Pay equity audits can address a chief concern of diversity, equity and inclusion efforts. According to a 2021 Society for Human Resource Management report, they also may inspire trust within an organization.
But employers need to have the right mindset if they are going to attempt an audit, Robert O'Hara, member of the firm at Epstein Becker Green, said during a Feb. 10 web event hosted by Deloitte Legal. Namely, stakeholders should commit to taking advantage of the information they receive as a result of the analysis.
"You have to go in with an eye that you're going to make adjustments as needed," O'Hara said. "If you're not prepared to do that, I would be reluctant to have you do a pay equity analysis, because now if you do it and you find you have problems, and you bury it, I don't think you're in a very good position from a legal perspective."
That does not necessarily mean employers must preemptively decide to make sweeping changes to their pay practices, or a complete overhaul, he continued, though such changes may be warranted if an audit reveals large, systemic issues at play.
In a step-by-step presentation, O'Hara discussed what a modern pay equity analysis looks like, highlighting four key components.
#1: Consider using legal privilege
O'Hara said it is highly recommended that employers conduct their audit under legal privilege, particularly if they have never done such an analysis before. This protects information from being subject to disclosure or discovery during legal proceedings.
"The reason for that is that you have complete control over the data and the analysis, and the outputs of that," he continued. "It's not something where you can go and say 'I'm going to do this,' and announce it to the world that you're going to do this, and then you get bad results and all of a sudden it goes to ground. You want to be very, very careful about how you do that."
Choosing this route also gives employers the flexibility to make adjustments, if necessary, on their own time. "The reason you want to be proactive here is so you know where the issues are," O'Hara said.
#2: Develop comparator groups
HR teams will spend much of their time at this stage of the process, O'Hara said, as they will want to ensure comparisons are accurate. Aside from an employee's title, employers also would do well to consider performance evaluations, length of service, experience, education and geography, among other factors.
One objective may be to determine whether an employee's title is actually reflective of the day-to-day duties they perform and responsibilities they hold.
"That's one of the things that you find out when you do this exam," O'Hara said. "You look at these things and say, 'Why is this person paid so much more than this [other] person or this group of people?' Well, they have a very different kind of job. Now it becomes apparent that you've got a different job. Now, maybe you can adjust their titling. That might be the issue as opposed to the comp itself."
#3: Conduct a statistical regression analysis
Employers may want to conduct a regression analysis using a dedicated software package, O'Hara said.
This can be done internally within the HR organization or even within the compensation organization, "provided they have the right kind of guidance to do it smartly," he continued. O'Hara's presentation specifically directed employers to conduct audits in connection with a statistician.
Counsel should be involved, too. "In the U.S., if you're doing it on your own in HR, finance or some place else and it's not being directed by counsel, you're not going to be able to protect that data from disclosure if you're sued or something like that," O'Hara said. "Make sure you have those types of protections in place."
#4: Follow through on the results
Once employers complete their analyses, they will need to determine whether the data tell them something that they do not already know, O'Hara said. A particularly important step is to determine whether any individual outliers for a given position exist, and the rationale behind those outliers.
"The statistics won't lie to you."
Robert O'Hara
Member of the firm, Epstein Becker Green
Perhaps employers have hired "the only person in the known universe that can fix this problem," to borrow O'Hara's phrasing, and plan to pay that person accordingly. "That's a business decision — that's fine," O'Hara said. But if the employee takes the same job title and job description as existing members of the organization, it could skew the data as a result.
"Anytime that you demote, promote, hire or fire someone, that dataset changes," O'Hara said. "If you're in a big organization, and you hire 5,000, 10,000, 30,000 people a year, every one of those transactions has an impact on the data. In a smaller organization, those individual decisions loom actually larger from a statistical perspective."
Frequently, audits reveal that disparities exist because employers hire someone who is considered over the typical market for a given position, he continued. But others may be underpaid. "If you have a business rationale for it, a nondiscriminatory rationale for it, fine. But you want to know what you have before you're hit over the head with it."
Aside from starting wages, O'Hara said employers also may want to consider the impact of bonuses and other incentive structures. Another concern is channeling, a relatively new term for a practice by which an employer decides not to place certain types of people into certain roles on a discriminatory basis, such as because the person is of a particular gender.
Raising pay is not the only tool employers have at their disposal to fix disparities, either. O'Hara said job classification issues, for example, also can be taken into consideration
"The statistics won't lie to you," O'Hara said. "They'll tell you a diagnostic [of] what's going on, but they're not going to necessarily tell you what you have to do to fix it."
