Pay equity, diversity and inclusion
Pay Gaps and Pay Disparities, What’s the Difference?
Given the worldwide attention on pay equity, the term pay gap is one you’ve undoubtedly heard by now. But what you may not be familiar with is the closely referenced term, pay disparity.
In this post, we’ll be diving into the differences between pay gaps and pay disparities so you can begin talking about pay equity with clarity.
What are pay gaps?
Simply put, a pay gap refers to a difference in compensation between two classes of individuals: a reference class, which is a member of the highest-paid group, and an individual from a less compensated group. The pay gap is therefore the unexplained difference in compensation between the reference class individual and the member from another group.
Oftentimes, the pay gap references the difference in pay between men and women, which is known as the gender wage gap. Most recently, the gender pay gap has been understood as something along the lines of, “for every dollar a man earns, a woman earns on average only 82 cents.”
Pay gaps don’t necessarily mean there is a pay equity problem though. The reason for this is that pay gaps don’t factor in legitimate business reasons for why employers pay employees differently. Because of this, pay gaps are a rather directional metric when measuring pay equity – that is, they don’t necessarily identify the real problem, rather, they can point you in the right direction.
Pay gaps can also indicate the severity of a pay inequity situation, but they must be critically analyzed to identify real inequity and that’s where pay disparities come into play.
What are pay disparities?
While similar, pay disparity is a much more serious term. It’s a more refined version of the pay gap because the disparity takes into account legitimate business reasons for compensating employees differently.
Factors such as tenure, education, and experience are some of the valid legal reasons employers may pay employees differently. After accounting for these reasons, the remaining difference in pay between two individuals or classes is referred to as the pay disparity.
In other words, a pay disparity is the portion of the pay gap that actually poses a legal risk to an employer. It’s the difference in pay across classes of employees that cannot be explained by legitimate business reasons.
Pay gaps vs pay disparities
To further clarify the distinction between pay gaps and pay disparities, here’s an example.
X Corporation decides to conduct a pay equity audit on its workforce in an effort to achieve and sustain equal pay for equal work. After conducting the analysis, X Corporation discovers a pay gap between men and women in the tech department of $1 million.
The company immediately felt guilt and embarrassment for harboring such unfair pay practices. Thankfully, the pay equity consultant informed them that the $1 million pay gap didn’t necessarily mean that X Corporation was paying men and women tech employees differently because of their gender.
The pay equity consultant then guided X Corporation through the remainder of the analysis, asking what the organization’s compensation philosophy was and what attributes of a candidate’s profile they value when determining pay. X Corporation did indeed place a lot of emphasis on education and experience.
After accounting for the impact of education and experience on pay amongst its workers, the pay disparity showed a difference of $100,000. While still an issue, the difference between the pay gap and pay disparity was substantial.
Distinguishing between the two was critical and it also signaled to X Corporation where pay discrimination was happening. This allowed the company to take measures to correct it proactively.
Understanding the difference between pay gaps and pay disparities is crucial in advancing pay equity. The terms, while related, are different and the distinctions are crucial, especially in the context of solving for pay equity.
In the case of X Corporation, it helped immensely to have pay equity software coupled with expert consultancy to guide them through the audit process. The pairing ensures accuracy in the analysis, the methodology used, and in determining a path forward.
The role of pay gaps and pay disparities
Identifying pay gaps and pay disparities are key data points when conducting a pay equity audit. A pay equity audit should review workforce compensation on an employee level at the intersections of gender, race/ethnicity, age, and disability. Only then can you truly understand your organization’s compensation situation.
If your organization needs help identifying pay gaps and pay disparities within your workforce, contact us to learn about PayParity. We’ve helped hundreds of organizations achieve pay equity by analyzing their worker compensation information at the intersections of gender, race/ethnicity, age, disability, and more.
These organizations have since closed or are working to close identified pay disparities. As a result, they’re performing better in a business sense, are seeing improved employee engagement, are winning the war for talent, and are receiving improved ratings from investors and shareholders.
Making pay equity a strategic business priority may seem daunting, but we’re here to make the process efficient, enjoyable, and enlightening. If you’re new to pay equity, check out our white paper, What is Pay Equity below.
To help you facilitate discussions around compensation, we created the Pay Equity Communications Planner.