While many people are familiar with the concept of the gender pay gap, it’s important to understand the difference between the adjusted (or controlled) and unadjusted (or raw) pay gap.
Recognizing this distinction is essential for organizations seeking to diagnose and resolve pay inequities effectively. It’s also critical to effectively complying with current and forthcoming legislation such as the EU Pay Transparency Directive.
What Is the Unadjusted Pay Gap?
The unadjusted pay gap, also known as the raw pay gap, represents the overall difference in average or median pay between demographic groups without accounting for differences in job-related characteristics. It is often used in public pay transparency reports and serves as a high-level indicator of potential disparities.
For example, the UK gender pay gap report requires companies with 250 or more employees to disclose the median pay difference between men and women. If women in an organization earn a median salary of $50,000 while men earn a median salary of $60,000, the gender pay gap is 16.7% [(60,000 – 50,000) / 60,000]. This figure does not consider factors such as job role, experience, or education level.
While the unadjusted pay gap highlights disparities in earnings, it does not differentiate between pay differences due to compensable factors (such as career level, job function, or tenure) and those potentially resulting from bias or discrimination.
The unadjusted gender pay gap in the U.S. was at its lowest in 2023 at 16.2%. However, it increased in 2024, and is back to 18%. The unadjusted gender pay gap in the European Union was 12.7% in 2023, which was the impetus for the EU Pay Transparency Directive. A primary requirement of that directive, however, deals specifically with the adjusted pay gap, which we’ll touch on later.
Breaking Down the Unadjusted Pay Gap: Explained vs. Unexplained Components
Conceptually, the unadjusted pay gap consists of two components:
1. Explained Pay Gap
The explained pay gap accounts for pay differences that result from Wage Influencing Factors (WIFs), such as:
- Differences in occupation or industry
- Variations in experience and tenure
- Career level and managerial responsibilities
- Educational background and certifications
- Performance and productivity measures
Because these factors influence compensation, part of the raw pay gap can be attributed to these differences.
2. Unexplained Pay Gap (Also Known as the Adjusted Pay Gap)
The unexplained pay gap is the portion of the raw pay gap that remains after accounting for all relevant, job-related compensable factors. This is also known as the adjusted or controlled pay gap. It represents disparities in pay that cannot be justified by legitimate factors and may be attributable to demographic characteristics such as gender, race/ethnicity, disability status, or other protected classes.
A pay equity analysis focuses on identifying and addressing the unexplained pay gap. If, after controlling for compensable factors, a pay disparity remains, it suggests the presence of potential bias or discrimination in compensation practices.
The EU Pay Transparency Directive, for example, requires organizations to have adjusted pay gaps below 5%. Employers must develop a remediation plan or be subject to a joint pay assessment if their pay gaps are above that threshold.
EU Pay Transparency Directive Preparedness Guide for Employers
Why Understanding the Difference Matters
Understanding the distinction between the adjusted and unadjusted pay gap is crucial for organizations committed to pay equity. Relying solely on the raw pay gap can be misleading because it does not differentiate between disparities that result from legitimate job-related differences and those stemming from inequitable compensation practices.
Organizations should conduct robust pay equity analyses to isolate and address the unexplained pay gap. By doing so, they can:
- Ensure compliance with equal pay laws and regulations
- Minimize legal and reputational risks
- Enhance employee trust and retention
Taking Action to Close the Adjusted Pay Gap
To effectively address pay inequities, organizations should:
- Conduct regular pay equity analyses: Use statistical modeling to assess whether employees in similar roles, with comparable qualifications and experience, receive equitable pay.
- Identify and remedy unexplained pay inequities: If significant pay differences remain after accounting for legitimate factors, take corrective action to close the adjusted pay gap.
- Enhance pay transparency: Clearly communicate pay structures and criteria for raises and promotions to reduce ambiguity and foster trust.
Trusaic’s PayParity® solution is designed to help organizations analyze, remediate, and prevent pay inequities with confidence. Our software is backed by sophisticated analytics, unbiased insights, and legally compliant methodologies to ensure anti-discriminatory compensation practices. Our R.O.S.A. tool helps optimize your remediation budget so you can make every pay adjustment count.
Learn more about how our robust methodology simplifies pay equity and guides you to make compliant pay decisions with ease.
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