Prepare to conduct a pay equity analysis
Setting up a structured compensation system should help you avoid pay inequity. To ensure your pay system is working as intended, you can conduct a pay equity analysis to verify that there are no pay differences by gender or race/ethnicity. The analysis is a way of understanding whether pay at your organization is influenced by factors you want (e.g., type of job, location) or those you don't want (e.g., gender, race/ethnicity). This type of analysis can help reveal trends across groups as well as individual outliers. At Google, all compensation decisions (e.g., assigning incoming salary, salary adjustments, allocating bonus and equity) are driven by a pay-for-performance philosophy. The team closely monitors other processes, including performance management and promotion, and at the close of each cycle analyzes outcomes by gender and ethnicity.
Pay equity analyses can be complex, so you’ll first want to have a structured compensation process, complete with a compensation philosophy and pay targets. Once you have that, and if you decide a pay equity analysis is right for your organization, you’ll want to start by doing the following:
- Understand the legal context. Before you start this analysis, connect with a lawyer who has expertise in employment issues. This analysis could have a wide range of legal implications and you should understand all the considerations.
- Define the questions you want to answer. Clearly define what you are investigating in each analysis. For example, is there pay equity among male and female new hires doing similar work?
- Standardize your compensation variable. Pay targets may differ between jobs, so standardizing your compensation variable allows you to make comparisons across jobs. One way to do so is to use pay (or compa) ratios, an employee’s pay divided by the pay target for that role. For example, Job A has a pay target of $100 and Person X in that job makes $90. The pay ratio is 90% (90/100). Job B has a pay target of $110 and Person Y makes $99 in that job. The pay ratio is again 90% (99/110). Using pay ratios, we see that Persons X and Y are paid similarly relative to their jobs, even though their actual salaries and pay targets differ.
- Determine how to reliably detect if there any differences. This varies from organization to organization and depends on what variables you want to look at. Before selecting or discounting a sample group, see what sample sizes work best for your organization and analysis. For small organizations with under a few dozen employees, running a pay equity analysis may not be practical, but examining compensation data is still valuable. For example, if there’s only one woman in an organization, you can check how her pay compares to that of male colleagues with the same job, level, amount of experience, etc., or calculate the average of men’s and women’s salaries with some simple control variables.
Once you’ve done the above, it’s time to begin the analysis.