What, Why, When and How to Conduct a Pay Equity Audit

While Pay Equity Audits are not new, there is currently increased attention by many organizations to look at pay through the lens of equity and fairness in the workplace.  Susan Kreeger, RealHR’s founder and CEO explores this topic with Jennifer Loftus, Founding Partner and National Director of Astron Solutions, a total rewards and talent management consulting firm, in a two-part interview.

Part I:  What, Why, When and How to Conduct a Pay Equity Audit

Part II: Audit Results and Implementation

Understanding Fundamentals

1. What is a Pay Equity Audit?

A Pay Equity Audit is a type of HR audit conducted when an organization is looking to find differences in compensation such as base pay, total cash compensation, variable pay, benefits, and other perquisites where those differences aren’t the result of job-related factors. Also critical to the process is for the organization to be committed to do something about what they uncover.

2. Typically, what are the audit categories that an organization considers? Have they changed after 2020?

For an organization just dipping its toe into the proverbial water in this area, an organization would most likely look at pay and gender.  There are many different protected categories that can be looked at for discrepancies but the big two are race and gender. Often age is added as a third category.

This has been consistent pre-2020 and post.  The primary difference now is the volume of activity, with many more organizations showing an interest in conducting audits. The content of the audits has remained mostly consistent.  Some organizations are looking more broadly but  generally speaking, they look at race, gender and age. Organizations might layer in additional differences such as disability and ethnicity.  This is limited by the kind of information that an organization has available.  Also, the size of the organization impacts the ability to analyze multiple categories—there needs to be a big enough sample of employees to use for analysis and to slice and dice the information.

3. What kind of data do you need to look at for the audit and what methods do you use?

It is important to determine with the client what data is available to gather.  For many organizations it can be a difficult lift to initially gather the information.  The data might need to be pulled from different systems and then edited to present consistently.  Astron uses a template for client data.  Typical information to gather includes

• The organization’s compensation policy
• Employee census to include unique identifiers such as Department, Job Title, Pay Range, Compensation (variable and base pay), Date of Hire, Education, etc.
• Protected Class Information
• Other factors such as housing benefits or other perks

4. How do you determine if pay gaps are based on legitimate job factors such as performance, tenure, geography, experience, etc. or whether there is systemic bias based on other factors?

To process and analyze the data, Astron first reviews the information from the statistical perspective, using tools similar to what the EEOC uses to look at data as described in EEOC Compliance Manual  Section 10-III.A.3.b.II and EEOC Directives Transmittal 915.003.  Generally, Astron also uses a compa-ratio analysis to look at where salaries of protected and non-protected class employees fall in their ranges. Next, they will look for discrepancies in the statistics such as pay differences within groups of employees. These differences require a deeper dive to uncover whether there are legitimate reasons for the discrepancies, such as when someone was hired, their location, or required training or education.

Education is an important factor to look at closely.  Very often, a bachelor’s degree is included in the requirements for a position but actually might not be necessary to perform the job.  The requirement can skew pay patterns by blocking certain protected classes from access to higher-paying jobs.

5. What are the main motivators behind requests that you receive to conduct a Pay Equity Audit?

Astron has found four main motivators behind requests to conduct Pay Equity Audits:

• Someone in leadership hears that an audit is a good idea and the organization decides to follow-up on finding out more about it.
• A more pro-active client might be looking for ways to set itself apart as an employer of choice by either emphasizing the equity within their organization or commitment to maintaining equity.
• Some clients might be concerned or suspect that they have an internal pay equity problem so they want to find it and correct it.
• Internal employee group pressure on management to ensure pay equity.

There has been a shift in motivation over the past ten years.  Around 2010, organizations were looking at conducting audits because they knew they had pay equity problems; 2016, organizations were more aware of the positive messaging around pay equity; 2020, organizations know that they can’t be left behind on ensuring pay equity.

6. How have you convinced reluctant organization leadership that it’s important to conduct a Pay Equity Audit? Are there times when you might recommend not to conduct an audit?

One of the most compelling calls to action for reluctant leadership is to consider various reputational and ROI factors.  A basic consideration for management is the cost of hiring a consultant and raising salaries versus the cost of litigation and reputational impact.  The positive reasons for conducting a pay equity audit are powerful, beginning with the ethical responsibility to maintain an equitable work environment. Positive branding, and attracting and retaining talent, also play a major role in management’s support for conducting the audit.

There are situations where Astron would not recommend moving forward with an audit.  Astron listens carefully for the commitment of management to make change if issues are uncovered.  If the organization is not ready to do that, it’s not a good idea to conduct the audit at this point. The audit might be tabled until other groundwork is laid.  The groundwork might include

• Prepare the organization to get comfortable with Diversity, Equity and Inclusion work in general. This could require bringing in DEI expertise and embarking on learning and development within the organization.
• Do a self-analysis. Look at what data is currently being collected by the organization. Determine if this gives a good understanding of where there might be pay equity issues.
• Consider starting with a particular division in the organization rather than opening up the entire organization to review. This would prepare for what might be uncovered in a more manageable way.

7. When finding pay differences among diverse categories of employees within an organization, what factors may impact those differences?

When looking at pay, it’s important to understand that pay is an end product of many other Human Resources activities.  These activities are part of a comprehensive system that impacts pay.  Some HR factors to consider:

• What is your hiring practice and are you getting a diverse pool of applicants?
• Have you set fair and appropriate salary ranges for positions?
• Is there bias in your performance review process?
• Are you sufficiently rewarding shift and overtime workers?
• Where do you have pockets of turnover and what is the cause?

8. Under what circumstances would you communicate in advance to employees that the organization is planning to conduct a Pay Equity Audit?

It depends. If Astron is brought in to do a Pay Equity Audit and there are no immediate issues of concern to address, they would usually do the audit work first and then present results as appropriate to employees, in consultation with management.  Astron prefers to present information to employees having done the work and then be able to provide answers to employees with the support of data.

If Astron is brought in because the organization needs to address specific immediate issues of concern about equity and fairness that have been raised, it would be beneficial to let employees know that the concerns are being addressed. It would be important to let  employees know that a Pay Equity Audit is going to be conducted as one of the steps to resolve the problem.

Culture also will be an important factor for making the decision about communicating in advance of the audit.  Some organizations are very transparent with all types of information, others not as much.

Stay tuned for Part II, Results and Implementation, of our Pay Equity Audit interview.