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What Is A Pay Equity Analysis?

Pay Equity Analysis

If there were ever a time when organizations could overlook pay equity, that time has passed. Many states are proposing or passing legislation and activist investors are making demands. The good news is conducting a pay equity analysis can help your company attract and retain top talent and can result in a reputational boost. 

But what is a pay equity analysis?

Pay Equity Analysis

Basically, such an analysis compares pay for similar work, factoring in legitimate variances such as experience, location, and role before calculating any pay gap between genders or races. 

Elements of an Effective Analysis

The process upon which many companies rely has three main steps. Those include:

  • Data collection. In the United States, you’ll need to collect by gender, race, base salary, total compensation and the above listed legitimate factors that potentially could drive pay differences.  Such factors should mirror the company’s pay philosophy.
  • Running statistical models. The labor force is separated into categories of workers who are subject to similar compensation practices. In each category, auditors estimate regression models that include legitimate factors. Compensation leaders, legal counsel and other critical stakeholders are asked to validate models to ensure they represent pay norms upon which the company aims to build. Such norms may include paying for experience at certain companies versus general work experience, pay driven by geographic variables, and pay for performance.
  • Risk and remediation. Using the regression models, companies can calculate systemic compensation variations across employee segments such as male and female, for the company overall, for separate regions or businesses and for specific jobs.

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If statistically important differences are found in employee categories that defy explanation by any model factors, the pay equity analysis will subsequently cite specific employees who should be considered for raises as well as the pay adjustments needed. Calculation of the adjusted pay gap for any workforce unit requires the calculation of the pay gap for each employee. This is defined as the percentage difference between actual and expected pay from the pertinent statistical model. Individual pay disparities are subsequently averaged for each worker category separately. Lastly, the adjusted compensation gap is calculated as the difference in the average gaps between employee segments.

Closing Pay Gaps

In general, closing pay gaps necessitates zeroing in on a disparate or bigger set of outliers – employees who should be considered for pay adjustments. It also may require more expenditures for pay adjustments. In addition, such closure calls for the ability to swiftly assess the effect of various adjustment strategies. 

Specifically, a popular approach considers diverting pay adjustments to the segment that is, when compared, markedly underpaid. Forwarding monies to that segment can substantially heighten the impact of constrained budgets and is fair in that any underpaid segment would be considered for a raise.

The approach also calls for lowering the number of standard deviations that are used to identify outliers. As the number of such deviations drops, the number of outliers, and the adjustment for each, goes up.

So, what is a pay equity analysis? Well, it’s characterized by three elements:  a thorough review by compensation leaders of statistical models, remediation strategies informed by impact estimates, as well as learning from statistical models, and related data examination to enhance equity efforts.

What your company learns along the way will inform optimal ways to allocate adjustments and point to other factors your company can use to address the overall root causes of pay inequities.

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