Should We Do A Pay Equity Analysis?

Dear Peoplism,

We recently ran an engagement survey, and one of the questions we scored lowest on was whether employees feel their compensation is fair. Over half the company doesn’t agree their compensation is fair, and that is especially the case for women and our employees of color. It’s a competitive market for tech talent, so I’m not that surprised to see that people don’t think their compensation is fair overall. But I’m a bit surprised to see that there is such a difference for women and employees of color because we have pay bands and all employees are within range of the pay band for their role. I’m not sure what to do about this finding. I’ve been hearing more and more about pay equity analysis. Should we do a pay equity analysis as a next step?

Sincerely,
Perplexed About Pay Equity

Dear Perplexed About Pay Equity,

You’re not alone in your confusion. We all know that compensation fairness is crucial. But as with most complex problems, the solution–and even the diagnosis–isn’t simple.

Let’s break things down so that we can decide if a pay equity analysis is right for your organization.

How to Address Pay Equity: Understanding Unadjusted vs Adjusted Pay Gaps

To get at the root of the issue of pay equity we have to understand the difference between an “unadjusted pay gap” and an “adjusted pay gap.” To calculate the unadjusted pay gap at a company, you simply look at the average salary of one group of employees (e.g. women) compared to the average salary of another group of employees (e.g. men). This is the calculation that underlies reports that women make 0.83 cents to the dollar compared to men, and Black women make 0.63 cents to the dollar compared to White men.

However, the unadjusted pay gap doesn’t take into consideration that, for example, women may be working in less lucrative fields or have lower tenure than men. Once we “adjust” for such factors, we can compare employees from different groups that otherwise share the same characteristics (like education, tenure, etc.) and are in similar roles. This gives us the “adjusted pay gap.”

The adjusted pay gap is what most pay equity analyses are concerned with. The adjusted pay gap tells us if the pay gap at an organization is the result of one group of people being paid more than another to do the same or similar job. That would clearly be discriminatory. If that’s happening, there are fairly simple solutions, including setting pay bands, eliminating the ability to negotiate, and making one-time adjustments so that everyone is being paid equitably for doing the same job.

In our view, pay equity–aka not having an adjusted pay gap–is table stakes. It’s the bare minimum. Remember that since the 2009 Lilly Ledbetter Act was signed, employees can sue for pay discrimination even if they find out about a pay inequity years later. So, yes, you should build pay equity analysis into your annual compensation review to make sure there are no big structural issues in how you pay people for doing similar roles.

However, often when we do run an adjusted pay gap analysis for clients, we find that there is no pay gap for underrepresented groups. If you have clear pay bands, you limit negotiating outside those bands and have clear criteria for raises, you may fall into that category.

Why Unadjusted Pay Gap is a Key Metric

Despite having pay bands, your underrepresented employees still report unfairness. We believe that’s because it’s really the unadjusted pay gap that drives unfairness—and the spiral of retention and engagement problems that stem from unfairness.

Remember that the unadjusted pay gap is the average difference in pay between groups. If at your company, high-paying roles (e.g. leadership, software engineer) are disproportionately filled by majority groups and lower-paying roles (e.g. support, administrative assistant) are filled by minority groups, you are going to have a high unadjusted wage gap.

If your underrepresented employees don’t see people like them being hired for high-paying roles and don’t see a path for themselves to get promoted into higher-paying levels, they are understandably going to feel that their compensation at your company is fundamentally unfair.

That’s why we believe it’s critical not just to look at pay equity within roles but also to examine who you’re hiring and promoting at different pay bands and levels.

Examining Your Workforce: The First Step to Addressing Pay Equity

So should a pay equity analysis be your immediate next step? If you truly stick to pay bands and no employees fall outside them, we would actually say no.

We're definitely not saying it's a bad idea to do a pay equity analysis. Regular pay equity analysis is part of a well-balanced DEIB strategy. If you are interested in running a pay equity analysis to see if your assumptions are true, we can help.

But if you need to prioritize your resources (and who doesn't?), your first next step should be to examine the makeup of your workforce by pay band and demographics. You should also look at how long people are in a role before being promoted and see if there are any disparities (i.e. do some groups of employees get promoted much faster than others?). If you see major disparities in these areas, you need to address your hiring and promotion processes. That will likely go a longer way toward improving the underlying problems your underrepresented employees are signaling than a pay equity analysis would.

Until there is equity in representation in high-paying roles, we can’t win the fight for true pay equity–or the fight for engaged employees.

Good luck,
The Peoplism Team

If you need help understanding if a pay equity analysis is right for your organization, get in touch.