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

Pay Equity Audits are gaining increased attention from organizations aiming to assess compensation through the lens of equity and fairness. In this article, Susan Kreeger, founder and CEO of ProspectHR, explores this essential 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 the Fundamentals of a Pay Equity Audit

What is a Pay Equity Audit?

A Pay Equity Audit is an HR audit designed to uncover pay discrepancies in base pay, total compensation, variable pay, benefits, and other perks—discrepancies that are not job-related. Conducting this audit is only valuable if the organization is committed to taking action on the findings and making meaningful changes to address any inequities.

What Are the Key Audit Categories and How Have They Changed Post-2020?

For organizations starting a Pay Equity Audit, the primary focus often revolves around gender pay disparities. However, many organizations also examine race and age as additional categories. The content of the audits has remained mostly consistent before and after 2020, but the volume of organizations now interested in conducting audits has increased. Many organizations also include categories such as disability, ethnicity, and other protected classes, depending on the available data.

The size of an organization often influences the audit’s scope; larger companies with a more diverse workforce can more easily analyze multiple categories, while smaller organizations may need to start with fewer categories to ensure statistical validity.

What Data is Required for a Pay Equity Audit and What Methods Are Used?

The data required for a Pay Equity Audit typically includes compensation policies, employee census data (with job title, pay range, hire date, etc.), protected class information, and other compensation-related factors like benefits and perks. Gathering this data can be a challenge, as it may need to be pulled from various systems and cleaned up to present consistently. Astron Solutions uses a template to standardize client data for analysis.

How Do You Determine if Pay Gaps Are Legitimate or Due to Systemic Bias?

Astron analyzes the data statistically, similar to the methods outlined by the EEOC (Equal Employment Opportunity Commission). Using tools like compa-ratio analysis, Astron identifies discrepancies in pay within protected and non-protected class employees. If discrepancies are found, a deeper dive is necessary to determine if the gaps are due to legitimate job-related factors, such as tenure, location, performance, or education, or if they are the result of unconscious bias or other systemic issues.

What Motivates Organizations to Conduct a Pay Equity Audit?

There are four main motivators for organizations to conduct Pay Equity Audits:

1. Leadership hears about audits and decides to act.
2. Proactive companies aiming to become employers of choice emphasize their commitment to equity.
3. Organizations suspect internal pay equity issues and want to address them.
4. Internal employee pressure to ensure pay equity.

While organizations in 2010 were largely reacting to known pay equity problems, by 2020, most organizations recognized the importance of addressing pay equity to remain competitive in the job market.

How Do You Convince Reluctant Leadership to Conduct a Pay Equity Audit?

For organizations hesitant to conduct an audit, the most compelling reasons often include the potential reputational and ROI benefits. Addressing pay equity can enhance a company’s brand, attract and retain top talent, and provide ethical responsibility. The cost of conducting an audit may be high, but it’s often outweighed by the risks of litigation or reputational damage.

In some cases, Astron might not recommend moving forward with an audit if the organization is not prepared to act on the findings. A careful preparation of leadership and organizational readiness is essential for successful implementation.

What Factors Impact Pay Differences Among Diverse Employee Groups?

When examining Pay Equity Audits, it is critical to understand that pay disparities are often influenced by several HR factors, including:

• Hiring practices
• Salary range fairness
• Performance review biases
• Overtime and shift work reward systems
• Turnover and retention patterns

These factors should be part of a broader conversation when analyzing pay equity within an organization.

When Should You Communicate a Pay Equity Audit to Employees?

Communication about a Pay Equity Audit to employees depends on the audit’s purpose. If the audit is performed proactively with no immediate concerns, the audit results should be presented after the data has been gathered and analyzed. However, if the audit is a response to specific equity concerns, it is helpful to inform employees upfront about the audit and its purpose.

Company culture plays a significant role in how this information is shared. Some companies prefer complete transparency, while others may take a more cautious approach.

Conclusion

Pay Equity Audits are a critical tool for ensuring fairness in compensation. Organizations that conduct these audits and take meaningful action can create more equitable and inclusive workplaces, fostering greater employee satisfaction and attracting top talent. As awareness around pay equity grows, businesses can no longer afford to ignore the importance of this process. It is not just about addressing past issues but proactively ensuring fair and equitable compensation for all employees moving forward.

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