Addressing California's Pay Equity Problem

California's SB973 seems like an interesting innovation in legislative devices. Like tax policy, the law is employing data analysis to enact legislative intent indirectly by (1) creating the a private obligation to uncover and analyze information about pay equity; and (2) trusting that company managers, directors, and investors will exercise self-interest and take the necessary steps to remedy any pay inequities within their organizations.

Environmental, Social, and Governance (ESG) policies are among the non-financial factors used to evaluate a company. ESG includes pay equity – or more often inequity - among employee classes within an organization. Most notably is the wide disparity between the compensation for women and minorities when compared to their white male peers.

It is a timely issue. Mark Benihoff, for example, has been outspoken about pay inequity at Salesforce and led the effort to close the company’s pay gap.

Governor Newsom signed California SB973 into law at the end of the 2019-2020 legislative session. The law went into effect on January 1, 2021 requiring companies with more then 100 employees to report employee compensation based on race and gender.

Currently, federal law requires that company report similar information using the EEOC’s Employer Information Report (EEO-1). This gives the federal government an enormous dataset to produce meaningful analyses that inform the United States legislators when writing laws to with respect to pay disparity.

However, the EEOC’s efforts have been disappointing. The information gathering and aggregation may have produced meaningful analyses, but the insights have not influenced federal law in any meaningful way. The reporting burdens have therefore far outweighed any benefit.

My professional perspective is built around the thesis is that nearly every current event and all of history can be explained by tax policy and its consequences, both intended and unintended. I can cite dozens of examples (and yes, as you may be wondering, it makes me a fascinating dinner guest).

The United States is a capitalist democracy with a modestly educated population. These are the prerequisites to the US's current tax paradigm: the fastest and most effective means to implement legislation is through tax law. Read enough tax law, and the pieces come together like a stained glass window revealing our nation's principles and social priorities.

California SB973, however, presents a seeming evolution in legislation. Unlike the EEOC, the purpose of the law is not the information that is reported. Instead, the legislative intent is explicitly within the reporting process itself. By forcing the employers to analyze their compensation information, managers will be presented with the results. Presumably, managers and directors will take action to remedy the disparities, or be pressured into action by investors or stakeholders.

This seems an interesting addition to our legislative devices. Like tax policy, the law is enacting legislative intent indirectly by (1) creating the obligation to uncover and analyze this information; and (2) trusting that company managers, directors, and investors will exercise self-interest and take the necessary steps to remedy any pay inequities within their organizations.