Forty years after sex discrimination became illegal, a huge gap in pay and promotions still yawns. Now angry women are suing their employers--and winning. How afraid should you be?

(FORTUNE Magazine) – THE DELUGE BEGAN LAST MAY. THAT'S WHEN Boeing agreed to cough up as much as $72.5 million to settle a class-action lawsuit brought by female employees; they had asserted that the company paid them less than men and did not promote them as quickly. The next month, in June, a court ruled that a lawsuit charging Wal-Mart with discriminatory pay and promotion practices could proceed as a class action. In July, Morgan Stanley stunned a courtroom jam-packed with Wall Street women by announcing an 11th-hour $54 million settlement to a class-action suit that made similar allegations. Then, in August, an assistant store manager for Costco sued the retailer for denying her a promotion. Her lawyers have asked the court to allow that case, too, to proceed as a class action.

Just because a company is sued doesn't mean it's guilty, but the flood of sex-discrimination headlines is sobering. After all, didn't we get through this long ago? Don't men and women have a pretty level playing field? Aren't women paid basically the same amount as men for doing the same job? And don't women have an equal shot at getting promoted?

Not exactly. For most management jobs it's still not even close. And if men don't know it, women certainly do. They are bringing these cases, and winning big settlements, because it appears that the evidence is overwhelmingly on their side. Forty years after the Civil Rights Act made discrimination on the basis of sex illegal, studies show that women--virtually across all job categories--are still paid less for doing the very same job. And though women now hold about half of all managerial and professional positions, they account for only about 8% of executive vice presidents and above at FORTUNE 500 companies (see chart). "Everybody expected a lot more progress by now," says Ilene Lang, president of Catalyst, the research firm that gathered the data. "There are so many women in the workplace. You just assumed this was a 20th-century battle, and by the 21st century it would be over."

Why the explosion in litigation now? Well, just as the economy went south, the market tanked, and stock options dried up, a critical mass of career women began reaching their 40s and 50s and 60s. And they are shouldering way more financial responsibility than ever before: About 62% of all working women are contributing half or more of their household income, according to an AFL-CIO survey of 800 working women earlier this year. A difference of several thousand dollars between a woman's entry-level salary and a man's may not have mattered much at the start of their careers, but over a lifetime, the gap widens--adding up to a world of difference in, say, which worker's kids will be burdened with a boatload of college debt.

Changes in civil rights legislation enacted in 1991 made it easier for women to do something about the problem. The changes allowed for jury trials and substantial compensatory and punitive damages against companies that discriminate by gender. Suddenly those cases became "incredibly lucrative," says one defense lawyer. "Companies settle them because they don't want to go to trial and look like a bigot in front of a jury." What's more, recent technological advances make it easy for plaintiffs lawyers to gather and analyze mountains of data across vast geographies and gather prospective class members. Women can join such cases with the click of a mouse.

The threat of a sex-discrimination case has become one of corporate America's worst nightmares. When the Houston-based law firm Fulbright & Jaworski surveyed 300 company general counsels last summer, 62% said their biggest area of litigation exposure--and greatest fear--was employment lawsuits, which include suits claiming sex discrimination. The American Bar Association is currently advertising a seminar entitled Wal-Mart Class Certification: How an Individual Can Take On a Whole Company--And How to Prevent It. Many legal and human resources experts expect the number of suits to increase dramatically. Nobody knows exactly how costly they'll be to business. But a brief filed recently by the U.S. Chamber of Commerce litigation center in support of Wal-Mart's appeal of the class-action certification of its lawsuit estimates the damage somewhere in the "billions and billions of dollars." One analyst says the potential damages to Wal-Mart alone, if it is found liable, could amount to $2 billion to $4 billion--and that doesn't include what the company would probably have to pay to equalize skewed salaries.

The cases cast a cold, harsh glare on practices corporate America would prefer to keep out of the spotlight: the way it rewards its workers, determines entry-level salaries, makes promotion decisions, and divvies up merit raises. Traditionally those matters have been largely secret and, except in unionized shops, left to the discretion of management. Now, some say, a byproduct of the lawsuits will be to push companies, for defensive reasons if nothing else, to raise some salaries and put pressure on others at a time when extra money is especially hard to come by, and to adopt quotas (though nobody is using that word), making sure they have enough women in all ranks of management to keep them out of trouble. "I have heard corporate executives say, 'We are going to be forced to do this,'" says Robin Conrad, senior VP of the Chamber of Commerce litigation center, who is apoplectic about the implications of the Wal-Mart class action. "Then we're regimented, right? Like the federal government. It sort of flies in the face of a system of meritocracy in this country--that we work hard and should be rewarded for it."

It's no surprise that the lawsuits have stoked workplace distrust. "Employers are pissed. They say, 'How dare you bite the hand that feeds you!'" says Johnny Taylor Jr., an employment lawyer and chair of the Society of Human Resource Management. "Employees already mistrust employers. So each time a case reveals the secret that was never told, employees think, 'Aha! They really are paying men more than women.'" That breeds more cases, more inquiries, more management defensiveness. "The mindset of employers is: 'Which one of my employees is going to sue me tomorrow?'" says John Harper, a partner at Fulbright, which conducted the general counsel survey.

Forty years ago women's biggest battle was simply to get access to the workplace at all. That changed with the Civil Rights Act of 1964, which made it illegal for employers to discriminate on the basis of race, creed, and--as an afterthought--sex. (Congressman Howard Smith of Virginia slipped the gender provision into the bill in a last-ditch effort to kill it.) The law provided for the creation of the Equal Employment Opportunity Commission and required that any company with 100 employees or more file annual accounts of how many women and minorities it had at all levels of the organization.

In the 1970s the EEOC took on the automakers, oil companies, and AT&T--where, in 1971, only 1% of all but the lowliest supervisory jobs were held by women, according to the New York Times, even though the company ran on an army of female telephone operators. The big blue chip replied that the commission "failed to recognize that the primary reason the Bell System exists is to provide communications service to the American public, not merely to provide employment to all comers, regardless of ability." But two years and $70 million--plus in settlement costs later, the chastened company agreed to promote more women. It's no coincidence that two of the eight women running FORTUNE 500 companies today--Carly Fiorina at Hewlett-Packard and Pat Russo at Lucent--are both products of the enlightened post-lawsuit AT&T.

In the '80s the EEOC (headed by Clarence Thomas from 1982 to 1990) became less feisty; conservative Reagan-era courts all but eliminated the class-action suit and made it much tougher to prove sex discrimination. But under mounting pressure from civil-rights and women's groups, in 1991 Congress passed the law that made it easier for women to file sex discrimination charges. While the economy was booming, not much happened. But in the latter part of the decade, cases against big companies started trickling in: Mitsubishi settled for $34 million in 1996; Home Depot for $104.5 million in 1997; Merrill Lynch for an undisclosed sum in 1998; American Express for $42 million in 2002. And on to Boeing and Morgan Stanley in 2004.

When the courts pondered whether to give the green light to those class-action suits, they turned to statistical analysis. The courts have said that if data on pay or job levels indicate a pattern that is "two deviations from the norm," then there is a "legal inference" that discrimination is present--and a suit can proceed. The norm is generally defined as what might be expected, say, given the number of women in your workforce.

Calculating a standard deviation can be devilishly complex. But at Wal-Mart and Costco, allege the plaintiffs' lawyers, it wasn't hard to tell that the numbers were out of whack. At Wal-Mart women make up more than 72% of hourly workers and hold only about a third of the store manager jobs, according to charges in Betty Dukes v. Wal-Mart. A Wal-Mart spokesperson disputes that figure, saying that 60% of the company's associates are women and more than 40% of its managers and professionals are women--and adding that "Wal-Mart does not tolerate discrimination of any kind." At Costco women make up half the workforce but hold only one in six of the richly paying top management jobs, according to charges in Ellis v. Costco. (Costco denies the allegations; a spokesperson didn't return calls asking for comment.) Says the Chamber of Commerce's Conrad of the allegations: "You know how you can play around with statistics. You can make them say anything you want to say. There is an element of junk science in all of this."

To be sure, there are several reasons a pay gap between men and women exists. Biology is one: Working women who have children often take time off, delaying promotions. Preference is another: Some women choose professions that pay less or quit high-powered jobs when they don't seem worth it (see "Power: Do Women Really Want It?" on The oft-quoted Census Bureau statistic--women working full-time earn just 75½ cents for every dollar a man earns--doesn't correct for those things.

So Hilary Lips, a Radford University psychology professor who has studied the pay gap, recently decided to conduct a study that did control for those factors. The study caused quite a stir. She found that only in jobs that pay $25,000 to $30,000 a year do men and women earn roughly the same. The further up the pay scale and the higher the education, the wider the earnings gap. Women psychologists earn 83 cents to the male dollar; women college professors earn 75 cents; women lawyers and judges earn 69 cents (see chart for more examples).Even in "women's industries," women consistently earn less than men: women elementary-school teachers earn 95 cents to the dollar; women bookkeepers earn 94 cents; women secretaries earn 84 cents. Says Lips: "It cannot be explained in any way except that people think that what men do is more important and more valuable than what women do."

A top financial services executive who has appeared on FORTUNE's list of the 50 Most Powerful Women in American Business will never forget the weekend she spent several years ago analyzing the pay scales of her direct reports. She was taken aback to find that time and again the men outearned the women. Her father was visiting her at the time, and she was sitting on the floor of her porch, surrounded by paper, on a Sunday. "Dad, look at this. How can this be?" she asked. "Well," her father replied to his daughter, "maybe women just don't work as hard."

But research shows that women--including women with children--are every bit as hardworking and ambitious as men. Earlier this year Catalyst conducted a survey of 950 top executives, both men and women. Fifty-five percent of the women said they wanted to be CEOs, almost exactly the same as the men. About as many mothers aspired to be CEOs as fathers. Women, like men, believed they needed to outperform expectations, take on big assignments, and work long hours and weekends to get ahead.

So what was the difference? Lack of operational experience accounted for some of it--36% of women in the Catalyst study said it was a problem for them, compared with 25% of men. But the far bigger reasons cited by the women were exclusion from informal networks--the boys' after-dinner drinks, the golf games, the men's clubs--and persistent stereotypes and assumptions their bosses made about their ambitions, their aspirations, and their abilities. Men, for example, may assume a woman wants to cut back or quit when she has a baby. But in a story two years ago on the growing number of women with stay-at-home husbands (see "Trophy Husbands" on, FORTUNE found that when the playing field is level for women, they keep working. The decision about which spouse stays home with the kids has little to do with gender. The biggest determinants are serendipity, timing, and, most of all, which parent has the greatest earning potential.

Over a lifetime that earning potential can be significantly affected by seemingly small disparities in pay--Marc Bendick Jr., an economist and expert witness for the Wal-Mart plaintiffs, calls them "micro-inequities." Consider the stories from Boeing. Charles Phillips, a former training manager there, notes that when it was time to dole out annual raises, there was no way to rectify the fact that in the same job category men usually made the most, and women and minorities, the least. Even if you subtracted two percentage points from the 7% raise for the man making $100,000 and added two percentage points to the 7% raise for the deserving woman making $50,000, the man would get $5,000 to the woman's $4,500--widening the gap still further. "There was never enough money to fix the problem," Phillips says. "It was heart-wrenching to figure out how to bring the women up and at the same time not penalize the men. Eventually we just gave up."

If you start out too low, it's almost impossible to catch up. Consider Phillips' wife, Terri, 50. She wanted so badly to have a career at Boeing that she accepted a $13,000 job as a clerk there in 1989, figuring she'd work her way up. Soon after, she was making $27,000; by the time she was laid off in 2003, she was making about $70,000 as a senior manager in HR. At least that's what the org chart reflected, and that's what her boss called her. In payroll, though, she was a Level 1 employee (one step lower than a senior manager) and paid accordingly. When she tried to fix the discrepancy, higher-ups told her she didn't have enough direct reports to be called senior manager; another time she was told Boeing was afraid that if it corrected the problem, she might sue. When she left the company, she was still making $15,000 to $20,000 less than the other senior managers. She says she figures her gender cost her about $200,000 during her management years. A Boeing spokesperson says that the company "is firmly committed to an environment in which employees are treated fairly," adding that Boeing never admitted wrongdoing.

One explanation for women's lower pay and status is that women don't negotiate as deftly as men, according to economist Linda Babcock, co-author of the 2003 book Women Don't Ask. Studies show that women are much more likely to accept a salary offer without quibbling. A study of Carnegie Mellon graduate students reports that men were eight times more likely than women to negotiate an initial salary, resulting in starting pay an average of 7.4%, or $4,000, more than their female classmates.

Many companies argue, in effect, that failing to negotiate is the job candidate's problem, not theirs. "If [a woman] will work for $8 and a guy will hold out for $9," asks one defense lawyer, "is that discrimination, or is it market reality?" Retorts employment lawyer Taylor: "That's like saying, 'If I could hire children to work for $1 an hour in a coal mine, why wouldn't I?' There are a lot of decisions and practices we could justify on the basis of pure market analysis."

Wal-Mart has gotten religion. The retailer has made big changes to its employee practices that one analyst warns could drive up its operational costs. The far greater consequence, though, may be the standard it sets for the rest of corporate America. Recently Wal-Mart began to tie 15% of a manager's bonus (which can amount to 85% of salary for top executives) to meeting diversity goals. What that includes, explains the company's new chief diversity officer, Charlyn Jerrells Porter, is that the sex and race of those promoted closely reflect the percentages of those who apply. This is not a quota system, she says. Only the most qualified are to be promoted. But if the company is recruiting effectively, "at some point, the stats take over" and the percentages naturally match up. Wal-Mart is also taking another bold, possibly precedent-setting step: It has begun to require that new hires with the same experience receive the same starting pay--no matter what their pay was in the past. (This applies to hourly hires; the company is reviewing changes for salaried types.) Says Porter: "We don't bring a female in at $6 and a male in at $7, where both have similar prior work experience, because if you do, then you have an immediate issue."

Of course, gender disparities in pay and promotions aren't always glaring. In companies where the problem is subtler, many people in power tend to think there is no problem. Remember the financial executive whose father thinks women don't work hard enough? Last year she was on a diversity committee made up of herself and white men. She says the men were convinced that women were getting promoted faster than men--until she got them the stats that showed otherwise. Laura Liswood, a senior adviser and former managing partner at Goldman Sachs and head of the Council of Women World Leaders at Harvard's Kennedy School, says that the groups that dominate (usually white men) "tend to think the system is meritocratic, that it works correctly, and that if changes are needed, they're minor." In the exact same organization, she says, women--and minorities--believe the opposite.

That disconnect between what working men and women think underlines the need for transparency about pay and promotions, according to a growing consensus among legal and HR experts and defense lawyers. So far, of course, transparency has been in very short supply. For example, Boeing spent four years and enough legal challenges to fill 31 feet of shelf space, according to the plaintiffs' lawyers, just to keep from having to reveal that it had conducted its own internal studies and found that it was indeed underpaying its women. Boeing settled one day before the start of the trial, which would have forced the company to share those details. Boeing agreed to settle "because it was in the best interests of the company, its employees, and shareholders, and enables the company to move forward and avoid the continued exposure and distraction of protracted litigation," says a spokesman.

One simple solution would be for the EEOC to make public the reams of employment data that companies are required to file every year. But it won't--because, according the 1964 Civil Rights Act, it can't, except in some cases. The EEOC can supply data to be used in certain lawsuits. It also sometimes shares information with academics for research on the condition that no companies be identified. Isn't the EEOC supposed to sniff out discrimination whenever it occurs? Yes, says EEOC chair Cari Dominguez, but it has limited resources. When it comes to litigation, it must pick its shots, such as the Morgan Stanley case settled last summer. "We can't boil the ocean," says Dominguez.

For companies that may be vulnerable to sex-discrimination lawsuits, here's the prescription from one defense lawyer handling a high-profile case. Be much more formal in setting up systems for selection and promotion. Define the required competencies. Always post jobs. Be able to justify your selections either for hire or for promotion: Have a good explanation when pay and promotion don't look even-steven. Establish guidelines for how you set pay--both entry-level and raises--so that you are consistent. "Some companies do a good job and some do a terrible job in outlining expectations and being candid about performance," says the defense lawyer. "Make sure that women are getting the explanations and feedback they need to honestly understand the skills they need to advance." Finally, when you deny a woman a promotion, explain why. The companies in which all this is a closed and secret process are the ones that get into trouble.

Taking that kind of action may not eliminate the pay gap or suddenly catapult more women to the top. But at least it might lead to happier and more productive employees. And it would certainly reduce the risk of lawsuits from people like Terri Phillips, the former Boeing manager. "There wasn't anything in my nature to sue," she says. "That's not the way I was taught to deal with things." In the end, though, her reasoning for joining the class-action suit went according to an imprecise formula used by many of the other plaintiffs in sex-discrimination suits: "I don't want to hurt the company. But if companies continue to be run like this, it will end up hurting my granddaughters."


FORTUNE.COM SUBSCRIBERS ONLY Read more online, including "Power: Do Women Really Want It?," "Trophy Husbands," and "Women vs. Wal-Mart."