Benefits and Compensation

Pay Equity Audits: On the Rise and Becoming Essential

More companies are adding at least onepay equity auditto their annual planning. Society for Human Resource Management (SHRM) research from 2021 shows that 58% of organizations have reviewed their pay structures and decisions, with enterprise-level businesses taking the lead. More than 8 out of 10 said they adjust salaries to account for inequities.

These statistics are good news for anyone concerned about pay bias and equity. But what are pay equity audits, and why are they so popular now? To understand, we need a good definition of pay equity itself. At the most basic level, pay equity generally refers to equal pay for equal work, not to be confused with what’s commonly referred to as the “pay gap” (i.e., distributional differences in gender and race groups among pay grades within an organization that results in overall group average differences in pay).

Breakdown of a Pay Equity Analysis

With that in mind, let’s look at the makeup of a comprehensive pay equity audit. An audit would consider whether similarly situated employees are being paid the same after controlling for legitimate factors such as tenure or time in job. Consequently, a pay equity audit requires four components: similarly situated employee groupings (SSEGs), gender and race information, pay (base, non-base, or total), and explanatory factors.

During a pay equity audit, analysts usually focus on two primary questions: “Is employee actual pay similar to expected pay (calculated by a regression analysis)?” and “Are there statistically significant disparities in pay between demographic groups that cannot be explained?” The analyst might also investigate broader issues beyond the primary questions to look for subtle patterns of systemic pay bias, barriers to opportunity for traditionally disadvantaged groups, or the funneling of traditionally advantaged groups toward higher-paying roles and better experiences.

Why Pay Equity Analysis Is Necessary Now

The increase in interest incompensation analysisprocesses like pay equity audits comes from the alignment of several factors. First, the government has increased its focus on pay discrimination in recent years. In early 2022, President Joe Biden signed an Executive Order to advance pay equity among the many organizations that fall into the category of federal contractors. States like California and Illinois (among others) have also passed laws aimed at increasing pay transparency and closing the pay gap.

The second reason for the uptick in pay equity audits is the societal shift in the workforce. Candidates are becoming more calculated when accepting jobs and often asking for salaries that are higher than current employees in the same position within the organization. This is leading to salary compression and potential internal equity issues. Plus, pay equity alongside responsible environmental, social, and governance (ESG) activities can help increase corporations’ real and perceived value, per McKinsey & Co. reporting.

Of course, not all companies achieve pay equity by conducting audits. Organizational inaction frequently stems from one major misconception: that a lack of statistical significance in pay disparities means the organization has equitable pay. Therefore, the organization thinks that a pay equity audit with no statistically significant differences means it has equitable pay. However, a lack of statistically significant pay disparity does not mean an organization has achieved true pay equity.

For example, say a business has 30 different job titles and there are no statistically significant differences between the salaries of men and women at each job title level. Is this business doing a phenomenal job offering equal pay for equal work? Maybe and maybe not. What if a closer inspection shows that women earn less than males in each of the 30 different job titles? Could this be due to a systematic pay bias against women? Pay equityanalytics are becoming more powerful at detecting these subtle but persistent patterns in pay disparity.

How to Conduct a Pay Equity Audit

You’ll find the following steps helpful if you’ve never been quite sure how to effectively conduct a proactive pay equity audit. Although you might still prefer to work with a consultant, you’ll better understand what to expect.

1. Classify employees into SSEGs.

To conduct a compensation analysis, you need a database that contains all available incumbents under inquiry. The data set should include all employees (including part-time and temporary workers). To make SSEG classifications, look for similarities in job content, skills and qualifications needed, and responsibilities. Don’t forget to consider the sample size of the SSEG to ensure a meaningful statistical analysis.

2. Create the data set for the analysis.

What variables drive your company’s pay decisions? These could include SSEG, prior experience, date of hire, time in current position, employment status, job title, performance ratings, and more. The variables you choose will become your data set. Ensure you also include race and gender data to evaluate differences between groups.

3. Review your analysis feasibility.

This step is perhaps the most important and includes two parts. First, check each variable against specific criteria that can be used for proper evaluation in a regression analysis. Second, evaluate the statistical power of the analysis.

4. Conduct multiple regression analyses.

Now is the time to conduct regression analyses for all your job groupings. The analyses will determine where—after controlling for legitimate personal or structural factors—race, gender, or protected status still accounts for differences in pay. You can also calculate employees’ expected pay using regression at this step.

5. Evaluate the regression model and assumptions.

At this point, you have your final model. Use it to evaluate beta weights, the significance of slopes, the R² value and statistical and practical significance, and the adjusted R² value. Make corrections where appropriate. You can now start drawing conclusions and crafting an executive summary report describing the methodology and your results.

It might seem challenging to undergo regular pay equity audits, but they’re the right thing to do, and they can be a massive asset to your business. Being able to say that you pay fairly keeps employees engaged, attracts future talent and investors, and keeps you free from discrimination lawsuits and negative press.

Brian Marentette, PhD, specializes in employee hiring, promotion, termination, and compensation decisions in high-stakes settings. Over the past 15+ years, he has consulted organizations with national and global footprints in some of the most litigious environments to develop, validate, and defend more than 100 personnel selection procedures. Marentette has also helped numerous organizations navigate their personnel decisions alongside the U.S. Department of Justice to comply with federal consent decrees resulting from discrimination in past hiring and promotional practices. In his current role as director of the people insights division at Biddle Consulting Group Inc., Marentette leads the pay equity; diversity, equity, and inclusion (DEI); and Equal Employment Opportunity Commission/Office of Federal Contract Compliance Programs compliance analytics.