A guide to pay equity analysis

Pay equity is essential in creating economic equality, but for many reasons, it remains an elusive goal. One contributing issue is that discussions about employee compensation are often considered taboo, so many people don’t understand what kind of pay they deserve or should expect. 

To advance the goal of pay equity, human resources departments need to take active measures to enforce pay equity within their organizations. Let’s take a look at the values and significance of pay equity and outline the steps necessary to conduct a pay equity analysis within your organization.

What is a pay equity analysis?

A pay equity analysis, also called an equal pay audit or a pay parity audit, is a method of researching pay rates within your organization and assessing any differences in pay relative to age, race, gender, job description and responsibilities, seniority, and a wide range of other criteria. 

The goal of a pay equity analysis is twofold. First, it’s a good idea for any organization to insulate itself from potential wage discrimination lawsuits. More than ever, state and federal governments, media, and legal bodies like the Equal Employment Opportunity Commission are turning their attention to the wage gap. 

Second, a pay equity analysis is a great way for HR leaders to improve the pay situation within their own organizations. This, in turn, will help them attract and retain the right employees by guaranteeing competitive rates, offering equitable opportunities for advancement, and promoting excellent treatment both laterally and vertically within their organization. 

A closer look at pay equity

How important is pay equity? Very important. But don’t take our word for it—take a look at the numbers. According to human resources strategy firm HR People + Strategy, “two employees hired at $50,000 and $52,500 (a 5-percent difference in starting salary) will have a $200,000 cumulative pay gap over a 40-year career, assuming a 3 percent increase for each over this time.” These numbers add up quickly and the gaps increase when factoring in other wealth disparities such as generational wealth and homeownership gaps.

A good way to understand a pay equity analysis is to define what it isn’t. The outcome of a pay equity analysis isn’t to pay everyone equally; on the contrary, a pay equity analysis addresses equitable vs. equal compensation. The primary driver for pay equity analyses is closing the wage gap and calculating wages to provide equal pay for equal work. 

We intuitively understand pay equity and, consciously or not, we try to enforce it daily. For example, consider professional sports. Sports journalists regularly report the earnings of professional athletes to an audience of mixed reviews ranging from scorn to satisfaction. 

Because we can observe or research the performance of individual players in quantifiable terms, we form opinions about their earnings when, say, a young rookie pitcher is signed for the same dollar amount as his more senior and more seasoned teammate playing the same position. In this situation, a pay equity analysis would look at each player’s stats and seek to find any qualifiers, like exceptional performance in one or more areas from the younger player, that justify similar pay between two players with different levels of experience. 

Conducting a seven-step pay audit

To successfully perform a pay audit or pay equity analysis within your organization, follow these seven steps:

1. Plan early and plan well

Are you conducting your analysis to keep you on the winning side of state or federal regulations, or are you targeting opportunity gaps within your organization? Identifying the purpose of your analysis will dictate the methodology, timeline, personnel, required budget, and stakeholder buy-in necessary to conduct a thorough and accurate audit. 

2. Research your pay policies

Before you even gather the compensation rates for all relevant positions, you need to understand how these rates were determined. Having an understanding of historical pay rates will not only safeguard your organization against legal action but will also help you understand the root causes of any pay inequity that currently exists.

3. Gather the data

When gathering data, the information you’ll need will vary depending on the scope and purpose of your audit. Typically, you’ll want to include information on job title, job grade or level, department, date of hire, gender, and, depending on the scope of the audit, race, age, education level, beginning salary, and overtime pay and bonuses. Then, armed with the payment policies of your organization, you can start to gather other important information like performance ratings, punitive actions, and level of experience within the given field. Expect this step to be time and labor-intensive, as it will inform the bulk of your wage gap analysis.

4. Compare the work of employees with similar positions

While federal law makes distinctions for “equal work,” specific state laws carry language for broader inclusion under their definitions of “comparable” and “substantially similar” work. Similar, comparable, or equal work goes beyond job title and description. Human Resource Executive shares that “state law typically defines ‘comparable’ as work that requires substantially similar skills, responsibilities, and effort, and is performed under similar working conditions.” Comparability should extend across departments or units. For example, how much is an IT systems engineer paid vs. a manufacturing engineer?

Individual states have additional requirements for determining comparable work. Be sure to thoroughly research the labor laws of your state and address them when drawing your comparisons.

5. Analyze the data

After organizational roles have been compared and separated into groups, it’s time for your analysis. You’re looking to determine whether there are differences in wages that can be tied to gender, race, age, or any other criteria. This analysis varies in complexity depending on group size, measurable criteria, and type of compensation. 

For example, analyzing the hourly pay among entry-level employees when comparing across gender should be relatively straightforward. Conversely, measuring the pay gap among a group of 25 or more managers with varying genders, education levels, and races will produce a more intensive analysis, and thus will need to be displayed in a way that illustrates those differences. 

6. Assess whether pay differences are legally justified 

Your analysis may reveal that employees performing comparable work are not paid the same wage. However, this doesn’t necessarily mean that unlawful activity is occurring. Federal law dictates that differences in pay are legal if they are based on seniority, merit, a system that measures earnings, quantity or quality of production, or any factor other than sex. Title VII of the Civil Rights Act elaborates on the vague language of that last clause by adding language for protections specifically “on the basis of race, color, sex, religion or national origin.” Important note: Be sure to address any outliers in employee compensation. Any employees paid significantly more or less than their counterparts will affect your analysis. 

7. Take action to mitigate any pay differences

If no applicable state or federal laws justify the wage gaps in your organization, then it’s time to address the disparities. Your company will likely need to make adjustments to payment. However, you are not legally allowed to reduce employee compensation. This means you’ll need a financially viable way to raise the pay rate of one or several employees. Discuss your audit findings and get approval on a wage increase from finance or human resources. Then, take everything you’ve learned and store or publish your payment policies to inform any future hiring or wage decisions.

The topic of pay equity is complex. However, addressing it has far-reaching benefits when it comes to securing economic viability. Companies focused on ending wage discrimination can be part of an ethical solution that boosts both individual and organizational outcomes. Start your pay equity analysis today with Lucidchart, where you can overlay data in an organizational chart and use conditional formatting to highlight pay disparities.