New compensation laws across the U.S. barring companies from asking applicants their current or previous salary are about to change the way money managers recruit personnel.
While some industry insiders are optimistic that the new laws could narrow the pay gap between men and women, others warn that it could increase overall compensation costs and carry penalties for organizations that violate the laws.
Effective Oct. 31, the New York Local Law 67 of 2017 prohibits employers based in New York City, or those that have a presence in the city, from inquiring about a prospective employee's salary history during the interview process.
"We are taking this very seriously. We believe it is going to have a significant impact on recruiting," said Scott Fletcher, a partner in Jamesbeck Global Partners' San Francisco office, an executive recruiting firm.
For example, recruiting firms create compensation packages for clients. Part of that process involves gathering and using historical compensation data, Mr. Fletcher said. But if a candidate's personal compensation history is no longer allowed to be used, recruiting firms will need to find other ways to provide those industry ranges to clients.
David S. Rich, an independent employment lawyer and business litigation attorney in New York, said the law aims to narrow the pay gap between men and women. "On average, women are paid less than men for the same work, and because your current salary is generally based on your previous salary, (asking for salary history) perpetuates that gender wage discrimination. This law aims to break that cycle."
New York isn't alone. Similar laws in Philadelphia, Puerto Rico, Massachusetts, Delaware, Oregon and California are expected to take effect next year.
"It will change the way employment decisions are made," said Amanda Grant, a principal at executive recruiter Third Street Partners, New York. Third Street founding partner Laura Pollock added that the law will force an employer to focus more on the value of the role "vs. what someone historically earned."
The gender pay gap in the financial services industry is comparably wider than most other industries. A report from the Institute for Women's Policy Research, released April 4, revealed that the gender wage gap among the 20 most common occupations is largest for financial managers, which include financial directors or comptrollers, where women earn 69.3% of what men earn. That amounts to about $513 less per week for women.
In 2006, women in financial management positions earned 63% of what men made, according to the institute.
The report also showed that female personal financial advisers make little more than half, or 56.4%, of what their male counterparts make — a 44.4% wage gap that is the widest across all occupations.
"I'm glad it's getting some attention," said Ariane Hegewisch, program director, employment and earnings, at the Institute for Women's Policy Research, Washington.
"There's a wage gap straight out of college. It's not large — it's about 5%. But then it grows, partly because every time you change jobs or get promoted, your current salary is taken as the base for your next salary," Ms. Hegewisch said.
Executive recruiters are taking steps to ensure they are in compliance with the new mandates.
Mr. Fletcher explained that Jamesbeck has been hosting breakfasts with employment attorneys and having roundtable discussions with clients to better understand the nuances of the law.
"Though going into effect in New York, it's in the works in a number of jurisdictions. So, it's important for us and our clients to understand the law well," Mr. Fletcher added.
David Barrett, founder of executive recruiting firm David Barrett Partners, New York, said: "Recruiters and asset management employers have to be very careful when approaching the subject of compensation. If it's not national, it's going to be next to national very soon. It's going to change the discussion with candidates."
Ted Kister, chief operating officer of David Barrett Partners, said in the same interview: "Seems to us that serious candidates will want to disclose their compensation, because they'll want the offer process to be efficient and won't want to waste their time" wading through lowball offers.
"It's going to be a challenge for the employers," he added.
Alan Johnson, managing director of the New York-based compensation consulting firm Johnson Associates, also noted that managers and recruiters need to make sure that they're compliant with the new law in New York.
"Penalties will be severe if you violate (the law)," he said. "It's going to be important to document the process. It requires some upkeep."
Mr. Johnson added that violating the New York law could result in a $250,000 fine, not to mention being vulnerable to lawsuits.
Mr. Rich noted there are a few exceptions to the law in the financial service industry. For example, a potential employer or employment agent can freely discuss with the applicant how much he or she expects to forfeit in terms of unvested equity or deferred compensation by leaving their current employer in the middle of the year. In other words, they can ask what bonus the candidate expects to be forgoing by switching jobs.
Another exception within the law is that it doesn't stop employers inquiring about the current salary during an internal transfer or promotion within the company.
Mr. Rich pointed out, however, that if the employer comes across the salary of the executive through public records, they're still not allowed to rely on that compensation history when determining the applicant's salary.
Some industry insiders said they don't believe New York's law will change the way the money management industry will recruit executives going forward.
"Typically, our hiring managers do not discuss compensation," said one Boston-based money manager executive who asked not to be named. "We typically determine a salary range based on the specific role and previous compensation is not taken into consideration when preparing an offer."
A New York-based executive recruiter, who asked not to be identified, said while "it's way too soon to tell," he doesn't think the law will "have a big impact" on the way money managers hire senior executives.
The recruiter offered the caveat, however, that it could "artificially raise compensation levels, because if we can't get confirmation of the person's compensation history, then people, especially midlevel, are expected to inflate expectations."
And one compensation consultant doesn't believe the new law will help achieve its intended goal. Mr. Johnson remains unconvinced that the New York law will have the desired impact on the money management industry, but instead will drag out an already belabored recruiting process.
"I don't think it's going to narrow the gap. But politicians want to believe compensation (in the money management industry) is driven by discrimination and not the market," said Mr. Johnson. "I don't think it's going to have a positive impact."
Mr. Johnson added he believes the law will simply "make the recruiting process more cumbersome (and) more drawn out."
Regardless of how effective the laws are going to be, managers and recruiters need to be careful in complying with them. "Employers need to review and modify their application forms," said Mr. Rich. "Businesses should train their managers not to ask about prospective job applicants' salaries."
He added employers also need to document any voluntary disclosures from any prospective employees.
Mr. Barrett agreed that "recruiters and employers need to make sure they've got policies in place to protect themselves."