Companies without a regular pay equity analysis, or pay equity audit, schedule risk serious compensation issues, like pay inequity and salary compression.
PEAs help organizations determine whether people in similar roles with similar skill sets are being paid fairly for their work. These audits, which usually happen annually, are necessary for most companies with at least 50 employees.
PEAs are big commitments. They’re time-consuming and require extra people on board to help collect, analyze, and interpret data properly.
But growing companies have larger risks for pay inequities than smaller companies, so it’s crucial to integrate PEAs into their compensation management strategies.
There’s a reason that some of the most successful companies have invested significant money and time into pay equity analysis: it gets results.
Pay Equity Gaps Come from HR Inaction
It’s usually not conscious discrimination that causes gaps in pay equity. Rather, the most common cause of pay inequities is HR inaction.
Pay equity is largely the responsibility of HR. HR manages salary ranges, job descriptions, bonuses, and raises. PEAs are necessary for keeping all of the above accurate and fair, so when PEAs aren’t being done, other aspects of compensation management can fall through the cracks.
Salaries for people in the same role drift apart, compounding raises widen pay gaps, and long-time workers become at risk for salary compression without PEAs leveling the playing field.
Although these gaps are influenced by several outside factors, it’s HR’s job to fix the problem and prevent future issues. The best fix, of course, is regular and in-depth PEAs.
Most organizations using PEAs can benefit from doing them annually. Not prioritizing them will only intensify current challenges and potentially open the doors to new ones, like employee dissatisfaction, high turnover rates, and even lawsuits.
How to Run a Pay Equity Analysis
The following steps outline the general pacing and necessary components of a pay equity analysis.
1. Consult a Lawyer
I can’t stress this first step enough: get a lawyer with experience in compensation issues and PEAs.
The laws surrounding compensation can be confusing, and this is one area you don’t want to try to interpret yourself. An experienced lawyer will explain everything to you regarding the pay policies your company should have in place and the laws it needs to follow based on federal and state regulations.
They’ll also guide you when questions or problems arise, helping you prevent small issues from snowballing into larger ones.
Having a quality lawyer on your side is a worthy investment.
Think about it this way: Would you rather figure the ongoing cost of a lawyer into your budget now or deal with potentially hefty financial repercussions of a pay lawsuit in the future because you didn’t invest in one?
2. Collect Employee Data
It’s time to collect data that gives insight into pay equity at your company. This data should inform you in three key areas:
- Employee data: Everything from an employee’s gender to their age, seniority, and education should come into play here. Disability status, LGBTQIA+ member status, national origin, and veteran status should also be included. This data showcases the employee’s demographics to help you see any gaps in pay with employees of specific ages, performance levels, working hours per week, etc.
- Role data: This data includes job titles and descriptions as well as where they fall within the organization’s tiers of roles. For example, is it an executive position or an entry-level position? What skills does it require? Is there a certain level of education someone needs to have to fill this role?
- Pay data: Finally, you need wage and salary data, which includes base wages and salaries plus any bonuses and variable compensation, like commissions.
The more in-depth you can go with data in each of these areas, the better. You want to see as detailed of a picture as possible for each employee to accurately gauge pay equity.
Data collection needs to be handled carefully, though. The data collected includes sensitive and identifying information about the organization’s employees, so the collection process should be guided with the help of a lawyer and privacy experts.
Enlist the help of a data collection service with experience handling employee data in your region. Remember that the European Union has its own laws regarding data collection and privacy, and if you have employees covered under the EU, you’ll need to also abide by its rules.
Taking these steps ensures that HR and anyone else working with the data to conduct the pay equity analysis can’t see employees’ personally identifying information.
3. Clean and Analyze the Data
The first step in performing data analysis for a PEA is to clean the gathered data. Cleaning data refers to scrubbing any incomplete, erroneous, or duplicate data from the collection, giving you a clean slate to work with.
Start by looking over the data. Remove any symbols, like %, #, or $, that could skew calculations. Make sure salary figures display correctly and there aren’t rows or columns of data missing or incomplete. Also, can you easily decipher between hourly wages and annual salaries?
Then, if necessary, group together similar jobs, like those you keep within the same salary bands, jobs with similar titles, or roles within one department. This can help you weed out small groups of data, which can be difficult to interpret accurately.
Finally, wrap up the initial clean-up with an expert data analyst check to ensure your dataset is ready to go.
Then, it’s time to perform an analysis. Ideally, you’ll have your third-party data analyst or an in-house analytics team complete this leg of the process unless you have people in HR with data analytics expertise.
If you’re handing the task to HR, equip them with data analysis software that can help them do the job, like PayAnalytics or ADP DataCloud. These tools can also assist with cleaning data and grouping it to prepare it for interpretation.
4. Interpret the Data
What does the data you’ve gathered mean? This step in the process puts meaning behind the data, allowing you to see where gaps in pay might be stemming from.
This is where you dig deep to pinpoint problem areas.
Are long-term employees still sitting near the bottom of a salary range, similar to newer employees? Are you seeing some employees with not-so-great performance reviews getting bonuses or raises that might not be warranted? Are there any disparities in pay between genders, races, ages, or departments?
Any significant disparities should be reanalyzed by looking at different analysis models to ensure accuracy.
5. Communicate the Results
Finally, HR should share the results of PEAs, first with leadership and then with employees.
Communicate directly with compensation decision-makers, as they’re ultimately in control of how and how much people get paid. Significant changes might need to happen, like adjusting the payroll budget or revamping salary ranges.
The employees who are affected by pay issues have the right to know. Talk them through the problem and provide a detailed solution to address the problem immediately.
Be sure to leave the lines of communication open so the employee feels comfortable asking questions or getting more clarity if needed.
The Best Way to Run a Pay Equity Analysis
At smaller companies, HR could conduct PEAs. But in most cases, hiring someone to do them makes the most sense. This isn’t something most organizations should tackle on their own.
An outside person or team that explicitly works in salary data analysis has a high level of experience with PEAs, so they know what data to use, how to clean that data, and how to interpret it. This can be a time-consuming and tricky process that’s best left to experts.
Additionally, hiring a third party to handle the job prevents in-house biases from creeping in. A third party has no ties to the organization, so they can collect, analyze, and present data unbiasedly.
This also frees up HR to focus on its many other responsibilities, like overseeing employee benefits, managing payroll services, and recruiting and training.
