The bonus blind spot in pay transparency that could lead to pay inequities

At the root of pay transparency laws being enacted by states and localities is the idea that, by giving job applicants the pay range for a particular job, employers will reduce any pay gaps between genders.

But such laws, including New York City’s requiring posting of “the minimum and maximum annual salary or hourly wage,” generally fail to explicitly account for one form of compensation ripe for bias—bonuses.

In some industries, such as finance and insurance, bonuses are one of the biggest parts of total compensation. In this sector, women earn 77 cents for every $1 earned by males, according to  Payscale Inc.

A study by PricewaterhouseCoopers of gender pay gaps in the U.K., which started enacting such laws earlier than the U.S., found that 75% of companies had a bonus gap above 10% in favor of men.

Related: What do employees want most? Transparency in pay, job security, and career pathways

“Bonuses and discretionary awards if not transparent could allow for one-sided deals. Favored employees could still come out ahead of others, and biases could lead to inequities in pay,” said Katerina Bezrukova, a management professor at the University of Buffalo.

“Depending on how states’ laws are written, in theory you could require disclosure of all forms of compensation similar to the way top officials of private companies are required to do under federal law,” she added.

Pay transparency laws started in Colorado, in 2021. New York City followed a year later. California, Illinois, New York, Rhode Island and Washington are among states with laws going into effect this year. Other states such as Alaska, Hawaii, Massachusetts, Michigan, South Carolina, Vermont and Hawaii are kicking around the idea.

Because bonuses are such a significant part of compensation, often up to 50% in financial services, “it’s likely there will be a push to include bonus eligibility information in job advertisements,” said Christopher Collins, a partner at Sheppard, Mullin, Richter & Hampton.

He noted that New York state’s newly passed transparency law, which goes into effect in September, will require a general description of other forms of compensation.

“Because benefits are so important to job applicants, we anticipate efforts to expand pay transparency laws to include a description of benefits offered,” Collins said.

Rhode Island’s new pay transparency law, which took effect last month, allows special damages of up to $10,000 for an employer’s failure to comply, plus damages including attorney’s fees. Michael Ferron, an employee rights attorney at Sinapi Law Associates in Warrick, Rhode Island, said some job candidates are beginning to consider alleging violations. “We’ve started getting those calls,” he said.

The state law includes nearly all types of compensation, except for tips and overtime. Reading a section of the law aloud, Ferron wondered whether bonus income could be construed to be included. “It would not surprise me one bit,” he said.

The growing number of states and cities with such laws will complicate compliance, particularly for companies with operations in multiple states. “Employers must consider the pay transparency laws in every location in which they operate, which can be challenging since so many states and local municipalities now have or are considering pay transparency laws with varying provisions,” Collins said.

Particularly vexing has been when employers recruit for remote work positions, said Cheryl Pinarchick, a partner in the Boston office of Fisher Phillips.

For example, New York City’s wage disclosure law applies to jobs that can be performed in the city. “Accordingly, the law applies to advertisements for remote positions that can be performed wherever the employee resides, because the position could theoretically be filled by an applicant who lives in, and thus would remotely (work) from, New York City.”

And many of the laws have lots of caveats. For example, night shift workers tend to earn a higher rate than those who work during the day. And many states permit employers to pay more based on seniority, although even that is tricky.

For example, Ferron said an employer in Rhode Island may increase pay for a more highly educated employee, but only if it is job-related and consistent with a business necessity. “That means a hospital may not pay a doctor who is qualified as a surgeon more than one who is not for the same position, unless surgery is actually part of their job.