Could Ability-Based Wages Close the Gender Pay Gap?

Could Ability-Based Wages…

How does your boss decide what to pay you? Is it based on your position, experience, or rain-making record? What about your core ability? An academic report suggests that income inequality and the gender pay gap could be reduced if people were paid based on their traits and abilities, rather than their job title.

Study Finds Income Inequality Thrives in Small, Professional Businesses

In July 2019, the Oxford Quarterly Journal of Economics published a new study about income inequality across the country. The study sorted through tax data for 11 million companies tracking the income of their owners and employees. It found that income inequality, which has been on the rise for over 40 years, coincides with the decline of traditional corporations and the increase in pass-through entities like S-Corporations and Limited Liability Corporations (LLCs).

S-Corporations are the favorite structure of small professional businesses focused on regional operations, like law offices, financial managers, and medical offices. In those businesses, owners and executives are far more likely to be part of the top 1 percent of earners, including lawyers, doctors, and wealth managers.

Productivity and Ability Doesn’t Justify Pay Gap

The study asked the question of whether these owners’ skills justified the difference in what they were paid. It found that the range of worker productivity is much smaller than the standard pay gap. Managers and rain-makers were approximately 50% more productive than the average worker at the company. But they were paid far higher.

Income distribution according to the study says the richest Americans earn 30% of all income, and the bottom 10% earn just 1% of the money. However, ability-based wages would narrow that spread and distribute wealth more equally across the population. When income is based on each employee’s education, IQ, age, and personality traits, the top 10% earned 19% of income and the bottom 10% earned 3%. The biggest difference came in the richest category.

Ability-Based Wages Could Help Close the Gender Pay Gap

It turns out, women in particular could benefit from the adaptation of ability-based wages. That is because women are distinctly underrepresented at the management and executive levels of business. In fact, this difference in job title makes up most of the gender pay gap. When the measurement of median income is limited by the same job and qualifications, the most recent data shows only a $0.05 difference. But an uncontrolled measurement shows that women earn only $0.79 for every $1 paid to their male counterparts. This demonstrates the systemic gender discrimination in promotion and hiring at the higher levels. For example, according to Payscale.com, by age 45, 38% of men had been promoted to a manager or supervisor level. By the same age, only 30% of women had reached the same level. The difference is even more stark at the executive level, which makes up 8% of men over age 45, but only 3% of women ever become leaders in their companies. This so-called “opportunity gap” shows that women tend to remain in lower-level positions throughout their careers (59% never move past the individual contributor level). Under the current model this equates to lower-paid positions, regardless of the women’s actual ability or productivity.

Equal Pay Act and Title VII Help Women Fight for Ability-Based Pay

All the statistics in the world won’t convince the owners of small professional businesses to change their pay model. But a well-argued complaint to the Equal Employment Opportunity Commission or in federal court might. Title VII of the federal Civil Rights Act and the Equal Pay Act both prohibit gender discrimination in wages. These laws, and their state equivalents give employees the tools they need to affect change at work and be sure they are paid what they deserve. If you believe you are paid less than your male counterparts for substantially similar work, you may be able to use an Equal Pay Act complaint to negotiate a different way to measure employee worth, and get properly compensated for your productivity and hard work.

At Eisenberg & Baum, LLP, our employment discrimination attorneys know how to use statistics like the Oxford report to prove your wage discrimination case. If you believe that you have been discriminated against as a woman in your small business, we will review your situation and help you plan a strategy to help you close the gender gap. Contact Eisenberg & Baum, LLP, today to talk to an employment discrimination attorney.

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