Designing a Successful Pay Equity Program Pt. 3: Conducting a Pay Equity Audit

Undergoing a pay equity audit is the surest way to determine whether or not your organization is fairly compensating your most valuable asset – your employees.

Employees increasingly expect greater pay transparency. Advocates go further, arguing that anything less than transparency around wages reinforces discrimination and obscures structural inequalities. 

Furthermore, without a comprehensive understanding of the pay system in your organization, you can’t accurately make decisions regarding issues such as risk management, recruitment, retention, and employee engagement. Fear-fueled inaction is not a viable option nor an effective compliance strategy. The only way to ensure fair pay is by doing the work to identify and eliminate pay inequities. More and more jurisdictions are even incentivizing pay equity analyses by creating litigation “safe harbors” for employers that do so.

A significant investment of time, energy, and resources is required to effectively navigate from audit to implementation. Understanding at the outset what a pay equity audit involves can help ensure the process is successful. 

This article is the third in the three-part series, Designing a Successful Pay Equity Program, and focuses on:

• How to conduct a pay equity audit 
• The importance of attorney-client privilege 
• How to implement a solution and act upon pay audit findings

Together, the series provides insight into how organizations can create a sustainable framework for achieving pay equity.

Selecting and implementing a solution 

Pay equity solutions vary widely. The extent and types of workforce data, how that data is organized, the availability of legal insight, internal bandwidth, and other factors specific to your company are important considerations during the selection process. When evaluating options, ask yourself: 

• Does my team have what we need to perform this in-house, or should we enlist the support of outside help? 
• What are our data challenges, and does the solution address them? 
• Is the solution protected by attorney-client privilege, so that results of the audit are legally protected? 

Additionally:

• How long will the audit take with this solution? 
• What is the cost of the solution? If the audit is conducted internally, what is the potential cost in employee time and resources? 
• Does the solution involve a plan for ongoing analysis and monthly tracking once the pay equity audit is complete? 

Employers should also consider potential costs such as penalties or remediation if issues arise. 

An effective solution often comes down to workforce dynamics and the complexity of the data. Organizations with small, constant, all full-time, and relatively uniform workforces and whose data is accurate, uniform, and well-organized, may be able to use software as the primary component of their approach. However, organizations with large, variable-hour, part-time, and/or high-turnover workforces — that are also prone to more complex and inconsistent data — are much more likely to need to enlist the help of an outside pay equity provider. 

Most organizations do not have sufficient internal support to conduct a thorough and accurate pay audit, which requires extensive regulatory, data science, and statistical expertise. Partnering with an organization experienced in pay data and analytics can also counter the potential for confirmation bias that can skew purely internally conducted audits. Pay equity audits should be empirical and fair. 

Ideally, a pay equity audit is predicated on thorough planning, grounded in clean data, and supported by the most appropriate solution. You should have a strong sense of pay equity goals and initiatives at the macro-level to help guide your implementation at the micro-level. These goals and the solution should align so that you’re not left with reams of data but no clear path to implement or interpret it.

Establishing attorney-client privilege

It’s critical to establish and preserve attorney-client privilege when undertaking a pay equity audit. Privilege refers to attorney-client communications and attorney work product. Misunderstanding around attorney-client privilege — who is entitled to it and where it fits in the process — can create problems and place employers at significant legal risk.

The unintended disclosure of sensitive information can occur when a pay equity audit is not handled in a confidential manner, making the results and the documents formed along the way discoverable in a court of law. If an audit reveals significant pay disparities, its disclosure may provide prospective plaintiffs with potentially damaging evidence to support alleged pay discrimination claims.

Maintaining attorney-client privilege minimizes this mandatory disclosure risk in the event of litigation. The audit itself should be conducted under attorney oversight so that documents from the audit are protected from discovery. 

The purpose of attorney-client privilege isn’t to hide or cover up wrongdoing. It’s intended to allow the attorney to facilitate candid discussions about the findings of the audit – a crucial step in reducing or eliminating any inequities.

Key steps in a pay equity audit

A successful pay equity audit is broken down into three major phases – preparation, auditing, and ongoing tracking and remediation – each distinguished by key steps that guide the process:

The preparation phase is the time to conduct a pay gap risk analysis, which lets you analyze the risk of pay discrepancies within your organization. It determines the magnitude and significance of any existing pay gaps that may be inferred from your EEO-1 reporting. 

While EEO-1 Component 2 reporting – developed to expedite enforcement specifically around pay discrimination – was discontinued in 2019, these reporting requirements are widely expected to return under the Biden administration. In the meantime, individual states are filling the gap with their own aggressive pay equity legislation. Both the EEOC and the OFCCP also continue to enforce and litigate pay discrimination cases.

Auditing

Establish attorney-client privilege – As discussed earlier, establishing attorney-client privilege is a crucial precursor to a legally protected pay equity audit.

Coordinate a pay equity project team – Leveraging compensation and compliance experts is important; however, it’s also wise to have a strong, collaborative in-house team made up of multi-disciplinary experts designated by your organization’s counsel. 

This should include individuals who understand your organizational functions, data sources, hierarchies, and compensation structure and philosophy across departments. 

Determine the scope of analysis – Every company is different, structurally and compositionally. It’s important to have a clear sense of what will be analyzed and to what extent. The scope may include compensation measures for analysis, workforce segments, the number of employees, locations, and lines of business.

Distinguish legitimate business factors – These can help explain pay disparities attributable to differences in skill, responsibility, education, experience, effort, quality of production, location, or other factors.

Identify pay analysis groups – A pay analysis group (PAG) is a collection of employees to compare for compensation levels – often similarly situated employees. After adjusting for level compensation differences, employees in a PAG are expected to receive the same compensation. Test your collaboratively defined PAGs to ensure that they are sufficiently distinct for analysis.

Conduct data-wrangling – Workforce data presents one of the most significant challenges in assessing and achieving pay equity. You need to extract, aggregate and consolidate your structured and unstructured workforce data; identify any missing, incomplete, or inaccurate data; and reconcile these issues. 

Once your data is cleaned and validated to ensure its accuracy, only then can it be segmented for analysis, such as average wage comparisons and average wage distribution, cohort wage comparisons, age and pay comparisons, overtime participation tests, and affirmative action comparisons. 

This is one step that most often benefits from outside support. A meaningful review of pay practices depends on the integrity of your organization’s employment data. Disjointed data silos, discrepancies based on human error, incomplete or inaccurate tracking, and multiple, inconsistent data platforms all contribute to dirty data – and decisions based on this faulty information can be catastrophic. 

Using bad data runs the risk of highlighting issues that don’t actually exist in your organization or worse, obscuring inequities that do. 

Perform advanced statistical modeling – Advanced statistical modeling ascertains organizational pay inequities. Regression analyses measure any remaining differences in average employee wages across protected classes after accounting for other legitimate business and economic factors tied to your compensation decisions. This activity also benefits greatly from outside support.

Finalize exposure calculations and remediation strategy options – Once you determine the pay equity audit findings, finalize the information and structure it toward potential remediation strategies that will address any identified pay inequities and close compensation gaps.

Select and implement a remediation strategy – Establish a plan and timeline that maximizes your organization’s available budget. If you find that unexplained pay disparities exist, making strategic pay adjustments is critical to avoid creating additional liability in the process. A misinformed remediation strategy can actually make a wage gap wider.

Ongoing Tracking & Remediation

Monthly reporting on diversity, equity and inclusion – Given the complexity and constantly changing nature of workforce data, monthly monitoring is a must to help support pay equity efforts. It is the best way to ensure long-lasting and sustainable results, allowing you to capitalize on a high degree of visibility in your organization and effectively track remediation efforts. 

If you’re subject to pay data reporting laws, monthly tracking also allows you to select the best “snapshot period” to demonstrate your pay data. Ongoing monitoring will help you spot trends and proactively address any potential issues or barriers.

Annual pay equity review and modeling update – Assess what changed in your organization over the year that may impact the accuracy of the monthly pay equity status predictions. Update the statistical model to reflect those changes and reassess the following year.

Acting upon the results of a pay equity audit

For pay equity efforts to succeed, executive leadership must drive them as a strategic priority and they should extend to every tier of your organization. Different internal stakeholders will require different systems, metrics, and messaging.

Perhaps most importantly, pay equity auditing should generate strategies for meaningful, long-term, and sustainable change. Solutions must address the root cause of the pay inequality: What made this happen in the first place? 

Long-term, systematic analysis is essential. Workforces are dynamic, as hiring, promotions, exits, furloughs, and various types of leave create constantly shifting pay data. Pay equity policies, in turn, must also be dynamic. Without regular measurement and analysis, complacency can seep in and dismantle all the progress you’ve made. This backsliding will likely expose you to the same issues that spurred your pay equity efforts in the first place.

Achieving pay equity is a long-term process. For companies daunted by the time commitment or cost, match your strategies to where you are in your journey. If your company is not generating much money or is still pre-profit, work to develop a plan that closes the gap over time. Some companies constrained by budget may raise salaries incrementally over several years until targets are met.

A recent article in the Harvard Business Review noted that “the collection, analysis, and disclosure of diversity data … holds the promise of being a powerful lever for progress.”

Overall, a comprehensive pay equity audit is the best place to start to understand what your organization is doing right in addressing pay disparity issues, and where it can improve to create and sustain a diverse, equitable, and inclusive workforce. To learn more about how pay equity is surfacing around the world and what your organization can do now to get ahead of it, download the Pay Equity Definitive Guide.