Pay Equity Audits: Holding a Mirror to Current Compensation Practices
In addition to recent legislative changes in California, Delaware, Maryland, Massachusetts, New Jersey, New York, and Oregon, pay equity in the workplace continues to garner widespread attention and has employers asking what they can do to better prepare. Developing a strategy to proactively engage in a pay equity audit is often the first and most effective step to ensure pay equity and minimize potential legal risk.
What Should Employers Expect When Conducting a Pay Equity Audit?
The scope and complexity of a pay equity audit may vary by employer, but, ultimately, the goals are to (i) identify whether pay inequity exists that cannot be explained by neutral, bona fide factors, and (ii) determine whether an employer’s current policies are creating, or contributing, to these inequities. Employers should take these steps:
Identify the Scope of the Audit
It’s important to first identify what departments, positions, and/or locations will be addressed in the audit. However, this step should be treated as an ongoing conversation and updated as needed throughout the process. In addition, employers should do the following:
- Know the specific positions and geographic locations in the scope to anticipate the state or local equal pay laws that may apply. Consider evaluating the pay rates of all employees or targeting specific departments, locations, or positions.
- Compare apples to apples. This generally involves substantially similar skills, effort, responsibilities, and the performance of such responsibilities under similar working conditions; however, it is important to consult state law to determine the relevant factors.
- Whether partnering with outside counsel or in-house counsel, request that steps are taken to preserve the attorney-client privilege and work product.
Conduct the Audit
In general, a pay equity audit will compare the average pay of men to the average pay of women (or other protected categories, where covered by applicable law) within relevant positions/grades. Employers should examine procedures and processes currently in place—performance evaluation and compensation systems, job descriptions, training programs, and any additional factors it uses to determine pay rates. Here, employers can expect to dig into their pay data to analyze whether disparities exist. Employers should also do the following:
- Because pay equity is not limited to gender, gather any data maintained on the demographics of the workforce. This will assist with reviewing where in the company women, minorities, and older workers may occupy certain positions/grades.
- Perform a statistical analysis to determine if sex (or any other protected category) has an impact on pay rates. Here, separate out and compare the salaries of men and women looking purely at position and grade, considering whether other factors explain any applicable disparities.
- Identify the factors used in deciding how employees are paid. This might include factors such as length of service, education, geographical location, or years of experience in the industry.
- Review performance evaluation procedures, identify factors used regarding compensation decisions, and consider whether they are applied consistently. Additionally, review factors used to determine employees’ raises and bonuses. Consider sending questionnaires to the managers that make these decisions, or ask them to submit descriptions of how they determine bonus and raise amounts.
Take Remedial Actions
After the audit has concluded, a subsequent review of specific employees’ pay or particular classifications/positions may be needed to determine whether the disparity is based on legitimate and neutral factors. If not, employers must be prepared to address any unjustified disparities and increase the affected employees’ pay rate so that such rates are comparable to the work that he or she is performing. In addition, employers should do the following:
- Be cautious when making ad-hoc or non-routine pay adjustments. It’s important to communicate changes effectively and in a manner that does not diminish employee engagement or morale.
- Give honest, brief, and general reasons for pay adjustments. For example, communicate that the adjustment is a result of ongoing compliance efforts.
What Should Employers Do After a Pay Equity Audit?
- Review and, if necessary, revise job descriptions/grades and consider implementing standard pay ranges or guidelines for each grade or job classification that may be useful when hiring new talent or acquiring companies with differing pay systems.
- Review and, if necessary, revise and distribute existing procedures on performance evaluations and factors contributing to bonuses and raises to ensure consistency in managerial decisions and positions/grades.
- Provide training to management, HR staff, recruiters, and compensation partners on the requirements of applicable state and local laws.
Audits of any sort can be overwhelming for employers, but engaging proactively in a pay equity audit helps employers identify and correct disparities as well as implement best practices going forward.