How to Create a Pay Equity Audit

Deciding how to compensate employees is one of the most consequential things a company does. How wages are paid factors into productivity and performance, but it can also lead to labor law violations if an employer violates the Equal Pay Act or FLSA. Additionally, pay disparities can lead to high turnover, which can be very costly.

You can address these issues with a pay equity audit — an analysis of your compensation practices that identifies pay disparities among groups with similar roles and qualifications. Complete a pay equity audit by collecting and analyzing payroll and demographic data across your workforce. Then you can decide how to compensate employees for any disparities you find. 

Learn about why pay audits are necessary and the steps you should take to conduct your audit the right way.

What Recent Statistics Reveal About Pay Disparities

In 2002, women earned 80 cents for every dollar a man earned. Twenty years later, the gender pay disparity hadn’t gotten much better, with women in 2022 earning 82 cents for each dollar earned by a man. 

When you factor in race and ethnicity, the statistics are even more startling. Black women, on average, make 66 to 69 cents for every dollar a white male earns. Native American women and Latinas are often paid even less.

It can be challenging to get companies to be forthcoming with this information. According to nonprofit research organization JUST Capital, only 32% of the country’s largest public companies disclose that they analyze gender-based pay gaps. Only 14% of those companies report their findings to the general public, and most of them only report once they’ve reached (or nearly reached) wage parity.

How Companies Can Ensure Equal Pay for Employees

How can companies that want to pay employees fairly obtain objective evidence that shows them how they’re performing to that end? The answer lies in conducting a pay equity audit. 

An audit helps employers determine the following:

  • Whether there are any disparities in compensation
  • Where and with what groups the disparities exist
  • Whether they disproportionately affect one segment of the workforce
  • Whether there is a legitimate business reason for the disparity

It’s critical for companies that want to compensate fairly to interrogate these aspects of their wage policies and correct any issues they find.

Why Is This Type of Analysis Important?

Unfair pay can lead to unhappiness or dissatisfaction and make employees feel devalued. In time, this can lead to disengagement, a lack of productivity, burnout, and, eventually, higher employee turnover. It can also lead to discrimination lawsuits for violating equal pay laws.

Ultimately, pay equity enhances your employer brand, making it easier for your company to attract and retain top talent. When candidates know you value employees by compensating them fairly, they’re more likely to want to work for you.

4 Steps to Conducting Your Audit

A probe may sound challenging, but it’s much easier when you understand your goals and what you hope to gain from the activity. The following steps will help you conduct your analysis in just a few steps. 

1. Determine Who You’ll Ask to Participate in the Audit

While the HR department will likely take the reins, you may also need access to data from other departments, including the finance and legal teams. Ensure that you discuss the process with them and get them involved early on so you’ll have the information you need to move forward.

2. Write Down Your Goals and the Scope of Your Study

Before you begin, figure out what you would like to achieve. What does your team hope to learn from conducting this audit? 

You also need to know in advance what groups you want to look at (e.g., gender, age, race, ethnicity, or other characteristics), what professional factors you will consider (such as years of experience, job titles, or job descriptions), and what types of compensation you will examine.

3. Collect the Data and Complete the Analysis

Based on the scope of your study, you may collect information about job titles, departments, wages, and bonuses, as well as demographic data about employees. Be aware that you may need to update your data if you don’t maintain an up-to-date central database with this information. 

Then, analyze the differences between comparable groups. For example, make sure you observe men and women with similar roles, education levels, and experience levels. If you have enough employees, you may want to conduct a regression analysis to determine which factors exert the most influence when it comes to how you pay employees.

4. Take Action to Address Any Pay Disparities

You may decide to adjust your pay scale right away or compensate employees in an annual wage adjustment. Make sure you take a look at your practices and policies to see what may need to be adjusted based on your data analysis. Don’t forget to communicate any policy changes to employees in writing.

Fair Employee Pay Contributes to Business Success

Auditing your compensation practices helps you maintain your integrity as an employer and show that you value your workforce. You’ll likely be rewarded with engaged and productive employees who feel good about working for your company. As a result, your company can enjoy increased performance, better profits, and more business success.