Pay equity analysis: A step-by-step guide

Pay equity analysis: A step-by-step guide

What is Pay Equity?

Pay equity analysis is a term used to describe the evaluation of pay differences among employees who perform jobs that require similar skills, effort, responsibility, and working conditions. A pay equity analysis aims to identify and correct pay disparities among employees who do 'comparable work' as defined by the Equal Pay Act of 1963. A pay equity analysis can also be conducted as part of an organization's commitment to promoting fairness and equity in the workplace and ensuring that its employees are paid fairly for their contributions.

Pay disparities persist for structural reasons even as traditional forms of discrimination fade. According to an American study conducted by the Economic Policy Institute, in 2019, Black workers earned 80% of the salary of white workers with comparable levels of education. Even as black workers close educational attainment gaps, the skills required in an increasingly technologically advanced workforce favor white workers.


Despite gains in educational attainment and work experience, research shows that women continue to be overrepresented in low-paying fields. Pay disparities become more pronounced where race and gender intersect.


An equal pay audit, also known as a pay equity analysis, ensures equal pay for equal work. Simply put, HR departments (or small business HR outsourcing companies) use a pay equity analysis tool to analyze pay rates within an organization and determine whether there are any unjustified pay disparities. This is accomplished by statistically analyzing payroll data.


What exactly is a pay equity analysis?


Pay equity is based on the idea that employees should be compensated equally for doing work of equal value. Work requiring substantially similar skills, responsibilities, and job complexity, performed under similar working conditions qualify for pay equity analysis. 


In a retail store, for example, a male shelf stacker and a female sales assistant should, in theory, be paid the same salary unless there is a compelling reason for a pay disparity. Employee differences in ability, tenure, and qualifications could account for a reasonable pay disparity.


Pay equity analysis (PEA) is performed by HR professionals to determine whether or not pay disparities exist in an organization. This is accomplished by statistically analyzing payroll data. Employees whose jobs are \"like for like\" have their pay compared. A PEA is typically performed once a year in an organization, but it can be performed whenever a company deems it appropriate. Any unjustified pay disparities are recommended for change.


Why should you conduct a pay equity analysis?

Many organizations continue to pay women and ethnic minorities less than White men for the same job. However, according to a Glassdoor survey, 67% of US employees would not apply for a job at a company where they believe there is a gender pay gap.


A pay equity analysis is both fair and ethical. It demonstrates your dedication to diversity, equity, and inclusion within your pay systems., 


HR is responsible for ensuring that the organization complies with any relevant pay equity legislation. Failure to do so may result in lawsuits and other legal action, as well as irreparable harm to the organization's reputation among employees and customers. 


Analysis of Internal and External Pay Equity

Before delving into a pay equity analysis, it's critical to distinguish between external and internal pay equity.


External equity entails comparing your company to the external market to see if you pay your employees per industry standards. This assists you in ensuring that you are making competitive job offers and providing fair salary structures.


Internal equity entails reviewing your company's pay systems to ensure that you fairly compensate your employees. In other words, you aren't paying employees unfairly low or high wages because of their age, race, or gender, among other factors.


Ideally, you should conduct an internal and external pay equity analysis regularly to assist you in developing an equitable compensation strategy.


What is a pay equity analysis?




Establish your objectives and gain support for them.


What is your primary goal in conducting a pay equity analysis?

The basic purpose of pay equity analysis is to decrease legal risks associated with the pay system. Is it possible to eradicate employee pay disparities?


It is also critical to obtain leadership approval before beginning your analysis. Knowing your ultimate goal will allow you to explain the purpose of the audit to senior management and how it will benefit the organization in the long run. Pay equity analysis requires people, time, and money. It is common for HR personnel, finance or payroll personnel, and legal counsel to be called in to assist with the audit. You may also want to enlist your analytics team's assistance or anyone familiar with regression analysis and statistical software.


Examine your existing pay policies and practices

The second step is to evaluate the current policies in place. What is the nature of your compensation packages? Are you observing any pay differentials based on demographic variables? Once such a suspicion has been noted, it's a good reason to do a deeper pay equity analysis. 


Begin with the fundamentals, such as determining whether your current pay policies are equitable based on gender and ethnicity, and work your way up. Google, for example, was concerned that customer-facing employees had an unfair advantage that made them more likely to be promoted to higher-paying positions. They conducted a pay equity audit and discovered this was not the case.


A pay disparity is justified under labor law if an organization can demonstrate that the disparity is due to one of the following factors:

  • a ranking system
  • a meritocracy system
  • a system that measures earnings, quantity, quality of production, or any other factor other than gender (also known as the \"catch-all\" exception, which includes factors such as education, training, or shift differential)


Related: Salary differentials


Determine the meaning of \"comparable work\" in your organization

\"Comparable work\" or \"substantially similar work\" is typically defined by labour law as work requiring similar skills, responsibilities, and input and performed under similar working conditions. Compatibility cannot be determined solely by job titles and job descriptions. To determine whether two jobs are comparable, the job must be examined in its entirety. This procedure is known as job evaluation. 


Identifying all employees who perform comparable work is critical in ensuring your organization meets legal requirements for pay equity. Because there is a growing trend for pay equity laws to go beyond gender, it is critical to check the specifics of the legislation in your area and identify all comparator groups.

Collect the necessary information

The greater the number of employees, the more reliable your estimates and results will be. We discovered that the results become more robust when 250 or more employees are analyzed.


The following step is to begin collecting data for analysis. This data can usually be extracted from your Human Resources Information System or payroll databases.


Here are some examples of variables to consider:

  • Information on pay:
  1. Bonuses 
  2. Basic salary
  3. Variable Compensation


  • Information about the position:
  1. Occupational title
  2. Team 
  3. Department 
  4. Job Level 
  5. Skill Pool


  • Employee/Contract details:
  1. Gender 
  2. (Weekly) Working times
  3. Age 
  4. Ethnicity 
  5. Tenure 
  6. Seniority
  7. Sexual preference
  8. Performance 
  9. Potential


The more variables you have, the more precise your estimation of potential biases will be.


It is critical to consider employee privacy when gathering data. Before you begin your analysis, make a plan to protect the confidentiality of all your employees. No information that could personally identify an employee should be shared. Before you proceed, remove all sensitive information from your data file.


  • Examine and identify pay disparities within your organization.

Many organizations benefit from enlisting the help of external experts or inviting their data analytics team to assist with this step.


However, it may benefit you and your HR team to improve your People Analytics skills to follow the analysis process. You could take a People Analytics course to improve your data-driven decision-making in HR.


When conducting a pay equity analysis, there are many things to consider. The most important is the purpose of the analysis. The objectives of the analysis will help determine the most appropriate methodology to use and the most critical data to collect. Additionally, analysts should know the organization's legal and compliance obligations.

Benjamin Sombi
This article was written by Benjamin a Consultant at Industrial Psychology Consultants (Pvt) Ltd

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