Pay equity is a legal obligation for businesses of all sizes. However, it can also be viewed as an opportunity to advance your brand, build your client base, and recruit and keep capable employees.
No matter where you are in your business life cycle, pay equity can be embedded in the structure of your organization. For example, startup businesses can include fair pay policies in their business plans, while existing businesses can identify and correct existing pay disparities within their companies.
What is pay equity?
Pay equity can be defined as setting the pay for a job based on the skills, effort, responsibility and working conditions related to the position. The goal is to eliminate discrimination based on gender, race and other factors.
Shaun Harper, founder and executive director of the University of Southern California Race and Equity Center, provides a broader explanation of pay equity. “It’s about the remediation of previous gaps that have historically and contemporarily disadvantaged particular groups, like women, people of color, LGBT employees and so on.” He adds, “It’s not just about bringing everybody up to the same level right now, but it’s also about correcting the historical harm.”
Although progress has been made, pay disparity still exists. For example, in 2020, a woman earned 82 cents for every dollar that a man earned, according to the Bureau of Labor Statistics. Using data from the three years prior to 2020, the U.S. Department of Labor estimates that workers who identified as Black, Native American and Hispanic earned approximately 73 to 77 cents compared to every dollar received by white workers.
The cost of pay inequity
In addition to the potential cost of lawsuits and having to remediate pay disparities, pay inequality can cost businesses in other ways. It can impact recruiting efforts, employee turnover rates and employee satisfaction, among other things.
“When employees sense or know for sure that they are being inequitably compensated, they leave. They pursue employment elsewhere. They’re less motivated to do a good job or to continue to do a good job in the place where they are,” says Harper.
What can be done to ensure pay equity?
Bringing diversity, equity and inclusion, or DEI, into your business strategy can positively affect your journey to pay equity.
According to Lauren Hoffman, associate director for women’s economic security at the Center for American Progress, employers “should conduct pay audits so they can identify existing pay gaps, prohibit the use of salary history in hiring, publish salary ranges for open positions and encourage job applicants to negotiate their salaries.”
What is a pay audit?
A pay audit, or pay equity analysis, is a method of researching pay rates within businesses; it can be done as a self-audit or by partnering at some level with a consultant. The following elements will typically be included:
The data used in the analysis will typically include employee demographic information such as race and sex; compensation data such as employee hire date, base salary and overtime pay; and job details such as title, department, job level and location.
Identifying and grouping employees who do substantially similar or comparable work is a part of an audit. Comparable work essentially requires the same skill, effort and responsibility.
Analyzing the data will help you determine whether men, women, people of color, LGBTQIA+ and other groups are being paid equally. The complexity of this analysis can depend on the size of employee groups, pay structure and other variables.
Current and past pay practices and policies
Examining current and past pay practices and policies can help identify the reasons for pay disparities. In addition, it can provide insights into the criteria used to set pay standards and the flexibility in making pay decisions.
When pay disparities can’t be justified, compensation adjustments will be needed. The business may also want to consider back pay for employees who’ve been underpaid for a significant period.
Resources for small business
Consultants and research centers that focus on race and equity issues may be able to assist small business owners who want to learn more about pay equity and conducting pay audits. Organizations such as the California Commission on the Status of Women and Girls, the National Committee on Pay Equity and PayScale offer free templates and step-by-step instructions for pay audits. Also, some payroll and HR software programs can help compare compensation and identify pay gaps.