Managing Pay Equity

Pay equity includes issues relating to the fairness of compensation paid by employers to individuals or groups of employees. To effectively recruit and retain employees, an organization must have internal equity, where employees feel they are being rewarded fairly based on performance, skills and other job requirements.

Organizations must also ensure external compensation equity with employers competing for talent in the same labor market. Understanding the legal obligations regarding pay equity allows HR professionals to evaluate the lawfulness of their organization's pay practices and identify necessary corrective action.

Pay equity raises serious legal questions for organizations and HR professionals. This article discusses a number of laws related to pay discrimination:

• The Equal Pay Act (EPA).
• Title VII of the 1964 Civil Rights Act.
• The Age Discrimination in Employment Act (ADEA).
• The Americans with Disabilities Act (ADA).
• The Lilly Ledbetter Fair Pay Act of 2007 (Ledbetter Act).

See Federal Statutes, Regulations and Guidance

This toolkit also examines the need for HR professionals to review their organization's policies regarding starting pay, allowable differences in pay, merit pay increases and promotional pay increases and to perform statistical self-audits of pay decisions. Finally, this toolkit offers HR practitioners insight into responding to challenges from employees about their organization's pay policies. 

See Bridging the Pay Gap: Why Pay Equity Pays Off

Background

Discussions about pay equity generally focus on gender differences and usually begin with disturbing data on the extent to which full-time female workers earn less than full-time male workers. However, pay equity issues are not limited solely to the area of gender discrimination. The Equal Employment Opportunity Commission's compliance manual, in the chapter addressing compensation discrimination, notes that "pay disparities persist between workers in various demographic groups."

See U.S. Companies Are Working to Fix Pay-Equity Issues and Black Women Must Work 263 Extra Days to Achieve White Men's Pay.

The EPA and Title VII of the 1964 Civil Rights Act both prohibit discrimination in pay based on gender but do so in fundamentally different ways. HR professionals must understand the critical distinctions between the two statutes. The ADEA and the ADA prohibit discrimination in pay based on age and disability, respectively.  

In Ledbetter v. Goodyear Tire & Rubber Co., the Supreme Court ruled that Title VII focuses on pay decisions, not on current pay. This ruling represented a significant change from the previously prevailing interpretation of Title VII. The Ledbetter decision led to passage of the Lilly Ledbetter Fair Pay Act, which clarifies that the statute of limitations resets as each discriminatory paycheck is issued.

According to the U.S. Bureau of Labor Statistics (BLS), in the fourth quarter of 2022, full-time female employees earned only 82.9 percent of what full-time male employees earned. Although this gender wage gap has narrowed considerably since 1979, for example, when women's earnings were only 62 percent of men's earnings, the large pay disparity continues to generate protest and calls for strong action. Although public debate has focused almost exclusively on the gap in earnings of male and female workers, similar gaps exist in the earnings of full-time minority workers when compared with the earnings of full-time nonminority employees.

See Usual Weekly Earnings of Wage and Salary Workers.

Civil rights advocates regularly cite the gender wage gap as compelling evidence of overt pay discrimination against female employees, particularly when male and female employees are doing equal work. Evidence of individual instances of such discrimination fuels those flames. Lilly Ledbetter, for example, presented strong evidence at her trial that Goodyear Tire & Rubber Co. systematically paid female production supervisors less than male production supervisors. Thus, in this instance, "pay equity" refers to the payment of equal pay for equal work, the very issue the EPA addressed.

See Equal Pay Day Another Reminder to Review Pay Practices and Closing the Gender Pay Gap.

Despite the public debate about equal pay for equal work, research indicates that a very small proportion of the gender wage gap is attributable to paying women less than men for doing the same work. In fact, scholarly research indicates that the gender wage gap occurs because women tend to work in lower-paying jobs, whereas men tend to work in higher-paying jobs. This differential occupational distribution of men and women largely accounts for the gender wage gap among full-time workers.¹  

See Close the Gender Pay Gap with Career Parity.

Further research has focused on the impact of caregiving demands that lead many employees to prioritize workplace flexibility over salary.² Although academic researchers generally agree that different male/female occupational patterns cause the largest portion of the gender wage gap, they do not agree on the extent to which that occupational pattern itself reflects discrimination against women in hiring and promotion.³

Relevant Laws

Four federal statutes ban discrimination in pay:

• The Equal Pay Act of 1963 (EPA).
  
• Title VII of the 1964 Civil Rights Act.
• The Age Discrimination in Employment Act (ADEA).
• The Americans with Disabilities Act (ADA).

In addition, the Lilly Ledbetter Fair Pay Act extends the statute of limitations for pay discrimination claims, and Executive Order 11246 prohibits pay discrimination by federal contractors.

The EPA

The EPA was the first piece of modern civil rights legislation. It has an extremely narrow focus, prohibiting pay discrimination based only on gender. The act prohibits employers from paying women less than men for doing the same or substantially the same work at the same facility. See Facts About Equal Pay and Compensation Discrimination.

Under the EPA, a claimant need only demonstrate that an employer pays men more than women (without proving discriminatory intent). To avoid liability under the EPA, an employer must prove an affirmative defense, that is, that any pay disparity is justified by:

• a seniority system that rewards employees based on length of employment;
• a merit system that rewards employees for exceptional job performance;
• an incentive system that pays employees based on the quality of their work or the amount of work they perform; or
• another factor related to job performance or business operations, such as paying a shift differential to workers on less popular shifts.

Claims under the EPA are rare and have not proved to be useful in attacking systemic pay discrimination against women.

In the early years after the passage of the EPA, virtually all jobs in the private sector were filled almost exclusively with men or exclusively with women.⁴ In addition, the use of sex-segregated help-wanted ads persisted well into the 1970s—even after Title VII outlawed sex-based job discrimination. This meant that few women were protected by the statute because few women actually worked in gender-integrated jobs at the same facility.

Even after Title VII's prohibition against sex discrimination in hiring and promotion gradually expanded opportunities for women to move into jobs traditionally reserved for men, female employees rarely lodged claims under the EPA. That pattern has continued. In FY 2021, for example, the U.S. Equal Employment Opportunity Commission (EEOC) received only 885 charges alleging violations of the law.⁵

See Questions and Answers on the Equal Pay Act and Female Doctor Can Pursue Equal Pay Act Claim.

Title VII of the Civil Rights Act of 1964

Title VII is a comprehensive federal law that prohibits discrimination in all aspects of employment, including compensation, based on race, color, religion, national origin and gender. According to the EEOC, "Compensation discrimination on the basis of sex in violation of Title VII does not necessarily constitute a violation of the EPA. This is because Title VII compensation discrimination claims are not limited to claims of unequal pay for equal work.

Compensation discrimination in violation of Title VII can be established even if no member of the opposite class holds an equal, higher paying job. Comparisons can be made under Title VII between the compensation rates of 'similarly situated' employees, which is a more relaxed standard than the equal work requirement under the EPA.

Furthermore, a Title VII claim can be brought based on an employer's segregating or classifying protected class workers in lower paying jobs and limiting their opportunities to secure higher paying jobs. Finally, compensation discrimination claims under Title VII are not restricted to claims in which comparisons are made between jobs in the same establishment, although Title VII does not forbid applying different standards of compensation to employees 'who work in different locations' as long the difference is not the result of discrimination." See EEOC Compliance Manual Section 10: Compensation Discrimination.

The Lilly Ledbetter Fair Pay Act's Modification of the Timeliness Rule

Under the Lilly Ledbetter Fair Pay Act, each new paycheck that is tainted by a prior discriminatory pay decision triggers a new EEOC charge filing period. Thus, as long as an employee's paycheck continues to be less than it would have been but for some prior discriminatory pay decision, the employee may make a timely challenge to that previous allegedly discriminatory pay decision.

Under the Act, an individual subjected to compensation discrimination under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, or the Americans with Disabilities Act of 1990 may file a charge within 180 days (or 300 days if a state or local agency enforces a law that prohibits discrimination on the same basis) of any of the following:

• when a discriminatory compensation decision or other discriminatory practice affecting compensation is adopted;
• when the individual becomes subject to a discriminatory compensation decision or other discriminatory practice affecting compensation; or
• when the individual's compensation is affected by the application of a discriminatory compensation decision or other discriminatory practice, including each time the individual receives compensation that is based in whole or part on such compensation decision or other practice.

See EEOC Notice Concerning the Lilly Ledbetter Fair Pay Act of 2009.

Consider the following example under the EEOC's broad interpretation: An employee now claims that her manager discriminated against her based on gender five years ago when he gave her an "average" performance rating. She further alleges that five years ago, the employer's pay-for-performance compensation system led to a lower merit pay increase than she would have received had the manager given her the performance rating she deserved. She claims that her current paychecks are therefore less than they otherwise would have been and that each current paycheck triggers a new 180-/300-day EEOC charge filing period.

Using the same rationale, employees who claim they were discriminatorily denied promotions in the past or were previously demoted could argue that those past discriminatory decisions taint each current paycheck, thus allowing them to challenge those past decisions, no matter how long ago they occurred. 

The ADEA and ADA

The ADEA and ADA prohibit discrimination in pay against workers on the basis of age and disability. Both statutes use Title VII's standards of discrimination, and the Ledbetter Act applies equally to pay discrimination claims under both.

See Age Discrimination and Disability Discrimination.

According to the Pew Research Center, the gender wage gap is smaller for younger workers (ages 25 to 34) than for all workers 16 and older. In 2022, women ages 25 to 34 earned an average of 92 cents for every dollar earned by a man in the same age group – an 8-cent gap. By comparison, the gender pay gap among workers of all ages that year was 18 cents.⁶

Federal wage and hour law currently permits employers to pay subminimum wages to employees with disabilities based on their comparative productivity. Disability activists argue that this conflicts with the ADA's prohibition on pay discrimination and some states have banned—or are considering banning—the practice.

See Fact Sheet #39: The Employment of Workers with Disabilities at Subminimum Wages.

Claims of pay discrimination based on age or disability can be rare, however, HR professionals must ensure fair pay practices for all protected groups of employees.

Executive Order 11246 and OFCCP's Guidelines on Compensation Discrimination

According to the Office of Federal Contract Compliance Programs (OFCCP), "Compensation discrimination can take many forms—from paying women less than men for doing the same job, to discriminating against minorities in access to high paying positions or opportunities to earn overtime. Even when base salaries and wages are fair, workers can still experience discrimination in other types of pay, like bonuses or commissions.

For this reason, courts consistently state in judicial decisions applying Title VII that there is no single way to prove compensation discrimination, and no particular limits on the kinds of evidence or information that might be relevant to proving discrimination in a particular case." Because of this, the OFCCP revoked previous guidance documents that too narrowly constrained pay discrimination investigations. Alternatively, the OFCCP will turn to existing standards used by the courts and EEOC when investigating pay discrimination claims.

See OFCCP Analysis of Contractor Compensation Practices During a Compliance Evaluation Frequently Asked Questions and LinkedIn to Pay $1.8 Million to Settle Women's Wage Discrimination Claims.

State Laws

Many states, cities and other political subdivisions have passed laws prohibiting discrimination in employment based on a wide variety of protected categories. State courts generally adopt federal courts' interpretations of Title VII although others have passed laws with greater protections. All states have an equal pay law; some more expansive than the federal Equal Pay Act.

See Mississippi Becomes the Last State to Enact an Equal Pay Law.

A growing trend in state laws prohibits asking about a job candidate's salary history due to concerns that this practice may perpetuate a gender-based salary gap if employers base a new employee's pay on his or her previous salary. Employers should consult with legal counsel for guidance on pay equity laws in their state(s).

See More Jurisdictions Are Banning Salary-History Inquiries.

Pay transparency is another state law trend that employers will likely encounter. Several states and localities have implemented laws requiring that employers include salary ranges in their job postings and many employees and job seekers are expecting employers to demonstrate pay transparency even when not required by law.

See:

Pay Transparency Infographic

The Push for Pay Transparency

Trend Toward Pay Transparency Continues

Reviewing Policies Regarding Pay Decisions

Developing a compensation strategy within this legal framework provides employers with an opportunity to proactively review their organizations' vulnerabilities regarding pay equity. A thorough self-evaluation includes the following steps:

• Ensure confidentiality of the self-evaluation
• Review pay structures
• Review starting pay policies
• Review merit increase policies
• Review promotional pay policies
• Review recordkeeping practices

See How to Ensure Pay Equity for People of Color.

Maximizing the Confidentially of a Self-Evaluation

The time to put confidentiality protections in place is before undertaking any portion of the self-audit. Once the horse is out of the barn, shutting the door is useless.

Unless the organization conducts the voluntary self-audit in anticipation of specific litigation or trial, the self-audit will be subject to discovery by the government and plaintiffs' counsel unless the employer can satisfy the rigorous standards of the attorney-client privilege. The attorney-client privilege, one of the oldest recognized privileges for confidential communication, is intended to encourage and facilitate a free exchange between an attorney, either in-house or outside, and the client during the professional relationship.

Although various approaches to maintaining an attorney-client privilege exist, a common technique involves the following steps:

• The president or CEO should state in writing to counsel, either in-house or outside, that senior management wishes to obtain legal advice concerning possible exposure to discrimination claims relating to the organization's compensation practices.
• The written communication from the president or CEO should direct counsel to use appropriate HR professionals and others with particular expertise, on a need-to-know basis, to conduct a voluntary self-audit of the organization's compensation practices for the purpose of providing legal advice.
• The written directive from the president or CEO should expressly state that all persons involved in the self-audit should treat the audit as confidential and should mark all documents and communications as "privileged and confidential, prepared under direction of counsel."

Of course, the organization must actually maintain the confidentiality of the self-audit and all related documents.

Reviewing Pay Structure

Once the confidentiality protections are in place, HR professionals review the organization's pay structure and policies governing the three most common pay decisions:

• Starting pay.
• Merit pay increases.
• Promotional pay increases.

Because the pay rates of hourly employees who are in collective bargaining units are rigidly set by collective bargaining agreements, HR professionals can reasonably limit the self-audit to practices affecting nonunion employees.

Almost all organizations have some type of formal pay structure. "Pay structure refers to the array of pay rates for different work or skills within a single organization. The number of levels, the differentials in pay between the levels, and the criteria used to determine those differences describe the structure."⁷ The most common pay structures are market-based structures, which rely on external market data to ensure that an organization's pay levels are competitive. See How to Establish Salary Ranges.

Although HR professionals will likely have substantial knowledge about their organization's pay structure, they should be able to answer the following questions before embarking on a self-audit of their employer's pay practices:

• Does the organization have a formal hierarchy of pay levels?
• Does each pay level have an assigned pay range?
• How does the organization assign specific jobs to specific pay levels?
• How does the organization determine the dollar values for a specific pay level?
• What, if any, are the important components of compensation in addition to base pay?

Armed with an understanding of their organization's pay structure, HR professionals will be prepared to review specific compensation policies. 

Reviewing Starting Pay Policies

Starting pay decisions often involve the most managerial discretion and hence the most risk for challenge under Title VII. Therefore, HR professionals should pay particular attention to starting pay policies and should obtain answers to at least the following questions:

• Does the organization have a written policy governing starting pay decisions?
• Does any organizational policy establish specific factors that govern starting pay decisions? Are decisions based on the value of the position to the organization, competition in the market and other bona fide business factors?
• Does organizational policy ensure that salary history is not a factor in setting compensation?
• Who participates in making starting pay decisions, and what is the role of each person?
• Who has ultimate authority to determine starting pay?
• What procedural steps are involved in making starting pay decisions?
• Does organizational policy require written documentation of the rationale for starting pay decisions?
• Does organizational policy require written documentation of the identity of the decision-maker for each starting pay decision?
• What, if any, constraints does organizational policy place on starting pay decisions?
• What steps, if any, does the organization routinely undertake to monitor compliance with its starting pay policies?

After reviewing starting pay policies, HR professionals should evaluate the degree of discretion exercised by decision-makers; the extent to which checks and balances exist to constrain the exercise of that discretion; the extent to which the exercise of discretion is (or could be) effectively monitored; and the extent to which the employer would likely be able to explain and defend, if necessary, starting pay decisions. HR professionals should be prepared to recommend appropriate changes in policy, if needed, to strengthen the defensibility of their organization's decision-making process for starting pay. 

Many jurisdictions have prohibitions on asking about a job candidate's salary history. In areas where such an inquiry is not prohibited, HR professionals should be especially attuned to information concerning the impact that a new hire's previous pay has on his or her starting pay. SHRM asserts that salary history should not be a factor in setting compensation.⁸ One federal court has stated that paying a male new hire more than a female new hire in the same job based solely on the new hire's prior salary would violate the EPA because such a practice would "contravene Congress' intent and perpetuate the traditionally unequal salaries paid to women for equal work."⁹

Reviewing Merit Pay Increase Policies

Most compensation systems have a pay-for-performance component. Pay-for-performance policies directly link monetary rewards to employees' performance ratings, often in the form of an increase in base pay.

Organizations typically use a matrix that allocates differing percentage increases in base pay for a specific performance rating, with the differing rates of pay increase based on the relationship between an employee's current base pay as compared with the midpoint of the employee's pay grade (compa-ratio). Even with a formal process in place, managers generally have some discretion in how much increase in base pay to award employees that could result in systemic discrimination.

HR professionals conducting a self-audit of their organization's pay practices should review internal policies to determine answers to the following questions:

• Does the organization have a written policy governing merit pay increases?
• What technique does the organization use to link performance and pay increases?
• Does the organization reward performance by means other than a merit increase in base pay?
• How much discretion do managers have in determining an individual employee's merit pay increase?
• What checks and balances, if any, constrain a manager's discretion in determining an individual employee's merit pay increase?
• Does organizational policy require written documentation of the rationale for individual merit pay increase decisions?
• What steps, if any, does the organization take to monitor compliance with its merit pay increase policies?

HR professionals should be prepared to recommend appropriate changes in policy, if needed, to strengthen the defensibility of their organization's decision-making process for merit pay increases. HR professionals should be particularly concerned about the degree of managerial discretion and documentation of the rationale for individual merit increase decisions. 

Reviewing promotional pay increases

Organizations typically reward promotions with an increase in the promoted employee's base pay. Such increases vary depending on many factors, including whether the promotion is to a new pay grade and the employee's pre-promotion pay rate. Some promotion pay increase policies allow managers considerable discretion, but other policies provide an inflexible standard. The issues with promotional pay increases are essentially the same as with annual merit pay increases.

In a self-audit of compensation practices, HR professionals should answer the following questions:

• Does the organization have a written policy governing promotional pay increase decisions?
• Does any organizational policy establish specific factors that govern promotional pay increase decisions?
• How much discretion do managers have in determining an individual employee's promotional pay increase?
• What checks and balances, if any, constrain managers' discretion in determining an individual employee's promotional pay increase?
• Does organizational policy require written documentation of the rationale for individual promotional pay increase decisions?
• What steps, if any, does the organization take to monitor compliance with its promotional pay increase policies?

HR professionals should be particularly concerned about the degree of managerial discretion and the extent of documentation of the rationale for promotional pay increase decisions. HR professionals should be prepared to recommend appropriate changes in policy, if needed, to strengthen the defensibility of their organization's decision-making process for those increases.

Reviewing record retention

The Ledbetter Act's change in the statute of limitations in which to dispute discrete pay decisions—and possibly other decisions that affect pay—creates a challenge for HR professionals. What records should an organization create with respect to such decisions and how long should it keep those records?

Consider the following hypothetical situation: An organization hires two employees into the same pay grade. One employee is Hispanic; the other is white, non-Hispanic. The annual starting pay of the white, non-Hispanic employee is $5,000 more than the starting salary of the Hispanic employee. The white, non-Hispanic employee quits six months later. Three years later, the organization fires the Hispanic employee, who promptly files an EEOC charge challenging his termination and alleging that his starting salary was discriminatory when compared with the starting salary of the white, non-Hispanic employee hired into the same pay grade on the same day.

In that scenario, what records will the organization have retained to document the rationale for the starting pay of the white, non-Hispanic employee who quit more than two years earlier? Which retained records will indicate who made that starting pay decision? At the time of hire, did the organization document the rationale for the starting salaries or identify the decision-makers? Even if the organization created such records for the white, non-Hispanic new hire, did the organization destroy those records at some time after the employee quit?

Any way you look at it, the Ledbetter Act creates record-keeping and record retention issues for pay decisions and possibly for a wide range of other decisions. Thus, as part of a voluntary compensation self-audit, HR professionals should examine these issues carefully and make any necessary recommendations for changing organizational practices.

Existing legal requirements for the length of record retention may no longer provide employers adequate protection from future claims. Unfortunately, no bright line exists for new record retention standards. Each organization will have to reach its own decisions on what to keep and for how long and HR professionals will need to engage in an ambiguous cost-benefit analysis.

Statistically Auditing Recent Pay Decisions

As with all HR policies, even the most carefully constructed pay policies with appropriate safeguards can still result in discrimination. Conversely, even the most poorly crafted policies with few, if any, safeguards may not result in discrimination. HR professionals have long known that the real test for discrimination is in empirical data. Because Title VII's focus is on pay decisions, employers should conduct a statistical self-audit of recent pay decisions.

The period chosen for the audit should be long enough to provide a sufficient number of decisions to produce a meaningful analysis but short enough so that turnover of employees does not create unnecessary complications in analyzing the data. As with the review of pay policies, the statistical self-audit should focus on starting pay decisions, merit pay increases and promotional pay increases.

Gathering the Data

Every organization's human resource information system (HRIS) is different. And no two organizations' HRIS systems maintain exactly the same information. Nevertheless, HR professionals can begin with a general list and can gather as much information as is readily available in electronic form. Gathering data from hard-copy personnel files may prove too time-consuming to be productive, at least initially.

Before gathering the data, HR professionals should obtain input from the person who is going to conduct the statistical analysis. Large employers may have the ability to do that analysis in-house. Smaller organizations may need to retain an outside statistical consultant. Whoever is going to conduct the analysis may have his or her own ideas about what data should be collected.

Starting pay data list. If the information is readily available in electronic form, HR professionals should gather the following data to conduct a statistical analysis of recent starting pay decisions:

• Employee ID.
• Date of birth.
• Educational level at hire (e.g., high school, A.A.S., B.A., M.A., Ph.D.).
• Gender.
• Race/ethnicity.
• Date of hire.
• Pay basis (e.g., per hour, year).
• Department.
• Exempt/nonexempt status.
• Full-time/part-time status.
• Job code.
• Job group, equal employment opportunity (EEO) category, etc.
• Job title.
• Starting pay grade.
• Starting pay rate.

Recent merit pay increase data list. If the information is readily available in electronic form, HR professionals should gather the following data to conduct a statistical analysis of recent merit pay increase decisions:

• Employee ID.
• Gender.
• Race/ethnicity.
• Date of birth.
• Date in job.
• Date of performance evaluation.
• Performance rating.
• Educational level (e.g., high school, A.A.S., B.A., M.A., Ph.D.).
• Effective date of merit increase.
• Merit increase amount ($).
• Merit increase percentage.
• Original date of hire.
• Pay basis (e.g., per hour, year).
• Department.
• Exempt/nonexempt.
• Full time/part time.
• Job code.
• Job group, EEO category, etc.
• Job title.
• Pay grade.

Recent promotional pay increase data list. If the information is readily available in electronic form, HR professionals should gather the following data to conduct a statistical analysis of recent promotional pay increase decisions:

• Employee ID.
• Gender.
• Race/ethnicity.
• Date of birth.
• Original date of hire.
• Date in pre-promotion job.
• Date of most recent pre-promotion performance evaluation.
• Most recent pre-promotion performance rating.
• Educational level (e.g., high school, A.A.S., B.A., M.A., Ph.D.).
• Effective date of promotion.
• Pay basis (e.g., per hour, year).
• Post-promotion department.
• Post-promotion exempt/nonexempt.
• Post-promotion full time/part time.
• Post-promotion job code.
• Post-promotion job group, EEO category, etc.
• Post-promotion job title.
• Post-promotion pay grade.
• Pre-promotion department.
• Pre-promotion exempt/nonexempt.
• Pre-promotion full time/part time.
• Pre-promotion job code.
• Pre-promotion job group, EEO category, etc.
• Pre-promotion job title.
• Pre-promotion pay grade.
• Promotion increase amount ($).
• Promotion increase percentage.

Analyzing the Empirical Data

A reliable statistical analysis of employment decisions often involves a two-step process. The first step consists of a basic regression analysis of the factors for which electronic data were obtained. If that initial analysis reveals no statistically significant disparities based on gender, race or ethnicity, then an organization can be reasonably confident that systemic discrimination did not occur during the period covered by the audit. However, the absence of problems in the recent past is no guarantee that future issues will not arise.

To guard against future systemic pay discrimination problems, employers should be certain to implement any changes suggested by the review of organizational policies. In addition, employers should consider adopting a formal schedule for future statistical self-audits.

If the initial regression analysis reveals statistically significant disparities based on gender, race or ethnicity, the organization should examine the data one layer at a time. Often, significant disparities revealed in an initial statistical analysis are a result of the absence of important data that were not initially included. Drilling down to identify potentially relevant information that was excluded usually requires a professional who is skilled in pay discrimination issues. To obtain such expertise, most organizations will require outside assistance, even if they were able to do the initial analysis in-house.

If significant disparities remain even after this two-step process, the organization has identified a likely problem of systemic pay discrimination, thus allowing it to take corrective action before a legal challenge is made.

Taking Corrective Action

Compensation self-audit results could produce recommendations for corrective action in one or more of the following areas relating to policy.

Revisions in starting pay policies by:

• Reducing managerial discretion.
• Improving the monitoring of compliance with policies.
• Providing a more complete written record of decisions.

Revisions in pay-for-performance plans by:

• Moving from annual merit increases in base pay to lump-sum bonuses.
• Reducing managerial discretion.
• Improving monitoring of compliance with policies.
  
• Providing a more complete written record of decision.

Revisions in promotional pay increase policies by:

• Reducing managerial discretion.
• Improving the monitoring of compliance with policies.
• Providing a more complete written record of decisions.

As challenging as some of these policy changes might be, corrective action to increase the pay of individuals will be not only extremely challenging but also controversial. Organizations should make changes in individual employees' pay only after the most diligent efforts have failed to identify legitimate, nondiscriminatory justification for one or more statistically significant disparities in starting pay, merit pay increases or promotional pay increases. Determining the existence of a disparity as to a class of employees is one thing; singling out individual employees for pay increases is quite another. 

For example, assume that an organization's best efforts failed to explain a statistically significant disparity in merit pay increases for black employees in a certain pay grade. If the organization were to retroactively grant merit pay increases to all black employees in that pay grade whose merit increase was lower than the increase given to white employees, a recalculation of pay increases would, arithmetically, lead to black employees having a significantly higher rate increase.

Alternatively, should an organization make changes in pay to only the minimum number of employees needed to eliminate the significance of the statistical disparity, thus leaving a disparity that is no longer statistically significant?

Because of the complex issues involved in adjusting the pay of specific employees, organizations should proceed cautiously and should do so with the advice of outside professionals skilled in this area. 

See How to Avoid Unintended Consequences When Raising Pay.

Additional Resources

Merit Increase Matrix

Merit Increase Policy and Procedures 

Performance and Salary Review Policy

 

Endnotes

¹Sanborn, H. (1964). Pay differences between men and women. Industrial and Labor Relations Review, 17(4), 534-550; Oaxaca, R. (1973). Male-female wage differentials in urban labor markets. International Economic Review, 14(3) 693-709; and Groshen, E. L. (1991). The structure of the female/male wage differential: Is it who you are, what you do, or where you work? The Journal of Human Resources, 26(3), 457-472.

²Greenwood, S. (2023, March 1). The enduring grip of the gender pay gap. Pew Research Center's Social & Demographic Trends Project. Retrieved from https://www.pewresearch.org/social-trends/2023/03/01/the-enduring-grip-of-the-gender-pay-gap/

³For the OFCCP's February 2009 salvo in this debate, see CONSAD Research Corp. (2009). An analysis of the reasons for the disparity in wages between men and women. Pittsburgh, PA: CONSAD Research Corporation.

⁴Copus, D., & Gartner, L. (1972). "Unique competence": A study of equal employment opportunity in the Bell system. Washington, DC: Equal Employment Opportunity Commission; Bielby, W. T., & Baron, J. N. (1984). A woman's place is with other women; sex segregation within organizations. In B. Reskin (Ed.), Sex segregation in the workplace: Trends, explanations, remedies (pp. 27-55). Washington, DC: National Academy Press; and Groshen, E. L. (1991). The structure of the female/male wage differential: Is it who you are, what you do, or where you work? The Journal of Human Resources, 26(3), 457-472.

⁵Equal Employment Opportunity Commission. Equal Pay Act charges. Retrieved from http://www.eeoc.gov/eeoc/statistics/enforcement/epa.cfm

⁶Aragão, C. (2023, March 1). Gender pay gap in U.S. hasn't changed much in two decades. Pew Research Center. Retrieved from https://www.pewresearch.org/fact-tank/2023/03/01/gender-pay-gap-facts/

⁷Milkovich, G. T., & Newman, J. M. (2008). Compensation. Boston, MA: McGraw-Hill Irwin, 60.

⁸Compensation Equity, Public Policy Issue Statement, Society for Human Resource Management, April 2018.

⁹See e.g., Price v. Lockheed Space Operations Co., 856 F.2d 1503, 1507 (11th Cir. 1988).