Pay Equity

What pay equity means in practice

Pay equity is about comparable employees, not averages. If a female and a male claims processor have the same tenure, ratings and location, they should be paid about the same. If one earns $3,000 less, you need a reason you can document that has nothing to do with sex, race or another protected characteristic.

Legitimate reasons usually include time in role, relevant prior experience, performance, geography, shift and certifications. Reasons that do not hold up well include 'she negotiated less', 'he had a competing offer three years ago' and prior salary, which several states now ban employers from asking about through salary history bans.

Most pay gaps are not created by anyone deciding to pay women or minorities less. They come from starting offers, from promotion timing, from who gets market adjustments and from managers who give bigger raises to people who ask.

The main US laws

• [Equal Pay Act](/glossary/equal-pay-act/) of 1963: requires equal pay for men and women doing equal work in the same establishment, where the jobs need equal skill, effort and responsibility under similar working conditions. Differences are allowed only if based on seniority, merit, quantity or quality of production, or a factor other than sex.
• Title VII of the Civil Rights Act of 1964: prohibits pay discrimination based on race, color, religion, sex and national origin, and does not require the jobs to be equal.
• Lilly Ledbetter Fair Pay Act of 2009: each discriminatory paycheck restarts the deadline to file a charge, so old pay decisions keep creating exposure.
• ADEA and ADA: also prohibit pay discrimination based on age (40 and over) and disability.

Many states go further. California, New York, Massachusetts, Illinois, Washington, Oregon and others use a 'substantially similar work' standard, cover more protected characteristics, or limit which factors can justify a difference. Massachusetts gives employers an affirmative defense if they completed a good-faith self-evaluation of pay. Rules vary by state and change often, so check local law and talk to employment counsel.

How a pay equity audit works

1. Group comparable jobs. Create 'similarly situated employee groups' of people doing substantially similar work, usually by job family and level.
2. Collect the data. Base pay, job, grade, location, hire date, time in role, performance ratings, gender, race and ethnicity. Clean it carefully; most audit problems are data problems.
3. Run a first screen. Compare average pay and average compa-ratio by group within each job group.
4. Run a regression. A multiple regression tests whether gender or race still predicts pay after controlling for legitimate factors. A statistically significant coefficient flags a group for review.
5. Review individual outliers. Look at each person whose pay is well below the prediction and check the file for an explanation.
6. Remediate and document. Budget for adjustments and record what you changed and why.

Many employers run the audit under attorney-client privilege by having counsel commission it, so findings can be addressed before they become evidence. Repeat it every year, and before any major pay change.

A worked example

A regional bank's operations center has 48 loan processors in one grade. The raw averages: men $54,200, women $51,900, a 4.2% gap. After controlling for tenure, prior banking experience and location, the regression still shows women paid 2.6% less, and the gap is statistically significant.

The outlier review finds the cause: 11 women were hired during an 18-month window when the starting rate was frozen, while men hired just after the freeze started at the new rate. Fixing it costs about $19,000 in adjustments. The bank also changes its process so every new rate triggers a review of recent hires in the same job, which stops the pattern from repeating.

Pay equity vs the gender pay gap

These get mixed up all the time. The gender pay gap compares the median or average pay of all women and all men across an organization, regardless of job. It mostly reflects who holds which jobs: if most senior engineers are men and most customer service agents are women, the gap will be large even if everyone is paid fairly for their job.

Pay equity compares people in the same or similar jobs. An organization can have perfect pay equity and a large gender pay gap, which points to a representation and promotion problem rather than a pay-setting one. Both matter, and the EU Pay Transparency Directive requires employers there to report on both.

How to keep pay equitable after you fix it

• Control starting pay. Set offers from the salary band based on documented experience, not on what the candidate asked for.
• Post pay ranges. Pay transparency laws already require it in many places, and posting ranges narrows negotiation gaps.
• Check every merit and promotion cycle by gender and race before approvals go final.
• Train managers to write down the reason for any off-cycle increase.
• Watch counteroffers. Retention raises granted to people with outside offers can quietly reopen gaps.