17.8% in 2018.
According to the WEF Global Gender Gap Report 2020, Iceland has the world’s smallest gender pay gap with a woman earning 0.877 dollar for every dollar a man makes.11 Moreover, in 2018, Iceland was the first country to make gender pay discrimination illegal. The established law stipulates that all companies and government agencies employing at least 25 people must obtain government certification of their equal pay policies with violations triggering high fines.
In 2018, the Swiss Parliament adopted an amendment to the Equality Act including a new section on equal pay requirements. The new provisions enter into force on July 1, 2020 and require companies with more than 100 employees to conduct an equal pay analysis which will require demonstrating compliance with the law and prove that no gender discrimination exists.
When analyzing the pay gap, a differentiation between “explained pay gap” and “unexplained pay gap” needs to be made. Real discrimination is derived after adjusting for contributors to the explained pay gap. For example, the pay gap in Switzerland has decreased over the years and was 18.3% in 2016 on average with 44.1% of this gap not being explained by objective factors.
The explained pay gap represents differences that stem from legitimate business factors such as professional position, job experience or tenure. Additionally, performance differences and part-time work are legitimate explanations for differences in pay. Further, differences may be caused by industry with more men working in higher paid industries. Roots that became less significant over the last years but still contribute to causes of inequalities are the level of education and the choice of study. For example, within the last 10 years the share of population aged between 25 and 34 with a university degree increased from 9.8% to 42.3% for women and from 14.4% to 34.7% for men.