In recent years, the term “unexplained pay gap,” used to describe persistent disparities in compensation between men and women, has become commonplace in businesses around the world. The phenomenon, whose causes are not always measurable, has been labeled a problem by the International Labor Organization.
Mercari Inc., which operates the leading flea market app Mercari, announced in September 2023 that a data analysis had found an unexplained pay gap of about 7 percent among its employees, exceeding the globally permissible limits. The e-commerce marketplace operator made the necessary pay adjustments, but it was baffled by the outcome after having worked to improve gender equality.
Aiko Cho, 45, manager of the diversity and inclusion (D&I) team at Mercari’s Management Strategy Office, led the analysis. In an interview with The Asahi Shimbun, she said the study revealed factors that are unique to Japan, where there is a wide wage gap between compensation packages for men and women.
Following are excerpts from the interview:
The Asahi Shimbun: Mercari disclosed that there was a 7 percent unexplained pay gap between men and women working the same jobs in the same pay grades. What prompted the analysis and how was it conducted?
Aiko Cho: In December 2022, Mercari obtained EDGE Assess Certification, which is given by the Switzerland-based EDGE Certified Foundation to recognize efforts for gender equality. During the auditing process, multiple linear regression analyses had to be performed to clarify whether there was an unexplained pay gap between men and women.
It is a statistical method using functions to shed light on causal relationships between outcomes and factors. We added variables such as gender and line of work to the base salary along with other factors before we asked a human resources analyst to analyze the data.
TAS: What did you think when you saw the results?
AC: They were quite unexpected. Even our employees had said there should be no “unexplained pay gap” at our company because we had been working to achieve diversity and inclusion and had been adding improvements to our system and its operation to achieve gender equality.
TAS: Could you give an example?
AC: Sure. Managers and higher-level executives, for example, must attend training programs and workshops aimed at eliminating unconscious bias, and we monitor each employee assessment to see whether the male-to-female ratio of those who gain high ratings and those who are promoted to higher pay grades is disproportionate. In addition, human resources staff attend assessment meetings to assist discussions and remove bias.
So I too thought any unexplained pay gap would be unlikely, and I couldn’t immediately think of any cause. The management team also thought it was unexpected. But that is also what bias is about. So we went on to determine the causes, to see where the gap came from and how. When we reviewed possible scenarios, we came up with two promising hypotheses for the causes.
TAS: What were they?
AC: First, there are a certain number of women who were recently promoted as part of our efforts to accelerate gender equality. One hypothesis is that immediately after their promotion, some of them were receiving wages lower than those of co-workers who were in the same pay grade. That may have influenced the outcome.
Second, there might have been a gap between the annual salaries offered to men and women when they were initially hired.
TAS: What would explain that?
AC: Over 90 percent of employees at Mercari are mid-career hires. When we offer annual salaries at the time of hiring, we determine the amount based on their salaries from their previous jobs. Engineers’ salaries, however, are determined by a skills test, not by their previous salaries. So there was virtually no unexplained pay gap for engineers.
For non-engineers, it is quite difficult to estimate their pay grades through interviews alone and to offer competitive salaries. That’s why we used their previous incomes as references. As a result, it reproduced the gender disparities in society.
So we raised the base salaries to redress the situation. Instead of giving each employee a 7 percent raise, however, we based their pay increases on their performance.
When we conducted multiple linear regression analyses again, the unexplained pay gap had decreased to 2.5 percent. We intend to bring that figure down to 1 percent or less.
From July last year, we started offering annual salaries to non-engineers without taking their previous salaries into consideration. We have already started restricting information on their previous salaries to the human resources level and are letting the top member of each department that is hiring new recruits determine their salaries.
TAS: It is unusual for a Japanese company to determine the salary of a new hire without referencing their previous annual income.
AC: We were nervous to do this because many of those we will want to hire will have already received many job offers from other companies, meaning that we might not be able to recruit them if we offer lower salaries or are less competitive in the job market for even a short period. We are working to increase our abilities to estimate a candidate’s worth through interviews alone and through discussions with front-line recruiters.
Staffers and outsiders alike wonder why we are going to such great lengths to remedy the situation. But people won’t work at companies that don’t address gender inequality or unfair pay practices. If a company continues to disclose information about its efforts to fix problems, even if disclosing problems is undesirable for the firm, talented workers from around the world will choose to work there.
TAS: According to a survey by the Organization for Economic Cooperation and Development, Japan ranks fourth from the bottom among member countries and the lowest among the Group of Seven countries when it comes to wage gaps between men and women. But the calculation method used in Japan fails to provide a detailed analysis as to the causes, and it is therefore difficult to come up with measures for improvement.
AC: The fact that such a pay gap exists even at Mercari, where 90 percent or more of its employees are mid-career and were hired using their previous salaries as references, shows that our society is plagued with pay gaps. When I think of how labor mobility will become increasingly common, we must end the cycle of pay gaps. I don’t think that what we do is the only solution, but we hope that sharing our efforts as much as possible will help redress the gap in society as a whole.