Do Banks Pay Women and Minorities Less?

“The time is always right to do right,” Rev. Martin Luther King Jr.

Among the many attributes of community banks is that they tend to focus on creating great places to work. They contribute to local organizations and encourage staff to stay active in their communities. They often offer regular work hours. But, when it comes to pay equity, they have work to do, according to Christie Summervill, the CEO of BalancedComp.

Summervill, who has 21 years of experience consulting with community banks on how much to pay their staffs, has compiled data recently from 300 banks and credit unions to see what disparities existed between women and men, and between ethnic and racial minorities and non-minorities.

What she found surprised her. With some exceptions, banks tend to pay female employees who are salaried, which means they are classified as exempt employees, less than male salaried employees, and salaried minorities less than non-minorities. When they were paid less, it ranged from about 2.8 to 4.4 percentage points depending on the asset class; it was 2.4 to 4.5 percentage points for minorities.

Summervill presented BalancedComp’s findings at a Bank Director Compensation & Talent Conference in November in Dallas, but did not divulge sample sizes for each asset class.

Banks Tend to Pay Salaried Women Less Than Men

Asset size Average Male Compa Ratio Average Female Compa Ratio
$100M to $200M 86.2% 85.9%
$200M to $400M 100.6% 99.2%
$400M to $600M 101.2% 97.2%
$600M to $1B 100.7% 96.3%
$1B to $2B 103.5% 99.5%
$2B to $4B 99.61% 98.3%
$4B to $8B 99% 96.2%
$8B to $12B 103.1% 99.8%


Banks Tend to Pay Salaried Minorities Less Than Non-Minorities

Asset size Average Minority Compa Ratio Average Non-Minority Compa Ratio
$100M to $200M N/A N/A
$200M to $400M N/A 99.5%
$400M to $600M 98.1% 100.7%
$600M to $1B 97.4% 101.9%
$1B to $2B 103.4% 103.5%
$2B to $4B 94.7% 99.3%
$8B to $12B 97% 99.4%

Source: BalancedComp. Includes data on nearly 300 BalancedComp clients across 50 states. Data pulled in August 2021. The Compa ratio is the percentage of the market rate. The system is bridged to client payroll systems without compromising individual privacy.

It was a different story for hourly staff, classified as non-exempt employees, where few pay disparities exist. Summervill thinks banks struggle to find hourly staff these days, and so they may pay more attention to competitive pay levels for hourly workers.

She thinks pay inequities exist among salaried workers because of a lack of discipline in salary management. For instance, community banks may set salaries based on what people said they expected, rather than dissecting the data. “It doesn’t come from an ugly heart,’’ she says. “Community banks are so employee-centric overall. It’s a lack of discipline.”

The Equal Pay Act of 1963 requires that employers pay men and women equal pay for equal work, and some 42 states have expanded the act with various laws of their own, raising potential liability issues for banks, according to the compensation firm Aon. States with the strictest laws include California, Colorado, Louisiana, Massachusetts, New Jersey, New York, Oregon and Pennsylvania.

Gayle Appelbaum, a partner and compensation consultant for Aon, says banks tend to be more interested in analyzing pay equity when they have operations in states that mandate pay equity. She has performed pay equity studies for bank clients and has found there has been progress in gender pay gap disparity in recent years. On average, she says the gender pay differential falls in the range of 5% to 8% across the banking industry, when using advanced methodologies to sort, analyze and compare employee census data.

Because of the liability in such studies, many banks involve their general counsel or outside attorneys before delving into such reports in order to ensure attorney-client privilege for their findings. “There are still some disparities, but the data shows that a lot of improvements have been made [in closing the gender pay gap],” says Appelbaum.

Banks striving to diversify their employee base should pay careful attention to pay equity, she says. When disparities exist, they should be examined to make sure they are within a reasonable range and based on established workplace criteria, such as education levels, performance or tenure, and not based on bias or unfair pay practices.

Summervill says she’s seen banks come up with strange reasons for paying women less, though. For example, one bank asked a female employee to avoid certification for a certain position within the bank so she could perform tasks that a certified employee was prohibited from doing. She complied but was paid $36,000 less annually than a certified male employee who did the job at the same bank — all for doing the bank a favor.

Summervill suggests bank boards ask human resources to conduct pay equity studies because human resource departments may be reluctant to initiate such studies on their own, since the results can be contentious.

BalancedComp’s data on CEOs and executive pay was mixed. Banks tend not to have many female or minority CEOs. For the few community banks that had female CEOs, they tended to make more than male CEOs in their asset classes, possibly because there are so few of them and competition for female CEOs is high. In five of the eight bank asset groups, female executives were also paid equal or more than male executives. Only two groups out of BalancedComp’s eight asset ranges had a minority CEO, and four out of the seven asset groups had no minority executives.

Summervill says banks should correct any inequities right away. After all, it’s the law. “The conclusion is that pay disparity exists,” Summervill says. “It’s not intentional but it’s absolutely there.”

Parachute Payments: Beware of the Tax Hazards

7-3-13_Crowe.pngDoes your employment contract with your CEO offer too much severance pay? If so, there could be significant tax consequences for the bank and the CEO.

Section 280G of the Internal Revenue Code (IRC) contains a rule that can result in punitive tax burdens for both the payer and the recipient of “excessive,” or “golden parachute,” payments, which are generally triggered during a change-in-control. The rule applies to public companies and certain other corporations that do not meet shareholder approval requirements for parachute payments. Parachute payments are considered excessive if they equal or exceed three times a defined base amount, generally the average taxable compensation paid to the recipient from the payer during the five calendar years preceding the year in which the change-in-control occurs.

Benefits such as stock options and restricted stock awards that are vested at an accelerated rate are factored into the calculation.

If the three-times-base measurement is triggered, then all parachute payments in excess of one times the base amount are subject to a 20 percent excise tax at the individual level (required to be withheld by the payer) and the payer must forgo its tax deduction for the same amount. The result is particularly harsh given the retroactive manner in which the tax burdens are applied.

For instance, assume a base salary of $500,000 for an officer of a public company and a change-in- control that entitles the officer to receive parachute payments. Under Section 280G, up to $1,499,999 (three times $500,000 minus $1) of parachute payments can be paid without any tax consequences. However, if one incremental dollar is paid and the three-times-base measurement is triggered, then the officer is subject to excise tax of $200,000 (20 percent of $1.5 million minus $500,000 base), and the payer is denied a deduction of $1 million (excess of parachute payments over base amount). Assuming a 40 percent marginal income tax rate, this amounts to a lost tax benefit of $400,000 to the payer. The one additional dollar of parachute payment results in combined additional taxes of $600,000 to the officer and the payer and represents one of the most expensive tax burdens in the entire tax code.

Planning Ahead
Planning around the application of parachute payments can be difficult and is best addressed in the negotiation stage of the change-in-control transaction. The tax rules are designed to prohibit obvious reallocations of income (such as reducing parachute payments in exchange for large bonuses in post-takeover employment contracts). However, there are some means of effective planning.

Recipients of parachute payments can accelerate taxable income into the calendar year preceding the year in which the change-in-control occurs, effectively increasing the base amount and allowing more room for parachute payments before triggering the three-times-base measurement. Accelerating taxable income can be achieved by exercising stock options, cashing out deferred compensation arrangements, and adjusting incentive plans. However, public companies must be mindful of the $1 million compensation deduction limit for certain officers imposed under IRC Section 162(m).

Payers can address potential golden parachute issues by drafting employment agreements to stipulate who bears the tax burdens should Section 280G be triggered. Under a “cut-back” provision, the employee’s parachute payments are simply reduced until they drop below the three-times-base trigger (leaving the employee to bear the entire tax burden). Under a “gross-up” provision, the employer is required to gross-up the parachute payments for all income and excise taxes until the employee receives the net amount called for in the employment agreement irrespective of the application of Section 280G. Gross-up provisions can exponentially increase an employer’s obligation under the contract, though, as the gross-up payments are subject to excise taxes and are nondeductible to the employer.

There are a variety of common contractual provisions that fall in between the more extreme cut-back and gross-up provisions and that call for a shared burden between the employer and the employee. These provisions often are negotiated as part of an overall transaction and should be considered carefully before offers are made and agreements are signed. The result of not doing so can be costly to all parties involved.