Equity Matters: The 5 essential steps of a pay equity analysis

Many business leaders know this stat: Women make 82 cents to every dollar earned by men. But most business leaders can’t tell you what the gender wage gap looks like at their own companies. 

Pay equity analyses can change that. By conducting a pay audit, leaders can identify potential inequities, and not just gaps in earnings between men and women. These analyses reveal the differences in pay between workers of different ethnicities, age, experience, level, department, and more — all in the name of pay equity.

When employers find and fix pay gaps, they enjoy several benefits. They create a workplace culture based on fairness. They cultivate trust with their employees. And they develop a strong employer brand candidates can’t ignore. 

Tangible, documented business outcomes bolster these benefits. Companies that commit to internal equity:

• Enjoy 87% less attrition.
• Are 70% more likely to win new markets.
• Have a 35% greater likelihood to beat competitors. 

At a recent Equity Matters Chat, a monthly discussion about all things pay equity, OpenComp Senior Compensation Consultant Kayla Reineke laid out the five essential steps of a pay audit. The event was hosted by the OPEN Imperative (Organizations for Pay Equity Now), a coalition of businesses committed to ending gender pay disparities in their organizations.

Step #1: Lay the groundwork for pay equity and pay transparency

Before an organization can perform a pay audit, it needs to define what pay equity is. Then, it must document how pay equity relates to its mission, ethics and other values. Leaders and HR practitioners need to have a strong grasp of a company’s compensation philosophy and pay practices, as well. This groundwork builds the foundation for the analysis, ensuring it's not just an item on a to-do list but an action toward creating a more equitable workplace and high-performing business.

Once that’s done, an organization needs to plan its audit. There are two types of pay equity assessments, Reineke said. 

1. The first is an overall assessment, which considers pay equity on a holistic level and identifies potential problem areas. 
   
   
2. The second type of assessment is a corrected or adjusted assessment, which applies factors like tenure, performance and experience to the overall analysis. These analyses determine whether wage gaps are lawful and justifiable. 

Step one, part two: Review company composition. Here, auditors look at factors like the company’s percent breakdown by gender, ethnicity, and other demographic data. This preparation informs the rest of the analysis — these categories serve as lenses to view the information from the audit. 

Check out Compensation philosophy 101 in OpenComp’s Compensation Academy courses.

Step #2: Examine salary and equity ownership

Now comes the analyzing. Companies can start by examining median and average salaries. This is the time to examine the percent ownership for each demographic group. 

This exercise provides a clear picture of whether there are pay gaps between different groups, and where they exist. Here, as with the following steps, companies should view the comp data through the factors they brainstormed in step one. “Any comp data you have that could impact the way someone is paid, cut and slice the comp data accordingly,” Reineke said. “Parsing your comp data allows you to hone in on those areas that have outliers and potential inequities.”

The analysis may reveal, for example, a base salary gap between men and women or Black workers and white workers. It could also uncover an imbalance in ownership: Do men have 75% ownership when they only represent 50% composition? “Looking for outliers like that will be really important,” Reineke said.

Read up on headcount planning in OpenComp’s Compensation Academy courses.

Step #3: Analyze market competitiveness

By comparing employee pay to the market rate, employers can determine if there are disparities that need to be addressed. Employers should hunt for inconsistencies. Are older workers and younger workers being treated similarly against the market? This exercise may reveal that women are being paid at the 45th percentile while their male counterparts are being paid at the 55th.

Learn more about benchmarking in OpenComp’s Compensation Academy courses.

Step #4: Review salary range positioning

The next step: Review how employees fall within salary ranges. Of the employees who fall below the respective salary range minimums, are the majority female or male? Who is compensated above the range maximum? What group makes up the majority of that population?

If employers don’t have salary ranges, they should develop them, Reineke said. In the meantime, they can still compare employee pay relative to their target market positioning using a ratio. For example, if an organization aims to pay software engineers at the 75th percentile, how close are they actually being paid to that percentile?

Find expert tips on setting salary ranges in OpenComp’s Compensation Academy courses.

Step #5: Take action

Once a company has examined, analyzed and parsed its comp data, it shouldn’t sleep on its findings. “You want to develop that plan of action,” Reineke said. “How are you going to close that gap?”

In an ideal world, companies proactively budget to fix pay discrepancies. But that budget may disappear amid rocky economic conditions. “In these instances, you need to make sure you track or flag these inequities so they’re top priority when the budget is available,” Reineke said.

Fixing pay gaps goes beyond adjusting someone’s earnings. Leaders must work to uncover the root causes of pay inequities and design corrective programs to eliminate those gaps for good.

Discover the future of pay equity in OpenComp’s Compensation Academy.

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Conducting a pay equity analysis is a complex process, but it's critical to creating an equitable workplace. By following these five steps, organizations can ensure that their pay practices are fair, justifiable and in line with their values and mission.

If you’re overwhelmed at the thought of conducting a pay equity analysis, consider joining the OPEN Imperative. Members receive a pay equity analysis, courtesy of OpenComp. Our monthly Equity Matters chats will connect you with fellow professionals spearheading pay equity efforts at their own organizations, leaders who share in your challenges and commitment to closing the gender pay gap once and for all. 

Emily Sweet is VP of Social Impact and OPEN Imperative Lead at OpenComp. She writes about topics including pay equity and diversity, equity & inclusion (DEI). A board member of the National Council of Jewish Women, Emily is a veteran philanthropic leader and policy advisor with more than 20 years experience advancing bold solutions to big problems that drive impact and inspire collective action. Connect with her on LinkedIn here.