Why Do Proactive Pay Equity Analyses – Implications for Diversity, Pay Equity, and Legal Risk Mitigation
Proactive Pay Equity vs. “Pay Gap”
Before diving into why we think all organizations should be doing proactive pay equity analyses, let’s first lay some groundwork on what a proactive pay equity analysis is and how it compares to other types of compensation analyses. A proactive pay equity analysis is an examination of an organization’s pay among similarly situated employees to identify meaningful disparities between race, gender, or other protected groups. A proactive pay equity analysis could employ any number of analytical tools or methods to achieve that result. This includes cohort analysis (i.e., a manual review of the employees and reasons for their level of pay), and other more complicated statistical analyses (i.e., multiple linear regression to statistically control for legitimate explanatory factors). The use of significance testing will identify disparities that cannot be attributed to a chance occurrence – these are legitimate differences that require an explanation. A pay gap analysis is an examination of average pay differences from either an extremely broad view (i.e., unadjusted) or narrow view (e.g., adjusted by job title). The pay gap analysis can adjust for things like job title, education, or other meaningful factors. The result of the pay gap analysis is a simple descriptive ratio of the two average pay amounts (e.g., average female = $67,750, average male = $87,600 results in a pay gap ratio of $0.77 – women earn 77% of what men earn). A pay gap analysis is best for outward disclosure, where as a proactive pay equity analysis is best for inward analysis of problems and solutions.
Benefits of a Proactive Pay Equity Analysis
There are numerous benefits to doing a proactive, regression-based pay equity analysis. These broadly fall into one of two categories: 1) Identifying and reducing legal exposure, and 2) Improving fairness (equity) in the organization.
Let’s start with the legal exposure benefit. For employers that hold a government contract and are subject to E.O. 11246, doing proactive pay equity analysis will keep the employer ahead of any issues with their compensation that may be flagged during an OFCCP audit. The most recent itemized scheduling letter requires employers to provide two years of compensation data to the agency in an audit. This may be obvious, but if you have not been doing proactive work and don’t know what skeletons are in the closet as it relates to pay disparities, your organization will be in a very bad position to rebut any issues flagged by the agency. Beyond OFCCP audits, Title VII of the Civil Rights Act prohibits discrimination in the workplace, including decisions about compensation. Every employer is subject to Title VII compliance and could face the same problems government contractors do during their audits. Doing proactive pay equity analyses go a long way in flagging potential problems, allowing employers the opportunity to make corrections before they have been caught by private plaintiffs or enforcement agencies.
A second set of benefits of proactive pay equity analyses fall more into the realm of ‘doing the right thing.’ Employers (generally) want to pay their employees fairly and the issues that come up in litigation are not usually intentional. Organizations and compensation teams do great work to set up firm policies, practices, and philosophies to guide the compensation decisions in such a way that they should be fair, consistent, and equitable. Unfortunately, people still make those decisions and very subtle biases can make their way into the decisions and wreak havoc. On top of that, labor market pressures and the need to keep headcounts up can result in ‘outside the box’ decision making. When too many of these types of skews make their way into the compensation decisions, you will start to see areas of concern in a proactive pay equity analysis, where people doing the same work, with the same set of skills, responsibility, experience, and other characteristics are not making the same money. Without a proactive look at all the groups of similarly situated employees across the organization, these disparities in pay go unnoticed.
Finally, a third category of benefits is really an offshoot of ‘doing the right thing.’ Proactive pay equity analyses often identify, as a biproduct of their rigor, other organizational problems that diversity, equity, and inclusion leaders find tremendously useful. For example, a pay equity analysis can easily highlight areas where there might be glass ceilings or sticky floors, where certain groups (often women and people of color), might not be making their way to the higher paying jobs, or are grouped in jobs with no upward lines of progression. These types of ancillary benefits often spark the need for even further proactive work to drill down and figure out: how did we get here as an organization and how do we fix it moving forward? A well-conducted proactive pay equity analysis can be the canary in the coal mine.