How to Conduct a Pay Equity Audit to Determine New Hire Salaries

We might not like to admit it, but fair pay is still a dream of the future. American women earn around 84% as much as men, and the gap hasn’t budged for 20 years. Over the course of a 40-year career, a 20-year-old woman will earn $407,760 less than a man in a similar position. 🤯

Those numbers are bad, but it gets worse. Only 32% of all workers feel fairly paid, leading to higher levels of dissatisfaction with their jobs, financial stress, and a whole other host of issues you don’t want to be putting your employees through.

Smart business leaders understand the financial and ethical case for treating everyone well. They also know the importance of pay equity audits in keeping pay gaps under control. Equity, after all, is the route to excellence.

TL;DR — Key Takeaways

• Pay equity refers to paying every employee fairly. Employees should receive equal pay for comparable roles. Nobody should receive special treatment, and pay should reflect the value each role provides.

• Fair pay has many benefits. It improves morale and incentivizes employees to work harder. Hiring is easier when talented candidates are treated fairly. Pay equity avoids compliance issues and pay discrimination lawsuits, and it’s also ethical and socially right.

• Pay equity analysis ensures fair starting salaries and increments. Audits rely on robust compensation data and knowledge of comparable roles. Regression analysis drills down into the causes of pay equity, identifying areas of concern.

• Solutions to unfair pay include boosting salaries and employee benefits. Performance reviews should be unbiased and follow pay policies. Training and career development plans also promote staff productivity and create routes for pay progression.

• Pay equity works best when combined with a broader focus on fairness. Transparency, pay policies, and compensation reviews help. Hiring is fundamental, as problems often start before employees receive their first paycheck. Toggl Hire can help you hire fairly and start on the right foot.

What is pay equity?

Pay equity is the principle of paying every employee fairly and transparently. Equitable pay ensures pay reflects employee contributions. When done right, equal levels of work receive equal pay—just as it should be.

In an ideal world, individual characteristics like gender, ethnicity, or personal connections don’t influence salaries. Pay relates to performance, role requirements, and market comparisons—the important stuff that really influences company fortunes.

There are opportunities for companies to constantly recalibrate. Understand that the skill set they’re hiring for and the skills that they have internally need to constantly be reviewed for what the market is bearing for those types of roles.

Aaronde Creighton, Chief Diversity Officer at the Leadership Circle

There are two dimensions to pay equity.

The first one, internal pay equity, entails creating fair pay structures within your company. HR teams monitor pay levels to avoid disparities and ensure fair treatment for everyone.

The other perspective is external pay equity. Employee pay should match similar roles at competitors—or as closely as possible. Otherwise, you’ll rapidly fall behind.

Pay equality vs. pay equity

Pay equity is not identical to pay equality, but the concepts are related.

• Pay equity matches an employee’s pay to the role they perform. Pay levels factor in seniority, role responsibilities, and required skills. Businesses base salaries on the value employees provide.

• Pay equality is about paying the same amount to every staff member in a similar role. HR teams match pay to factors like qualifications and seniority.

Why is pay equity important?

Money isn’t everything in the modern workplace, but paying employees fairly is.

As mentioned, pay equity ensures all employees feel fairly treated and rewarded according to their contributions. It shouldn’t take a genius to appreciate how beneficial this can be.

Companies following pay equity principles tend to see better workplace morale. Equity motivates employees to contribute their skills and energy. Fairly paid workers are happier and (usually) more productive.

Happy employees also tend to stay longer, meaning pay equity leads to lower employee turnover rates.

We found one of the most impactful things a company can do is just say that they strive to pay people fairly, and go a step further to say what they do annually to make sure people are paid fairly. That’s enormously impactful in shifting those perceptions of both organizational trust and pay equity.

Equitable pay also makes hiring easier. Word gets around about fairness (or unfairness). Skilled candidates want fair rewards for outstanding contributions, so they naturally gravitate towards companies with a reputation for treating staff well and share horror stories about companies that don’t.

Pay equity laws you should know

Before analyzing pay equity, we need to stress the legal side of fair pay. Citizen campaigns have made pay equity a regulatory issue in most countries. As a result, compensation practices must meet rules passed by national, state, and local governments.

Wherever you do business, understanding local pay equity laws is vital.

Meeting local fair pay standards helps you attract top talent (and build an appealing brand). It also helps your business avoid costly legal penalties.

This isn’t an exhaustive list, but here are some influential equity laws to guide your salary planning:

• Equal Pay Act (1963) — Part of the Equal Rights Act, the EPA requires equal pay for men and women in the same role. EPA applies to job content, not just the job title. You must assess employee contributions when determining pay, and you can’t retaliate if workers invoke EPA rights.

• Title VII of the Civil Rights Act — Title VII of the Civil Rights Act prohibits job discrimination based on race, religion, national origin, and other characteristics. Employers must justify pay disparities according to treatment and impact.

• California’s Fair Pay Act — The FPA only affects employees in California. This legislation mandates equal pay for “substantially similar work.” Employers have some wriggle room. Even so, you must justify pay differences and keep a salary history for at least three years.

• Fair Labor Standards Act — The FLSA enforces labor laws, including minimum wage levels. It sets rules about fair overtime pay levels and reinforces the EPA’s demand to pay male and female workers the same amount.

• EU Pay Transparency Directive (2023) — If you operate in the European Union, you must transparently advertise pay rates. Workers can request pay information about employees in similar roles. Companies with over 100 workers must also schedule pay assessments every three years. Otherwise, pay equity requirements resemble those in the USA.

• Equality Act (2010) — The UK Equality Act outlaws discrimination based on gender, age, disability, race, and other protected characteristics.

• Fair Work Act (2009) — Australia’s pay equity laws created the Fair Work Commission. The FWC oversees fair pay, employee disputes, and minimum wage compliance. Along with other laws, the FWA outlaws age, gender, and racial discrimination.

The Equal Employment Opportunity Commission (EEOC) enforces the US laws listed above. As an employer, the EEOC is your main regulator and your go-to place for advice.

How to conduct a pay equity analysis in 7 steps

Many businesses believe in pay equity (we sure hope you do). However, achieving equitable pay can be complex. From experience, we’ve found that a systematic approach is the way to go.

Haphazard compensation quickly leaves its trace. Pay discrepancies appear without anybody noticing. Annual reviews boost some employees’ salaries but leave others unrewarded. Departments rush ahead or trail other parts of the business.

Systematic planning helps avoid these issues, putting your pay equity policies on a firm foundation. This process starts with a pay equity analysis (or pay audit).

Step 1: Define the goals of your pay equity analysis

Start at the root by defining what the pay equity audit should achieve. List the reasons for investigating company-wide pay levels, such as boosting diversity and avoiding discrimination.

Mention relevant equal pay regulations as well. For instance, you should understand whether internal roles qualify as “substantially similar” under the EPA.

Step 2: Prepare your data

Now, get your data in order. Pay equity analysis relies on high-quality pay information about employees and roles. Valuable information to collect about roles includes:

• Base salaries

• Financial or non-financial bonuses

• Employee benefits

Pay equity is about more than wages. It also includes benefits and bonuses. Think about what qualifies as compensation in your organization and take care to include every component.

Collecting data for every employee may not be necessary and can be logistically difficult in larger organizations. Choose a sample size large enough to extract meaningful insights. 250-300 individuals is ideal.

Now collect anonymized data about role occupants. This helps identify pay disparity during the analysis phase. Information to gather includes contract type, working hours, etc.

Step 3: Define comparable roles

Now it’s time to assess your workforce structure. Divide your workforce into roles based on job responsibilities, essential skills, and necessary experience levels.

Keep individual identities out of the picture. This stage is about generating an objective list of roles for pay comparisons. Profile what each role entails and how the occupant delivers value to your company.

Think about cross-departmental comparisons, too. A good practice is to assign equity ratings to every role. Take into account seniority, skills, and value the role adds. Give each role a 1-5 score and add this to your assessment.

Ratings ensure your equity analysis will reach across departmental boundaries. They also help you comply with the legal definition of “substantially similar” roles.

An external view helps at this stage. Check competitors to see how they define roles (leave pay or benefits out of the equation for now). Ultimately, your comparison points should include both internal and external data.

Step 4: Analyze pay differences

By now, you’ve prepared your data and divided your workforce into comparable roles. The next step in your pay audit is using regression analysis to analyze and understand pay differences.

This form of statistical analysis assesses the importance of individual variables, which is invaluable in identifying pay gaps and their sources. Unfortunately, not all HR teams have the skills to deploy statistics reliably or use regression analysis software.

When you have the building blocks in place, the analytical process goes something like this:

• Take each group of roles in turn. Start by looking for obvious pay discrepancies. For instance, sales teams in different states might have a 5% pay gap unrelated to the regional cost of living.
• To investigate further, use variables like age, gender, ethnicity, and other protected characteristics. Look for unexplained deviations from average employee compensation and note pay differences connected to a particular characteristic.
• Create a pay equity report for each group of roles. Keep in mind the need to assess comparable positions. Sometimes, outliers may happen because you accidentally group senior and junior roles. Check this before arriving at firm judgments about pay equity.
• Factor in market rates. Sometimes, pay disparities stem from economic conditions. For instance, a shortage of developers may cause wages to rise faster than other roles. Always compare pay scales against relevant roles in the same sector.

Step 5: Investigate the causes of pay disparities

Information about existing pay disparities is useful but explains very little. We can do better. The next step delivers clarity about the reasons for pay inequalities.

Discrimination could start with hiring and pay negotiations or arise from biased decisions during annual reviews. A root cause analysis investigates where pay differences come from.

Here are some critical elements to include in your checklist:

• Biased hiring or promotions — Favored candidates may receive better initial pay. Biased HR processes might create a pay gap by rewarding individuals while marginalizing others. Analyze starting pay and salary increases to isolate where the problem arises.

• Performance evaluations — HR teams may not assess performance objectively and give every role the same level of attention. This can happen if you use many evaluation methods across your company. Applying uniform HR policies tends to help.

• Workplace discrimination — Pay equity analysis may uncover company-wide discrimination against protected groups. Discrimination could result from a merger or a change in ownership. It could also be deep-rooted and hard to detect. Either way, it needs addressing.

Step 6: Develop actionable solutions

Every pay discrepancy has a solution. Once you know the cause of unfair pay, it’s time to find effective and affordable remedies.

What does this mean? Well, there are many potential ways to prevent pay discrimination. The challenge is choosing the correct method for each situation. For instance, you could:

• Adjust salaries: The most obvious solution is simply paying more. This will bring low salaries up to market levels and equalize potentially discriminatory pay gaps.

• Provide more benefits: If analysis uncovers variations in health insurance or time-off perks, correct them. Implement consistent benefits policies across the board and avoid improvising packages wherever possible.

• Change pay policies: Raising pay alone is rarely sufficient. Pay discrimination almost always reflects bad pay policies. Investigate how you award salary increases and set base salaries. Integrate tools to prevent bias, such as diverse compensation panels.

• Revisit how you hire: Pay equity problems may start with hiring. Low starting salaries can leap as employees rise and develop skills. Base salaries may vary between roles and departments—skewing company-wide pay data. Ensure every salary aligns with pay policies as part of consistent hiring processes.

• Provide additional training: Paying more isn’t always essential. Remember, pay equity is a matter of perception and pay. Employees may feel fairly treated if you provide plenty of training opportunities, especially in younger workforces where future career plans are wide open and living costs are relatively low.

Step 7: Monitor and review regularly

Pay equity isn’t a set-it-and-forget-it thing. A pay equity analysis report delivers a snapshot of pay practices. It won’t magically adapt when pay differences emerge—as they inevitably will.

That’s why you need measures to monitor and correct pay equity issues.

So, carry out annual pay audits. Renovate your database of roles and pay rates, comparing compensation to market norms (which change constantly). Factor in changes to federal laws or regulations, too.

Other best practices for fair pay

A comprehensive pay equity audit is a powerful tool, but don’t stop there.

A dysfunctional company culture always distorts pay, no matter how many audits you schedule. After all, pay equity is a “people” issue. Unfairness starts from individual decisions, and no amount of regression analysis will change how we behave toward each other.

Solving pay equity issues demands a deeper perspective. The best practices below should help you get there.

Conduct regular compensation reviews

Compensation reviews take a strategic approach, making it possible to track pay and benefits over time. Annual chats with your workers are a chance to verify that pay levels for each role are up to scratch. Consider inflation and competitors’ pay policies. Then, adjust pay structures accordingly.

Promote transparency

Even if your pay structures are perfectly fair, a lack of transparency can lead to discontent and allegations of unfairness. If employees lack information about how you calculate pay, can you blame them for voicing concerns?

Open communication policies about pay practices are the only solution. Transparency builds trust and motivates employees to give their all.

Implement structured pay policies

Create a series of pay policies and make them available in the company handbook. These policies should explain how you determine compensation and contain answers to fundamental questions.

What kind of performance metrics do you use? How does seniority work? Why do rates differ between roles? Policies should answer these questions without room for ambiguity.

Offer unconscious bias training

Pay equity is partly about good management. Skilled managers and HR teams implement pay policies and monitor compliance. Bad managers let issues smolder under the surface until disaster strikes.

Managers should be equipped to detect sources of bias or discrimination and take action. They must also understand how bias arises during compensation meetings, hiring panels, or policy writing sessions.

Unconscious bias training helps, but it’s not the only solution. Combine training with objective performance assessment tools. Ask for a neutral second opinion when awarding salary increases.

Ensure equal opportunities for advancement

Finally, as mentioned, sustained pay equity depends on fair rewards for effort and skills.

Think about how it feels when colleagues are promoted just for time served (or without obvious cause). Those kinds of biased promotions corrode morale. Employees, then, have no reason to expect rewards for talent and investing in skills, so they start to slack just to meet the status quo.

The bottom line? Pay increases and promotions boost morale if they reflect skills and achievement.

Offer candidates more than just equal pay with Toggl Hire

Pay equity improves morale, helps you hire and retain top talent, avoids disputes, and ensures compliance with equal opportunities legislation. If you have doubts about current pay practices, now is the time to start a pay equity analysis.

But pay equity is about more than salaries. Equity deals with fair treatment at work and protection from abuse or discrimination. It also applies to how you hire.

If you want to ensure fair pay, you need to ensure fair hiring. As we’ve just seen, pay equity starts with fair job descriptions, bias-free hiring, and transparent negotiations.

Toggl Hire helps you streamline hiring, optimize the candidate experience, and avoid bias with fun and expertly-made skills tests. Use them to offer every candidate automated feedback and give all candidates equal attention via our easy-to-use ATS.

Fair pay and fair hiring are natural partners. Create a free Toggl Hire account and kickstart the employee experience. Then, follow our pay equity audit guide and ensure everyone gets the rewards they deserve.