Written by
Ruth Thomas
Senior Consultant and Co-Founder, CURO
LinkedIn

12 November 2020

Why care about pay equity?

As the notion of responsible business climbs the agenda expectations for fair pay has emerged from multi-stakeholders. While awareness of pay equity and its importance was originally driven by an evolving legislative landscape, but more recently social movements including #MeToo and Black Lives Matters, have highlighted the need to improve gender and racial equality. Then came the unexpected global pandemic. This resulted in a disproportionately negative impact on minority groups and threatened a setback on any progress made to date on pay equity and equality in the working world. 

Even with all of this attention, pay gaps still exist. These events have led to changes in what society expects of businesses. It’s become evident that those who fail to address fair pay will be left behind – both in the eyes of society, shareholders, and in the war for top talent. 

In this blog, you’ll learn: 

  • The meaning of pay equity 
  • How to get started with pay equity audits
  • Things to consider before performing a PEA 
  • When to use cohort and statistical modelling for analysis
  • How to remediate wage disparities 


What is pay equity?

Taking it back to the basics, pay equity is when compensation is paid fairly by employers to their employees and pay is determined free of any discrimination on the basis of a characteristic protected by law (such as race, ethnicity, religion or sexual orientation). But, pay equity is also about creating an inclusive workplace for all. The uncomfortable fact is that wherever pay gaps exist, inequality in the workplace exists. It also means that a lack of opportunity for all employees to earn the same exists.

The facts:

  • It’s been 50+ years of women and people of color earning at best $0.88 to every $1.00 white men earn. 
  • The World Economic Forum has equal pay predictions for the year 2277.
  • 60% of employees who perceived they were underpaid said they intended to leave, compared to only 39% of those who perceived they were overpaid, according to the Payscale salary survey.

For all the reasons stated above - ethics, shareholder expectations, company culture, hot job market, and compliance - the best way for companies to ensure they’re paying employees fairly is to start with a pay equity audit.

In recent surveys by Harvard Business Review and Trusaic, companies said that they were taking pay equity concerns seriously; but another survey that looked at the disclosures of the 922 largest public US companies, found that just 22% reported performing a pay equity audit between 2016 and 2020

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Getting started with pay equity audits (PEAs)

Pay equity audits, or PEAs, take one of two approaches: We have to do it or we need to do it because it’s the right thing to do.

In the simplest terms, a PEA involves comparing the pay of employees doing “like for like” work and investigating the causes of any pay gaps or differences that cannot be justified. The first step for a pay audit is to identify your own purpose or goals. In some cases, it may be that your company is trying to minimize pricey lawsuits and legal action. In other cases, the purpose may be to respond to shareholder demands for a pay gap analysis. Or your team may want to ensure that you’re paying employees fairly. The purpose of your pay equity audit will drive the process and the approach.

There are various ways of looking at pay equity within your entire organization or group of employees. Each approach gives a different lens through which to look, and all are useful in understanding how pay equity plays out. 

Pay equity approaches include:

  1. Raw (or unadjusted) pay gap
  2. Adjusted pay gap  

 

Raw pay gap

The ‘raw’ pay gap, also known as ‘unadjusted’ pay gap, is the difference between the average (determined by the mean or median) pay of a comparator group to the average pay of the baseline group. This gives an overall position on equity but often is not actually related to pay but to structural issues or root causes within the organization.

Root Causes: Allow employers to address systemic and structural issues, rather than just the symptoms. Much of what drives pay inequity is a result of barriers to entry and career progression for certain groups of employees throughout the talent lifecycle.

 

Adjusted pay gap

The ‘adjusted’ pay gap is the pay gap once all other factors that influence pay have been taken into account and is closer to analysis of whether there is ‘equal pay’ in your organization. With the ‘adjusted’ pay gap, it is important to determine whether those other factors are ‘permitted’.

Permitted Factors:
Explain a difference in pay between two employees that is allowed by law. This means that employees with the same permitted factors are paid equally, whether they are in the baseline group or the comparator group.


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Things to consider before performing your pay equity audit

  1. Understanding legislation
  2. Grouping employees
  3. Collecting employee data
  4. Comparing types of pay and business locations 


Understanding legislation

It’s important to forecast any legal issues that may impact your pay equity analysis. For example, establishing legal privilege to protect any analysis being discoverable in the event of litigation, can be critical in certain locations. Other legislation around data protection should be considered and of course, there is
evolving legislation being introduced to tackle pay equity worldwide.

Realigning incentives

Next, you need a methodology for grouping employees doing like work or work that is the same. Some companies already have job classification frameworks or use benchmarking levels. For others who pay spot rates, for example, this is a larger piece of work. When looking at how to divide your workforce into separate viewpoints for analysis, this division can be vertically (e.g. by function or job family), horizontally (e.g. by job level) and by location (e.g. by each office individually), or a combination of all three. As the size of the group decreases, you get closer to an equal pay audit, where the pay gap relates to similarly situated employees. In a typical organization, pay analysis groups (PAGs) will be created, looking at roles in the same job level, job family and location.

Collecting employee data

Without accurate, up-to-date data, you cannot start to understand the full picture of your workforce and might not uncover crucial issues that need to be addressed. Fundamental to any PEA is having data related to the protected characteristics being reviewed. Most companies have gender data, however, many do not have ethnicity or race data - and even fewer have data relating to disability, LGBTQ+ or religion. This data needs to be collected sensitively and with informed consent.

Comparing types of pay and business locations

Base pay is the obvious starting point. But some companies might prefer to take a total compensation approach including bonuses, long term incentives, and benefits. If your team is global, ensuring pay information has been converted using a pay parity rate is key, rather than just an exchange rate. This is so the cost of living is also taken into consideration. If this conversion is not possible, then it is best to look at each country separately.

Using cohort and statistical analysis in pay equity

After forecasting legal issues and legislation requirements, grouping your employees into pay analysis groups, collecting data, and comparing pay internationally, you can move onto your analysis. Here are a few types of analysis available for use in your pay equity audit:

Cohort analysis

A cohort analysis is a comparison of employees within pay analysis groups without statistical analysis. You can start by grouping employees into PAGs and analyzing their pay comparatively against the average pay for the group. Further grouping employees with similar permitted factors (like performance over time and qualification level) can manually help to identify if any pay disparities can be legitimately explained. Then adding in data on protected category status to your analysis helps you to segment outliers and target remedial action.

cohort-analysis-screenshot
Screenshot of cohort analysis example in CURO Pay Equity software

Regression analysis

Regression analysis investigates the variables that determine pay. The effects are measured simultaneously, i.e. the model attempts to estimate the contribution of each variable in the presence of the others. The analysis enables you to test whether a pay gap reduces after the dimensions have been controlled for. It also can generate predictions of what an employee would be paid based on their individual values.

regression-analysis-screenshot

Screenshot of regression analysis example in CURO Pay Equity software

ANOVA or analysis of variance

Another way to look at your data is by conducting an ANOVA or analysis of variance. This analysis determines the size of the contribution of each variable to the makeup of pay. It’s useful for your company as a whole and then for segments of your company’s team. It can also show whether a particular remuneration strategy is working – for example, if pay for performance is a large aim within a division, you would expect to see performance over time shown as having a large contribution.

ANOVA-screenshot

Screenshot of ANOVA analysis example in CURO Pay Equity software

 

Taking corrective actions for pay remediation

After you’ve completed your analysis, pay gaps should be remediated if they can’t be explained by one or more lawful justifications under federal and applicable state legislation. Consider the timing - and when possible - roll out changes into annual pay adjustments. It is also very important to communicate with hiring managers and others responsible pay decisions about the issues identified in the pay audit and the corrective actions being taken to remedy the problems so that the inequities do not perpetuate. Keep in mind that you can’t reduce the compensation of an employee to remedy a pay disparity.

Some issues will need process-related solutions and operational improvements to fix where pay inequity originated. This is where pay equity analysis becomes a valuable tool in your diversity, equity and inclusion (DE&I) strategy and why they should work together. Your team should then monitor hiring, promotion, and compensation processes on an on-going basis. Pay gaps can start to re-emerge as organizations experience turnover, re-structuring, changes in job duties, and subjective bias so it’s normal for compensation programs to need a revamp.


Ultimately, performing a pay equity audit creates an opportunity to engage employees and stakeholders in a conversation around values and your journey towards a truly diverse, equitable and inclusive workforce. This is because although pay equity is a key starting point, it’s just one piece of the puzzle of creating a diverse, equitable and inclusive workplace. For business leaders, it’s a matter of giving your workforce your word that you value their contributions to the company - and can prove it by paying them fairly for their hard work.

A commitment to equal pay takes time, investment, and a willingness to recognize that your past and current pay practices may be unfair. No team can complete one pay equity audit and think the work is done - it’s not - it takes ongoing action to create an equal, inclusive workplace for all. 

data-reporting-charts

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