Pay Equity: The Ultimate Guide

What It Is, Why It Matters, and How To Achieve It
Introduction

Getting started

Pay equity is top of mind at many organizations—as it should be. Unfair compensation practices have existed for far too long and it’s time to take action. 

If you’re ready to learn more about pay equity, why it matters, and how to improve it at your organization, this article is for you. We will discuss:

  1. What is pay equity?
  2. The importance of pay equity
  3. The state of pay equity
  4. Pay equity laws
  5. How to measure pay equity
  6. When to make pay equity adjustments
  7. Best practices to ensure pay equity

Two-thirds of compensation professionals say pay equity is “very important” or “somewhat important” at their organizations, yet only 37% of workers feel they're paid fairly. Further, around one in four workers have learned that a colleague of a different gender (23%) or race or ethnicity (19%) was paid more—even though they had the same job and level of experience. 

There’s clearly a disconnect, and it’s evident there’s still a lot of work to be done in this area. So what do you need to know to get started?

 
Chapter I

What is pay equity?

 

Decorative leafPay equity is the discipline of eliminating pay disparities based on gender, race, and other criteria. This goes beyond pay equality, or equal pay for equal work, to also address occupational segregation and opportunity gaps.

For example, only 4.6% of web developers are Black, while 85% are white. Similarly, 72% of office and administrative support professionals are women, while only 29% of chief executives are women.

Higher-level positions and in-demand skills naturally pay more, but people from marginalized groups tend to be left out of those roles. We can’t achieve true pay equity until we provide equal opportunities to people from underrepresented groups.

 
Chapter II:

The importance of pay equity

Decorative leafQuite simply, pay equity is the right thing to do. It’s good for your people, and it’s good for your business. Focusing on pay equity can:

  • Retain employees. About one in four workers (27%) who found out they were being paid less than a colleague of a different gender or race said they started looking for a new job. When the cost of turnover is estimated to be one-half to two times the employee’s annual salary, that’s an expensive problem to have—arguably more so than closing your pay gaps.

  • Support recruitment. Job seekers are 75% more likely to apply for a job if a company has a reputation for paying fairly. And 68% of job seekers said they’d be more likely to apply if the job listing included the position’s salary range. Make your commitment to pay equity known—and follow through.
  • Close the wealth gap. The pay gap widens the wealth gap, or a marginalized group’s net worth. For example, the average Black and Latino households earn about half as much as the average white household and own only 15-20% as much net wealth. Pay equity can help close that gap, drastically improving the lives of people from marginalized groups. Decorative leaf

  • Improve morale. Pay equity shows your employees that you value them, regardless of their gender, race, age, or other demographic status. This can improve team morale and employee engagement, and result in higher overall job satisfaction. In fact, 82% of workers feel more engaged and fulfilled by their work when they are paid fairly, and 81% say they are more productive and loyal to their employers.

  • Maintain compliance. Wage discrimination is illegal in the United States, as well as other places throughout the world. The United States Equal Opportunity Employment Commission mandated that organizations pay $14 million in monetary relief for victims of pay discrimination in 2021 alone. Following pay equity best practices can help you stay in compliance with the law.

  • Avoid litigation. Lawsuits can be costly, and damage your company reputation. Staying on top of pay equity can help your company follow fair pay practices, and avoid litigation.
 
Chapter III:

The state of pay equity

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While we’ve made progress on pay equity throughout the years, we still have a long way to go. People from marginalized groups still experience significant wage gaps.

Women earn 83 cents for every dollar men earn

Women earn 17% less than men, resulting in an average loss of $13,551 over the course of a year. This can vary by occupation or industry; women in the legal profession earn just 63 cents for every dollar earned by men.

The gender wage gap also varies widely by race:

  • Asian American, Native Hawaiian, and Pacific Islander (AANHPI) women earn 75 cents for every dollar white men earn, translating to an annual median loss of $12,600. Certain groups face a much wider pay gap. For example, Burmese women earn 52 cents for every dollar white men earn.
  • Black women earn 58 cents for every dollar white men earn. This results in a median loss of $23,074 every year of their careers.
  • Native women earn 50 cents for every dollar white men earn, resulting in a median loss of about $25,000 every year.
  • Latinas earn 49 cents for every dollar white men earn, equating to a median loss of $28,062 every year.

These numbers represent the uncontrolled pay gap, which is not adjusted for things like job title, years of experience, industry, location, or other factors. The controlled wage gap is 1%, which indicates that women tend to occupy lower paying roles than men, an additional troubling factor when considering how to close the wage gap.

The racial wage gap extends to men, too

Men aren’t immune to the wage gap either, though the pay disparities are less pronounced than they are for women. Data shows that:

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  • Latinos earn 91 cents for every dollar earned by white men.
  • Native American men earn 91 cents for every dollar earned by white men. 
  • Black men earn 87 cents for every dollar earned by white men.

Asian men earn $1.15 for every dollar earned by white men—but that doesn’t mean they don’t face significant challenges. Similar to Latinos and Black men, Asian men have higher rates of holding individual contributor jobs than white men, and lower representation in leadership roles. In many cases, this caps their lifetime earning potential.

Stock grants further widen the pay gap

Pay equity means more than salary, and data shows the pay gap widens further in companies that offer stock grants to employees. 

For example, women represent 47% of the U.S. workforce, but represent only 35% of equity holders and own just 27% of the equity. Some of this disparity is due to the opportunity gap, as women are more likely to hold more junior positions with less equity.

Black and Latinx people make up 29% of the workforce, but only 16% of equity holders—and they collectively hold just 9% of the total value of employee equity. Some of the disparity here is due to occupational segregation, as equity-holding Black and Latinx employees are less likely to hold roles in job areas with more equity. For example, Black employees make up only 3% of equity-holding product roles where equity amounts tend to be larger.Decorative leaf

Other factors that influence compensation—but shouldn’t

  • Gender identity and sexual orientation: Lesbian, gay, bisexual, transgender, and queer (LGBTQ+) workers earn 90 cents for every dollar the average worker earns. But Intersectionality creates additional disparities within this community. For example, Native American LGBTQ+ workers and transgender men earn 70 cents for every dollar the average worker earns, while transgender women earn 60 cents.
  • Disability: Employed workers with disabilities earn 74 cents compared to workers without disabilities. This can have a profoundly negative impact on their financial wellbeing. In fact, nearly 18% of working-age people with disabilities live in poverty compared with 8% of working-age people without disabilities.
  • Age: A full-time worker’s peak earning age is 45 to 54 years. Median full-time wages decrease in the 55-64 age bracket, and again for workers 65 years and older.
 
Chapter VI:

Pay equity laws

In the United States, it’s illegal to pay people differently on the basis of gender, race, color, religion, sex, national origin, age, or disability—and it has been for decades. Still, the wage gap clearly persists within these protected groups. 

This is a multi-faceted problem that requires a multi-faceted solution. Salary history bans, increased transparency, and accountability are all playing a role in closing the gap. As these solutions continue to show promise, pay equity laws will continue to evolve so we can continue to work toward pay equity.

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The Equal Pay Act

The Equal Pay Act (EPA) requires that men and women in the same establishment be given equal pay for substantially equal work. That is, when their jobs require substantially equal skill, effort, and responsibility under similar working conditions.

This extends to all forms of pay, including salary, overtime pay, bonuses, stock options, profit sharing and bonus plans, life insurance, and vacation and holiday pay. Equal wages must be paid in the same form.

The 1964 Civil Rights Act

Title VII of the 1964 Civil Right Act protects workers from employment discrimination—which includes compensation—on the basis of race, color, religion, sex, and national origin. Unlike the EPA, Title VII does not require that the claimant's job be substantially equal to that of a higher paid person outside the claimant's protected class. It also does not require the claimant to work in the same establishment as a comparator.

The Age Discrimination in Employment Act

The Age Discrimination in Employment Act (ADEA) protects applicants and employees who are 40 or older from employment discrimination based on age. This includes compensation, benefits, and promotions. Employers may, however, favor older workers based on age, even when a younger worker would be adversely affected.Decorative leaf

The Americans with Disabilities Act

The Americans with Disabilities Act (ADA) protects qualified individuals with disabilities from employment discrimination. The law also protects people from discrimination based on their relationship with a person with a disability. This extends to every aspect of employment, including compensation, benefits, and promotions.

The ADA also requires employers to provide reasonable accommodations, unless it would cause undue hardship. However, employers may not reduce compensation to make up for the cost of those accommodations.

The Lilly Ledbetter Fair Pay Act of 2007

The Lilly Ledbetter Fair Pay Act allows workers to file wage discrimination lawsuits within 180 days of their last discriminatory paycheck. This legislation nullified a Supreme Court decision that action could only be taken within 180 days of the first unequal paycheck.

This extends employer liability and underscores the importance of considering pay equity with every compensation decision. 

State and local pay equity laws

Federal pay equity laws have been around for decades, but pay discrimination still exists today. Many state and local governments are enacting their own compensation laws to address some of the root issues leading to pay inequities.

For example, California employers must share salary range information with current and prospective employees, include salary information in job postings, and maintain detailed pay records. Companies with employees in California are also prohibited from asking candidates for their salary history and using salary history information to create employment offers.

Colorado, Pennsylvania, and Maryland have similar pay equity laws. Colorado has a salary history ban and requires employers to disclose salary ranges in job postings, announce promotion opportunities internally, and maintain detailed pay records. Pennsylvania prohibits asking a candidate for their salary history and requires job postings to disclose the pay scale. Maryland has also implemented salary history bans, but only requires employers to furnish salary bands upon an applicant’s request.

State and local pay equity laws are enacted and amended frequently, so it’s important to stay on top of these in each state in which you operate or have remote employees.

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Chapter V:

How to measure pay equity

The first step toward true pay equity is to be honest about where your company stands. Analyze pay equity once or twice a year to get a thorough understanding.

There are a few ways this might be accomplished:

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  • Pay equity audit: Partner with an employment law firm to conduct a pay equity audit for legal purposes. These can be time-consuming and resource-intensive, but may show you acted in good faith under some pay equity laws. 
  • Compensation management software: Utilize compensation management software, like Compaas, to quickly analyze pay equity for business purposes. A continuous pay equity discipline can help you make fair pay decisions for job offers and compensation cycles
  • Track metrics manually: Export data from your HR systems to manually track pay equity metrics like compa-ratio and average salary. 

When measuring pay equity, it’s important to keep a few things in mind:

  1. Intersectionality matters. It’s not enough to only look at the gender wage gap or the racial wage gap—you should also be comparing pay by intersectionality. Decorative leafFor instance, compare the company's overall compa-ratio to that of women, white women, Black women, Black men, and so on. Look at each intersectional group to uncover disparities you might otherwise overlook. 
  2. Consider salary, bonus, and stock. Total Compensation can differ drastically from salary alone. Look at all three together to gain a more complete picture of pay equity.
  3. Consider employee impact and internal mobility: Rather than justifying discrepancies by seniority, experience, and education, consider the responsibilities and impact each employee has and whether their compensation and job title reflect that. Give promotions where they are due to ensure employees fall into the correct pay range for their contributions.
 
Chapter VI:

When to make pay equity adjustments

Decorative leafWhen you spot pay inequities, it’s important to address them as soon as you’re able. The most common approach is to run pay equity analyses during compensation review cycles. Make strategic adjustments first, then layer on merit-based adjustments and cost-of-living increases, as applicable.

If your company has adopted long-term remote work and has a location-based pay policy, you may also choose to adjust for pay equity during remote workforce transitions. Below-band employees moving to areas with a lower cost-of-market may move in-band without requiring any additional cash. And above-band employees moving to areas with a lower cost-of-market could free up budget to make pay equity adjustments elsewhere.

 
Chapter VII:

Best practices to ensure pay equity

Every organization has a responsibility to do their part to close the pay gap. This will require dedication and follow through in every aspect of your business, but it’s important to note that each change can lead to progress. 

Never ask for a candidate’s salary history

Using a candidate’s salary history in compensation decisions can perpetuate an existing wage gap. Even knowing it can influence decisions—so it’s best not to ask. In fact, it’s prohibited in many states and localities for this very reason.Decorative leaf

Following salary history bans, employers increased pay for job changers by about 5%. Women, however, saw an 8% increase in pay, and Black employees saw a 13% increase. This is a strong indication that salary history bans have been successful in helping to close the wage gap.

Reconsider asking for salary expectations too

Rather than asking salary history, many employers will instead ask for a job candidate’s salary expectations to ensure both parties are on the same page. This practice can also lead to unfair wage gaps.

A candidate’s salary expectations often align with their actualized wage gap. For example, Black women in the technology industry expect 91 cents for every dollar white men expect for the same role, at the same company. The expectation gap is mirrored almost directly in the eventual wages paid to these groups—Black women in tech earn 92 cents for every dollar their white, male counterparts earn.

If you do ask for a candidate’s compensation requirements, remember that in some jurisdictions it’s illegal to use this information to determine the pay you offer for a role. Even if it isn’t against the law where you are, it’s a better practice to hold to the pay rate for a position as opposed to lowering it when a candidate signals willingness to accept a lower salary.

Build job grades and salary bands

Decorative leafTake a more proactive approach to setting compensation targets by building salary bands and job grades. This will help you make more fair, strategic compensation decisions during hiring, review cycles, and promotions. Some states even require employers to share salary ranges with candidates during the recruitment process.

Embrace pay transparency

Communicate to company leaders and team members that pay equity is a priority for your organization. Share the steps you’re taking to self-audit, as well as your plan for addressing any pay disparities.When you make adjustments, let employees know that you’re doing so, and when they will see the changes in their paychecks. Finally, encourage all team members to come forward if they have questions around their compensation or pay equity. This level of pay transparency will help you build an organizational culture that people want to be a part of—ensuring your organization’s long-term success. 

Mind the opportunity gap

People from marginalized groups are underrepresented in every level of company management. For example, women hold nearly half (48%) of entry-level roles, but only 41% of manager roles, and 24% of C-suite roles. Their representation drops at each job level. We see a similar trend for men of color, who hold 17% of entry level and manager roles, and 13% of C-suite roles. White men, on the other hand, have increased representation at each job level. They hold 35% of entry level roles, 42% of manager roles, and 62% of C-suite roles.

This opportunity gap is undoubtedly a major contributor to the uncontrolled pay gap. Decorative leafStay on top of this by tracking your representation by job level to ensure you’re hiring and promoting people from underrepresented groups into leadership positions. If not, dig into your data to understand why. Is there a lack of internal mobility for people from underrepresented groups? Are they leaving your organization at a faster rate than the general population? Is your recruitment process disproportionately screening them out? Once you identify potential issues, address them through programs like mentoring, sponsorship, and voluntary interview training.

Limit salary negotiations

While 15% of men say they always negotiate their pay during the recruitment process, only 9% of women say the same. And when they do negotiate, women are more likely to ask for 1-10% more than their current pay whereas men are more likely to ask for 11% or more.

Further, women of color are 19% less likely than a white man to receive a raise when they ask for one, and men of color are 25% less likely. 

Try to limit salary negotiations. Instead, use your salary bands to set fair, competitive offers and award appropriate raises during your regular compensation review cycles. When you present an offer or a raise, explain why you've assigned that particular salary, and what they can do to earn more in the future.

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And if you find that negotiations are truly necessary to close candidates and retain team members, that’s a sign you need to revisit your salary bands. Then adjust compensation for all eligible team members.

Regularly measure pay equity

Even with the best intentions, pay equity can get off track. Measure pay equity once or twice a year to find and address discrepancies rather than allowing them to perpetuate. Include cash, bonus, and stock to ensure you’re looking at the whole picture.Decorative leaf

Slice your data in different ways to look for pay gaps by gender, race, and intersectionality. You may also drill down by zone, function, or department to see how pay equity measures up among team members who work closely together.

Final thoughts on pay equity

Achieving pay equity requires an intentional, ongoing commitment to equal opportunity and fair compensation. We’re making slow progress, but there’s still much work to be done. It’s time to prioritize pay equity and close the pay gaps once and for all.

 

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Author:

Jen Dewar

Jen Dewar

HR Writer

Sources:

1. Payscale; Pay Equity and DEI
8. The Federal Reserve System; Wealth Inequality and the Racial Wealth Gap
9. U.S. Equal Employment Opportunity Commission; Equal Pay Act Charges
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