Pay equity analysis: The full picture

Pay equity is not simply a legal compliance exercise; it is an integral part of acquiring and maintaining a top-notch workforce.

How pay decisions are made with respect to annual incentives, merit, hiring, and all other pay adjustments are all necessary components of a fully developed pay equity plan.

Professor Jasmine Martin was thrilled when ABC University offered her a position as assistant professor, based on her stellar performance. She accepted the position and began teaching as the fall school year began. Unfortunately, her enthusiasm for working at ABC U was short-lived. It did not take long for Professor Martin to suspect that, despite her skill and hard work, she was not being paid equitably with the other assistant professors.

An honest conversation with a friendly colleague solidified her suspicion. As one of only a few females in her department, Professor Martin was being paid significantly less than her male peers. Although she enjoyed working with her students and connected with many of her colleagues, she decided to leave the university at the end of the semester. ABC U lost another quality employee.

Related: Here’s how you can proactively address gender pay inequity

Like many other organizations, ABC University suffered from a subconscious gender bias, one they were not aware that they harbored. Although their compensation philosophy included language on fair and equitable pay and they have policies in place to ensure external market competitiveness, only a rigorous internal pay equity study could have provided the university with the data they needed to realize that their pay scales were uneven when it came to gender. With the right data, ABC University could have made an informed pay decision and rectified the situation before it was too late, and prevented Professor Martin’s departure.

The background on pay equity

Pay equity laws generally mandate that employees be paid based on their skills, expertise, training, knowledge and performance regardless of gender, race, ethnicity or other protected class. In other words, an employee’s pay needs to align with other employees possessing similar skills performing the same work. However, pay equity is not simply a legal compliance exercise; rather, it is an integral part of acquiring and maintaining a top-notch workforce.

Being proactive with pay equity

There are significant risks involved in not analyzing an organization’s pay equity status and rectifying any inequities found. The risks include:

Such is the case with ABC University. It will eventually need to confront this recurring phenomenon, educate its leaders and managers, and adjust compensation. The institution may even face a potential legal battle. Even after these changes are successfully implemented, it could still take years to undo its damaged reputation. By contrast, if ABC University had discovered these issues beforehand through a proactive pay equity study, it would have saved the cost of losing quality candidates and a damaged reputation (soft costs), as well as achieved higher returns from its hiring investments (hard costs of recruiting and turnover).

The sooner an organization gets out in front of the issue, the faster it can attract a pool of diverse applicants. Like Professor Martin, qualified candidates are less likely to work at an establishment that they know is not addressing pay equity issues.

Regression analysis: The right tool for the job

Once an organization has decided to conduct a pay equity analysis, it must also ensure that the correct analyses are performed. Done incorrectly, it may lead to findings that mistakenly assess pay equity or inequity (false positives and false negatives). For example, a basic statistical analysis of the two organizations shown below, shows that both have an average gender pay gap of $10,000. However, only one of the two organizations likely has a systemic issue.

When conducted properly, this analysis will yield two primary findings:

  1. The extent to which systemic inequity exists (organization-wide and/or within a given department or function), such as in Organization A, where all males earn $10,000 more than all females.
  2. Identification of individual outliers, such as Employee 10 in Organization B.

While descriptive statistics can be used to identify pay gaps and areas of concern, it is limited to examining the relationship between two variables at a time. In order to determine whether gender truly affects pay, a more comprehensive analysis, using multiple regression is required, as it would create a more unassailable set of findings.

The first step is to account for other variables that are known to affect pay. Since there is a multitude of such variables, a multiple regression analysis is necessary to understand and quantify the effect of each variable. The outcome of this exercise will be a formula that can reasonably predict a range of acceptable pay based on quantifiable data. The regression analysis will identify those variables with the strongest impact on compensation. The appearance of “gender” (or any protected class) as a statistically significant predictor will signal if there are systemic issues.

Once the predictive formula proves accurate, it can be applied to each individual employee to derive an expected range of acceptable compensation to compare with their actual pay. Individual outliers are identified as those whose actual pay is outside their predicted range, both lower than predicted as well as higher. Without an accurate predictive formula, one inclination may be to target only the lowest paid females as opposed to adjusting pay for all those outside their predicted range. Following the misleading path of using basic descriptive statistics alone can result in incorrect findings and additional or unnecessary remediation costs.

Integrating pay equity into other HR processes

When remediation is necessary, there are multiple approaches. More than being simply a mathematical analysis or an across-the-board decision, an organization must look at each person holistically. A balanced approach would examine each outlier from the perspective of qualitative measures not included in the regression model. For example, it may be acceptable to be paid above the expected range if the role is tied to a strategic initiative and therefore critical to the organization and the incumbent has a specialized skill set that is difficult to find. Conversely, it may be acceptable to maintain pay below the predicted range if the employee is new to the role and/or not performing well.

While the financial cost of remediation is typically less than 0.5 percent of payroll, a true remediation plan goes beyond pay actions. Incorporating the outcomes of a pay equity analysis into other human resources functions can be an essential to an organization’s growth and success.

How pay decisions are made with respect to annual incentives, merit, hiring and all other pay adjustments are all necessary components of a fully developed pay equity plan. To thrive, Human Resources departments should consider implementing the following:

For example, although you may find that your compensation practices are equitable, you may discover that certain positions are male dominated, or do not attract minority employees. If an organization is looking to attract more females into its maintenance department, it may prefer to use the term “technician” rather than “repairman.” Alternatively, if an organization is looking for a successful project manager in a specific industry, rather than requiring five years of industry experience, it should consider looking for proof of relevant experience.

Further, it has been suggested in the media that one reason for the gender pay gap today is due to females taking more time away from work to raise families, sacrificing career growth and advancement opportunities that have lasting effects on their long-term career. Although it’s counterintuitive, introducing a parental leave policy that is inclusive of all parents (as opposed to “maternity”) could serve to combat that gap. Although initially it seems that this would benefit males and not females, if males begin to take advantage of this benefit, career service levels for both men and women could become more equalized over time.

When considering the annual salary budget, carve out a portion for pay equity adjustments and also consider the impact on other programs such as internal investment on training and development, merit, incentives, etc.

Rewards of achieving pay equity

There are many rewards for organizations that value and achieve pay equity. They will benefit from a better work culture, attract quality candidates, reduce legal risks, and increase engagement, performance and productivity.

Pay equity helps define the values of an organization and is a cornerstone of meaningful diversity and inclusion programs. It helps create and preserve value (both cultural and economic). To preserve the value that a pay equity analysis creates, internal equity should not just be conducted as a one-time test; rather, it should be monitored regularly over multiple years, depending on the size of the organization.

Choosing a consultant firm

If your organization is looking to grow, it’s important to select a consulting firm that is nationally recognized for its leadership in compensation consulting including its statistical expertise for pay equity analytics. More than simply complying with the law, a smart consultancy explores and determines how an organization will maximize its benefits by integrating real equity throughout its corridors. In addition to the basic objectives for delivering pay equity, the pay equity analysis should help leaders and managers understand their data and organization better.

Although most individuals can run their own tax report, only the best accountants can pinpoint the data that will find their clients the best deductions. The same holds true with a pay equity analysis. Whereas many organizations can run descriptive statistics to report on pay equity, a good consulting firm can identify the extent to which true inequities exist, where they are most egregious, and pinpoint the individuals most adversely affected.

An accomplished consulting firm can also develop a true remediation plan for how to incorporate the results into your culture. The consultancy’s compensation consulting expertise should also include communicating the analysis with executive leaders as well as the broad employee population, taking the analysis beyond compliance, so that the organization understands its historical approach, and how it is going to do right in the future.

Moshe Mayefsky is a senior consultant in Segal’s New York office with expertise in human resources and benefits plan consulting. He works with clients in a wide range of industries, including professional services firms, sports leagues, manufacturing and higher education. Mayefsky is regularly consulted for special projects requiring in-depth analysis and specialized technical solutions.

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