Lindsay Morgia
September 25, 2023

6 steps for conducting an effective pay equity audit

As workplaces evolve, workers are holding their employers accountable by demanding more pay transparency. On average, women earn 82 cents for every dollar a man earns, and employees want to know what their companies are doing to address this pay gap.

According to beqom’s 2022 Compensation and Culture Report:

  • 37% of US employees said their company does not share current gender pay gap data internally or externally.
  • 43% of US workers who had discussed salaries with a colleague found they were earning less than the colleague.
  • This lack of transparency fuels a feeling among 29% of US workers that employers do not pay workers fairly.

Leaders can start closing the gap by conducting a pay equity audit to identify any disparities that exist within their organizations.

A pay equity audit is a type of analysis that can show leaders where pay inequities exist within the company and what factors – like race or gender – may influence compensation. The goal is to ensure that employees who do similar work earn similar pay. Completing these audits can be challenging. It takes time, money, commitment, and cooperation to do them correctly, however, it may be necessary.

Women of color face more significant pay discrepancies, even when factoring in education. This happens because of systemic biases, which can lead to:

  • Limited leadership development for women
  • Less support for women's career development
  • Leaders who are less likely to consider women for leadership roles, regardless of women's capabilities or performance

Also, women are more likely to leave the workforce because of caretaking responsibilities and tend to incur higher wage penalties when they return.

Pay inequities can lead to substantial income losses for workers. Black and Latina women can lose over $1 million over a 40-year career because of pay discrepancies.

For leaders, a failure to address pay inequities can lead to problems in recruiting and retaining top talent. However, the best way to ensure fairness in compensation is to conduct a pay equity audit. The six steps below will guide you through key elements of the process.

Step #1: Gather the team

Typically, HR departments take the lead on pay equity analyses. However, it is also important to include the finance department. In some cases, companies may want to invite legal counsel to ensure the company is complying with state and federal laws.

Companies with fewer than 500 employees may choose to conduct the audit internally. However, larger companies or those with limited HR resources may want to hire a consulting firm, such as Perfeqta, to support them in the process.

Step #2: Identify your goals

Why is your company doing a pay equity audit at this moment? What does your team want to learn from the analysis? Clear goals and objectives will help shape the methods you use and the data you need to complete the audit.

For instance, if your company wants to look at pay gaps by gender, the data collection process will look different compared to analyzing pay gaps by race or ethnicity. A consulting firm can help your team establish the goals and objectives that are most relevant to your business.

Step #3: Get clear on pay practices

Having a clear, shared understanding of pay policies before conducting the analysis can provide some context for the results. Some questions for the team to consider include:

  • How does the company currently make decisions about pay? Who makes those decisions, and what framework do they use to guide their thinking?
  • How much discretion do hiring managers have regarding whom they hire and the compensation packages they offer candidates?
  • Is there a hiring budget that may be influencing salary decisions?

Having a list of the current pay policies also serves as a starting point for the team when they are ready to identify solutions to pay inequities.

Step #4: Collect the data

Comprehensive pay audits require the following information:

  • Job title
  • Job level
  • Department
  • Hire data
  • Demographic information (e.g., race, gender, sexual orientation, education levels)
  • Base wages
  • Overtime wages
  • Bonuses
  • Any other forms of compensation

Suppose your company has a centralized database that includes up-to-date employee demographics, department, job level, and salary. In that case, gathering the necessary data for the audit should be fairly straightforward. However, for many companies, this is the step where things start to get tricky and time-consuming.

Some common issues teams may face during data collection include:

  • The data is not up to date
  • Crucial data is missing from the database
  • Data has been entered inconsistently or incorrectly
  • The data is housed in different databases that do not communicate with each other
  • The source of the data is unclear

It may be necessary to create and send out an employee survey to ensure accuracy, especially regarding demographics.

Step #5: Analyze the data

The methodology for the analysis depends on the organization's size and how much data is available. Smaller organizations with fewer than 30 employees, or those with limited data, can examine the differences in salaries between comparable groups. For instance, small companies can look at the average pay between men and women at the same job and education levels and compare the differences.

Larger companies will likely have enough data to conduct a regression analysis. A regression analysis can demonstrate which factors have the most influence on salary.

Step #6: Take action

There are several ways to remediate pay discrepancies evident from the pay audit. On average, companies make a 4-6% salary adjustment for those affected by pay gaps. These adjustments are often included in annual pay adjustments or are made incrementally going forward.

The team may also change some of its hiring and pay policies to reduce the gap for future employees. Any decisions regarding policy changes must be clearly communicated to employees and carefully monitored by the leadership team to ensure proper implementation. Once the initial pay equity analysis is complete, leaders can run the analysis annually as part of the pay review process.

Learn more about building an equitable workplace through inclusive leadership.

Download our free resource guide, The Executive’s Guide to Inclusive Leadership. We share actionable strategies for company executives who want to lead with empathy, practice allyship, and make decisions rooted in equity.

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