Why Pay Equity Audits Are Essential, and How to Start

A pay audit entails understanding the work an organization does, who is doing what parts and how much, and whether people doing similar work are paid the same. Many organizations fall short in that last area.

There are various reasons why organizations do not pay people the same. Often, those reasons are valid. But research and data show women and people of color are consistently paid less than their colleagues. And typically, it has little to do with differences in the work or workers’ education, skills and potential.

Pay inequities have been illegal in the U.S. for more than 60 years (thanks to the Equal Pay Act), yet the Economic Policy Institute recently reported the country has made little to no progress in closing gender pay gaps for the last three decades.

Much of that has to do with America’s collective past and culture. Blaming anyone for the current situation is not particularly useful. It is likely better to see the problem clearly, then address it in practical ways that promote sound business decisions. Pay equity audits can help do just that.

Practical Reasons Pay Equity Audits Matter

Inside organizations, such audits provide a clearer picture of specific pay equity risks, where compensation at the role and/or job classification level fits in the market, and where there may be recruiting or retention issues.

Outside organizations, states (e.g., California, Illinois, Massachusetts) are beginning to require employers to report pay data. In addition, the Equal Employment Opportunity Commission recently indicated it will revive the requirement to report pay on the EEO-1 and will propose the rule in January 2025.

Organizations likely do not want to report pay data to regulators unless they first know the details and facts behind it.

The Hardest Part of a Pay Equity Audit

To understand whether people who do comparable work are comparably paid, organizations typically need to examine the work itself. This involves looking at the skills, effort, responsibility and working conditions required to do a specific job. It does not involve looking at the people doing the jobs. That comes later.

Comparing work is likely the hardest part of a pay equity audit. That is because equal work is a misnomer. Two people with the same jobs at the same organization rarely do the same thing every day. So, organizations need to find a way to describe work and understand the value that role brings. And, the result can’t be based on what people are currently paid.

It may be tempting to skip a detailed analysis of the actual work and simply rely on job titles as proxies for the work. The trouble is that if an organization’s job titles are based on pay ranges and it compares pay based on job title, it is not comparing pay with work. That organization is only comparing pay with pay. This generally provides a false sense of security and equity.

To do a pay equity audit that provides meaningful information, organizations should take time to describe and understand the work people do based on their skills, effort, responsibility and working conditions.

There are many ways to approach this, and the outcome depends on the depth of the analysis, the specificity and accuracy of requisite information, and the level of utility and stringency toward data, metrics and analytics.

An organization can describe jobs in ways that allow it to compare what people do and what it takes to do it. That is, ultimately, what is important. At a minimum, for comparison’s sake, that requires reasonably detailed job descriptions that use the same words for the same tasks or attributes.

How to Conduct a Pay Equity Audit

Having the right resources and data is likely the secret to a successful pay equity analysis. With that in place, a computer may perform a multivariate regression calculation to see whether any pay gaps are statistically correlated to gender or race. After that, results may be examined and better understood.

A particularly useful framework breaks this down into six steps.

Secure the leadership mandate. This is how those who are tasked with ensuring pay equity get the resources needed to go through the process, work with the results, address any issues and perhaps even celebrate progress.
Group any and all comparable jobs. This is how the responsible parties understand and organize work descriptions, so they know what jobs are similar in skills, effort, responsibilities and working conditions. It sets up the ability to compare work and pay.
Model internal equity. This is a statistical analysis to see whether there are pay gaps between comparable jobs that can be statistically connected to race or gender.
Benchmark external competitiveness. This exercise compares pay within the organization to pay in similar industries, area employers and direct competitors. It helps to understand general market fit.
Communicate transparently. This is how those responsible handle the audit results and manage any necessary changes to address pay gaps. If it is prudent to raise some people’s pay while others do not receive a raise, the organization must be able to explain it in ways people understand and don’t take personally. This is also an opportunity to communicate the employer’s commitment to pay equity.
Update continuously. This is the lather/rinse/repeat step of audits. Pay equity can shift every time people enter or exit the organization. And, when a sudden shift like a merger or layoff occurs, it is likely essential to know how decisions affect both pay equity and market positioning.

Caveats and Considerations

Pay equity audits provide an opportunity to see the organization more clearly, understand its market competitiveness, improve compliance and reduce risk, and build a better workplace through enhanced communication, transparency and fairness.

Along the way, consider getting advice from internal or on-retainer employment lawyers about whether any identified pay gaps are problematic.

Sometimes there are good business reasons for pay differences. This is where the organization looks at the people doing the work and their skills, experience, tenure and any other special factors that support their pay.

Sometimes, the organization learns its job categories are off base, necessitating an adjustment and analysis rerun.

Not all pay gaps are discrimination, but all pay gaps require business reasons for their existence.

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