A 2018 study published by the Federal Reserve Bank of Cleveland looked at a variety of possible causes of the stubborn wealth gap between white Americans and African-Americans including generational wealth, home ownership and investment returns. They determined the most influential cause of the wealth gap is the income gap. We looked at some ways that blacks could help themselves in previous blogs – encouraging school choice options at the elementary through high school levels and pursuing higher earning majors at the university level. However, there are some things that corporate America can do to assist in this regard.
First, stop asking candidates what they were making in their last job or what they are looking to make. Multiple studies make it clear that the salary history/salary expectation question has been a significant factor in the income gap for women and minorities. Here’s an anecdotal but true example shared with me by a VP of HR. A Division President and the VP of HR had been interviewing recent college grads for an entry level technical position in the company. They had already hired three male candidates at $40,000 per year and were interviewing a young, Hispanic female. At the end of the interview, the President asked her what she was looking to make. She said $36,000. After the interview the President instructed the VP of HR to prepare an offer letter at $36,000. In this case, the HR leader refused, insisting they pay her the same $40,000 they had been paying. When the President asked, “why, she only wants $36k?” The VP replied, “because I don’t want to have to explain to a judge why she’s making 10% less than those guys and neither do you.” The President said he’d never thought about that.
Here’s another true, but anecdotal story that illustrates the second part of the salary dilemma. A young man completed college and took a job in the career for which he had prepared. After only a year, the young man determined that he had made a mistake in his career choice and began looking for something new. He took a job at a significant pay cut – seeing the offer as a type of life boat. He later found out that he was being paid less than most of his peers because he was willing to take the job at the lowest offer. The young man went on to work for over 10 years with that company, but was never able to catch up to his peers due to corporate rules regarding caps on raise approvals.
While this story happened to a young, white male, this happens to women and minorities much more frequently – they take a job at a lower rate and then have difficulty making up ground because of the way larger organizations structure compensation increases. In fact they often lose ground because increases are usually stated in percentage terms. Take the Hispanic female. If after a year she and all the other entry level employees received a 3% increase, she would go from $36k to $37,080 and the guys would go from $40k to $41,200. She’s now gone from $4,000 behind them to $4,120 behind. Repeat this over 10 years and you have a serious gap. She decides to leave the company and the next employer asks her what she was making. She tells them and they make her a better offer, but still well behind where she would have been had the original company started her at $40,000.
Organizations should decide what compensation a role is worth to them before advertising for it. They should be transparent about the compensation with applicants and should they find that they are not getting the talent they want at the stated comp level, they can always raise it. Many managers still feel that if they can “win” the negotiation – i.e. get the candidate to agree to a lesser salary – they have won something for the company. This thinking is counterproductive.
A second approach corporate America can take is to take a look at the gap between the highest and lowest paid employees in an organization. According to the Economic Policy Institute (EPI), CEO pay has increased 940% since 1978 while worker pay increased only 12% over the same period. This is inexcusable and is certainly fueling some of the Marxist and Anarchist activity of the past few years. While I loathe the idea of government interference in this area, I fear that it will come to pass if corporate boards don’t proactively address this matter.
Perhaps they could take a page from our food supply chain? If a company claims that a food product is organic, for example, there are third party (non-government) auditors who will certify that the claim is legit. Our food supply chain is full of third-party, non-government audits that give confidence to the buyer that the seller’s food or food packaging products are safe. What if a third party organization were to develop standards for compensation structures along with an auditing process for certifying that a company is a “fair compensation firm?” This would mean that executive compensation is within a reasonable range based on the size of the company. I’m just brainstorming here, but I would encourage corporations to do something before they are forced to.
Some other ideas that would help the income gap include expanding ban-the-box laws. The National Employment Law Project reports that 36 states have adopted ban-the-box laws in some form. Here’s the gist – most employment applications have some form of the question, “have you ever been convicted of a crime?” Even though many include the disclaimer, “having a conviction does not necessarily affect your eligibility…” the actuality is that those applications were usually placed to the side. Ban-the-box prohibits employers from collecting this information at the application stage. It does not prohibit them from having criminal background screen criteria as part of their selection process, but it forces them to decide if a candidate is worth pursuing before asking that question.
Here’s an anecdotal example of how ban-the-box can work to a minority candidate’s favor. I once worked for a company that had a firm, “no felony convictions” policy. I later found out that one of our regional managers had a felony conviction – he had made a mistake in his youth and served prison time for selling cocaine. He was also related to one of the company’s founders who convinced the other founders to take a chance on him. He turned out to be one of the better unit managers and later regional managers in the company. Had he not been sponsored by someone at the company, his application would have been rejected prior to the first interview.
One final suggestion to corporate America – build applicant tracking systems that block out candidate’s names during the early phases of applicant screening. This is a simple engineering solution to biases we have when we see a candidate’s name. If Michael, Terrence, Alison, LaKeisha, Mohammed, Sofia, Juan and Jun Li all apply for the same position, any human screener is going to favor some of these names and have hidden biases against others.
Research shows that the longer a person remains a candidate, the less those biases effect hiring outcomes. It is the screening out of people early in the process that contributes greatly to the on-going income gap.