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.”

Addressing the Income Inequality Imperative Before It’s Too Late

There’s an unofficial adage in journalism that three similar events make a story. One car wreck at a particular intersection is an accident. Two accidents are an unfortunate coincidence. Three times is a trend — and an issue to discuss and address.

So it was hard not to start worrying when three different guests — an entrepreneur, a former regulator and a longtime financial services consultant — mentioned the same potential fear on Promontory Network’s podcast “Banking with Interest.” They all worried that rising economic inequality, which has been exacerbated by the Covid-19 crisis, could spur widespread social unrest beyond anything we’ve seen to date.  

“Things can go really bad,” entrepreneur and Shark Tank costar Mark Cuban told me in April, well before the brutal police killing of George Floyd in late May sparked nationwide protests in response to racial injustice and inequality. “We’ve seen riots. We’ve seen small businesses burn down.”

One recent warning came from Karen Shaw Petrou, managing partner of Federal Financial Analytics. Petrou is one of the most thoughtful voices in the financial services industry; since 2018, she has been adamant that income inequality is an increasing — and underappreciated — risk to the financial system.

You have empirical and theoretical evidence that the more economically unequal a nation is, the more fragile its financial system,” Petrou told me in June. “I worry… that prolonged economic inequality, combined with the kinds of crises it keeps precipitating, will also lead to rage. History is not inspiring on the topic of what happens to societies with profound inequality.”

John Hope Bryant, the founder, chairman and CEO of Operation Hope, a not-for-profit dedicated to financial literacy and economic inclusion, agreed.

“Societies don’t crater from the top down,” he told me. “They crater from the bottom in. You cannot have 1% doing great, 15% doing pretty good and 80% plus doing pretty crappy and expect that to be sustainable.”

They are hardly alone. Both Citigroup CEO Michael Corbat and JPMorgan Chase & Co. Chairman and CEO Jamie Dimon flagged economic inequality as a growing threat to financial and political stability. And Brian Brooks, Acting Comptroller at the Office of the Comptroller of the Currency, acknowledged to me that systemic inequities need to be addressed.

“People are not actually crying out because the system is a terrible system, right? They’re crying out because the system that has worked for a bunch of people has totally excluded other people for a fairly long period of time,” he told me. “And the banking system can fix that.”

Among other things, Brooks wants to reexamine how credit scores are calculated and how current models shut minority Americans out of the finance system.

Economic inequality predates the spread of the coronavirus. The wealth gap between the richest and poorest families more than doubled from 1989 to 2016, according to the Pew Research Center. The data is particularly grim for African Americans. The average wealth of white households was seven times the average of black households in 2016, according to a recent post by Petrou. White Americans owned 85% of U.S. household wealth at the end of 2019, she wrote, while Black Americans held just 4.2%.

But the coronavirus crisis is set to make the problem far worse.

“Low-income households have experienced, by far, the sharpest drop in employment, while job losses of African-Americans, Hispanics, and women have been greater than that of other groups,” Federal Reserve Chairman Jerome Powell told lawmakers recently. “If not contained and reversed, the downturn could further widen gaps in economic well-being that the long expansion had made some progress in closing.”

There are proposed solutions. Petrou has called for the creation of an “Equality Bank,” controlled by a consortia of banking companies to “rewrite the profit equation to serve low- and moderate-income households.” This bank could offer short-term, low-dollar loans to consumers through the banking system, without the often-onerous rates and terms of existing products like payday loans.

Bryant has called for a new Marshall Plan to combat the problem, including calling for a universal income for workers making less than $60,000 per year,  a national financial literacy mandate, and a redesigned education system that includes a free college education for most students.

“You need a mass of people to be highly educated,” Bryant said. “This is not rocket science. It’s the radical movement of common sense. As you educate more people, and raise credit scores along with it, you get more economic energy. You get more small business startups, you get more job creation. You get higher educational engagement. You get better skilled workers. You get less societal friction. This is an investment, not a giveaway.”

Brooks, meanwhile, has said the OCC is set to launch a pilot project designed to bring together banks, civil rights organizations and academics to tackle wealth creation. Cuban has talked about creating jobs to track and trace the spread of the virus in the short-term and pushed for government investments in low-income housing and companies offering stock to employees so that they have a stake in a firm’s success.

Tackling economic inequality hasn’t been a high priority for many in banking and government. That needs to change — and soon. While people may reasonably disagree on the right solution to this issue, most are of the same mind when it comes to what happens if we don’t try to address it.

We need to lift people “from the bottom-up,” Cuban told me. “We have never thought like that in the past, and we need to. Because if we don’t, oh my goodness … If we screw up, it could get ugly.”