How To Carry Out an Effective Pay Equity Analysis
In the US, women are paid a staggering 16% less than their male coworkers. The gender wealth gap is even wider—on average, women have 32% of the wealth men do.
But pay gaps aren’t just about gender. According to the US Department of Labor, Black employees nationwide typically make just 76 cents for every dollar their White counterparts earn. For Black employees in the US, it’s believed that the pay gap compared to White Americans starts as early as 16.
Pay equity is a big deal. How can you make sure you’re part of the solution? We recommend starting by looking inward via a pay equity analysis.
Conducting a pay equity analysis can feel like a daunting task. But by carefully reviewing compensation and considering factors like job function, performance, and experience, you can create a more equitable workplace where everyone feels valued and respected for their time and hard work.
Fair pay is more than numbers; it’s about building a workplace where everyone feels valued and respected. Learn more about how to carry out a pay equity analysis to better understand how staff are being compensated and tackle any issues.
What Is a Pay Equity Analysis?
A pay equity analysis is a payroll audit comparing compensation rates to spot gaps or discrepancies. Analyzing pay scales against protected classes can help ensure fair compensation across your team. For example, you’ll want to make sure that employees in the same role are paid equitably based on their qualifications, experience in the field, and tenure at the company, regardless of their age, skin color, gender, sexual orientation, or disability.
Types Of Pay Equity Analyses
There are two types of pay equity analyses—internal and external. If this is the first time you’re looking into pay equity, we recommend conducting both for a complete data set to work with.
Internal Pay Equity
An internal pay equity analysis is an internal payroll audit and compares compensation rates within your company. You’ll want to compare current compensation rates within and across roles as well as your company’s historical data to see whether employees are paid equitably now, and whether there’s been any change over time.
External Pay Equity
An external pay equity analysis involves researching what competitors and other businesses in the external market are paying their employees and then comparing that pay scale to your own. This helps you determine whether you’re compensating employees fairly according to industry standards.
How Is Pay Equity Calculated?
You can calculate pay equity by dividing the median estimate of one group of individuals against another and finding the percentage between them. For example, to calculate the difference between men’s and women’s pay in the business, divide the median wage of the women in your company against the median salary of the men.
- Calculate Average Pay for Each Group
Average Pay for Group A = Total Pay for Group A / Total Number of Employees in Group A
Average Pay for Group B = Total Pay for Group B / Total Number of Employees in Group B
For example, Group A could be women, and Group B could be men in the same role.
- Calculate the Pay Gap
Pay Gap = Average Pay for Group B - Average Pay for Group A
- Express as a Percentage (Optional)
Pay Gap Percentage = (Pay Gap / Average Pay for Higher-Paid Group) x 100
For example, if the average pay for men is $70,000 and the average pay for women is $60,000, the pay gap is $10,000, or:
Pay Gap Percentage = ($10,000 / $70,000) x 100 = 14.29%
You should also account for variables such as hours worked, experience, time with the business, and occupation.
Why Conduct a Pay Equity Analysis?
When you prioritize fair pay as an employer, you demonstrate your commitment to your employees and to a fair and equitable workplace. Pay equity analyses can help you do that. While these might sound like lofty and even intangible goals, there are concrete business benefits to conducting pay equity analyses, too.
Comply with Regulations
The Equal Pay Act of 1963 states that all employees doing similar work in similar conditions should be paid equally, without regard to gender. This law prevents discrimination in the workplace based on gender, but it clearly outlines a few instances in which differences in pay are appropriate:
- Merit-based systems, where performance may impact pay
- Production-based systems, where quantity or quality may impact pay
- Seniority or tenure, where an employee’s time with the company may impact pay
So long as none of these systems take an employee’s gender into account, they’re perfectly legitimate reasons to pay employees differently.
Promote a Fair and Inclusive Workplace
Diversity, equity, and inclusion (DEI) are more than corporate buzzwords. DEI initiatives have real impact on your bottom line. According to Great Place to Work, inclusive companies boast significantly higher employee retention and 9.8 times the employee enthusiasm than companies without genuine inclusion. Ensuring equitable compensation helps you commit to these values in practice, not just in theory.
Enhance Brand Reputation
Your brand reputation matters, and not just to your employees. Brand reputation is important in attracting top talent, ensuring customer loyalty, and even increasing sales. You’ll want to make sure the way you treat your employees reflects your company values. Setting a precedent of fair pay at your company is something customers, employees, and prospects are sure to notice.
Retain Top Employees
Fair pay and a solid reputation can help keep your best employees engaged and working hard. Since your brand is built on employee experience
Prevent Discrimination Lawsuits
Some team members may feel their lower wages—compared to others in the same role—are due to their race, gender, sexuality, disability, or other protected status as defined by the Equal Employment Opportunity Commission (EEOC). Conducting pay equity analyses can address these concerns (and mitigate the risk of legal action) by creating a culture of transparency around compensation at your company.
Conducting a Pay Equity Analysis Step-By-Step
You know why pay equity analysis is so crucial. Here’s how to conduct one for your business. Take that first step towards creating a fairer, more inclusive workplace.
Step 1: Set Your Analysis Goals
The first step is to determine your “why,” which will help you set the appropriate goals. Do you want to update your current practices? Tackle the issue of inadequate pay? Reduce legal risks? Double-check that your fair-pay practices are working well? Your overall goal will impact the process you follow. Give this some careful thought first.
Step 2: Get Buy-In from Stakeholders
You’ll also need to get buy-in from key stakeholders and your leadership team. The ultimate goal is to fix any inequities, if discovered, and getting stakeholder buy-in early ensures everyone is on the same page no matter the results of the pay equity analysis.
Similarly, carrying out a pay equity analysis is no small job, and you’ll need the budget and capacity to support it. Other teams may also need to be brought in to help, such as an analytics team or a data expert.
Step 3: Set the Parameters for Your Data
It’s important to define key terms around your data, as this will determine how you process it. For example, comparable work. What does this mean in your organization? One of the first things you’ll do when analyzing the data will be to determine who does comparable work across departments to determine how their pay is assigned.
Step 4: Gather the Required Data
You’ll need to work with the relevant teams to pull payroll data for your employees to analyze. It’s best to break down each analysis individually and prioritize the practices you deem most important.
For example, if you know a gender pay gap exists, this is the first thing to look for and compare. If you want to ensure that employees who don’t have a formal education are offered the same opportunities as those who attended college, you’ll first need to analyze the data to determine if this is already the case.
Step 5: Review the Data
You have what you need. Now is the time to review and compare your data, checking if it meets your parameters and noting those that don’t match your desired criteria. Here, you can also think about drawing up a plan of action and priorities across the business.
If you spot a pay disparity, do a little digging to check for supporting documentation (like performance reviews, recent high sales commissions, or a bonus) that may explain why one employee is paid slightly more or slightly less than their peers.
Step 6: Rectify Issues
Once you understand how pay equity looks across your organization, you’ll then need sign-off from executives and stakeholders to make the necessary changes. Note that this isn’t something that can happen overnight.
While you may have agreed on a budget at the start of this process, you may need to adjust this to ensure your actions don’t negatively impact the business. But keep in mind that unequal pay and legal disputes can cause far more damage.
Start Your Pay Equity Discussion
Pay equity analyses can help a business create a fairer, more inclusive working environment that improves overall employee satisfaction. They can even help to reduce the risk of legal disputes and accusations of discrimination from employees.
While you may feel daunted by the prospect of discussing pay equity, it’s an important issue to tackle. Get started with effective pay equity and transparency discussions with your staff and leadership now.