If you lead People, Total Rewards, or DEIB, you already know that simply “meeting the law” on pay is table steaks. A proactive pay equity analysis does more than check a box. It builds trust, strengthens your employer brand, and keeps your best people from walking. In fact, when employees perceive their pay is fair, organizations see up to 26% higher performance and 27% higher retention. That’s a big lift for any HR leader’s scorecard.
In this guide, we’ll demystify pay equity analysis, show how it differs from benchmarking, and outline a practical, five-step audit you can run, pairing livingHR’s expertise with Payscale’s compensation data and software.
What Is Pay Equity Analysis? (And What It’s Not)
Pay equity analysis is a rigorous, internal review of how you pay people in comparable roles, controlling for legitimate factors like role, level, skills, tenure, location, and performance - to spot and correct unexplained differences that disadvantage protected groups.
What it’s not (common misconceptions to avoid)
- Not a market study: It uses your internal HRIS and payroll data; external pricing is a separate (but complementary) exercise.
- Not a quota or equal-outcomes mandate: It doesn’t force targets by identity; it tests whether people doing similar work with similar qualifications are paid fairly.
- Not “everyone gets the same pay”: Performance, skills, and scarcity still drive differentiation; the goal is to remove unexplained gaps.
- Not anti-merit: It protects merit by ensuring pay reflects role-related factors rather than bias or inconsistent practices.
- Not a one-and-done project: Run it before merit cycles and after org changes so you can course-correct in real time.
- Not just base pay: Evaluate total compensation (base, bonus, equity, allowances, sales incentives) and pay-opportunity (range placement).
- Not a substitute for job architecture: Clean titles, levels, and ranges are the foundation; without them, any analysis will be noisy.
4 Common disparities to identify:
- Raw (unadjusted) pay gaps by identity: The average pay difference between identity groups (e.g., gender, race/ethnicity) without accounting for role, level, tenure, location, or performance.
- Adjusted gaps after controls: The pay difference between comparable employees after controlling for job-related factors (role, level, skills, tenure, location, performance), isolating disparities potentially tied to identity.
- Pay compression: When employees with different experience or tenure (often new hires vs. long-tenured peers) earn similar pay in the same role/level, squeezing intended progression.
- Bonus/equity differences: Systematic disparities in variable pay (bonuses, commissions) or long-term incentives (equity/stock grants) across groups, after considering plan eligibility and performance criteria.
What are the Different Types of Pay Equity Analysis
1. Controlled Pay Equity
A controlled pay equity analysis compares employee pay after adjusting for legitimate business-related factors that influence compensation, such as:
- Job level or function
- Location
- Experience or tenure
- Education
- Performance
Purpose:
To isolate whether differences in pay are due to unexplained factors—like gender, race, or other protected characteristics—after accounting for all relevant variables.
Example:
Two employees in the same role, with similar tenure and performance, should have similar pay. If a pay gap still exists between a woman and a man after controlling for those variables, it may indicate potential pay inequity.
2. Non-Controlled Pay Equity
Definition:
A non-controlled analysis looks at raw pay differences across groups (e.g., average pay for all men vs. all women in the organization), without adjusting for any variables.
Purpose:
To understand overall organizational pay gaps and identify broader systemic trends that may be influenced by structural inequities (e.g., underrepresentation of women in leadership).
Example:
If men at a company earn an average of $90,000 and women earn an average of $75,000, the raw gender pay gap is 17%, even if men are more concentrated in higher-paying roles.
How to Run a Pay Equity Audit in 5 Practical Steps
A pay equity audit doesn’t have to be daunting. Think about doing a deep clean of your home. The entire project can feel overwhelming but breaking it down into multiple steps makes it much more manageable. Here's how to get started:
1. Bring in the Right People
A pay equity audit takes a team. It’s important to get the right people involved. Get diverse perspectives from various departments. All of these stakeholders may not need to be included in the weekly implementation meetings, but their input is valuable to scoping the project and setting goals.
The team should include:
- Cross-functional senior leaders – to gain buy-in and champion your cause
- HR business partners – to keep you honest and in line with process and practices
- Legal counsel – internal or external counsel to keep legal requirements top of mind
- Finance – to understand budget constraints
- Total rewards teams – to get the full picture of rewards, not just basic pay
- People analytics – to understand the data
You want people who can not only shape the policy, but execute on it. Don’t forget about tools. Platforms like Payscale can automate the heavy lifting. Payscale’s pay equity software can track insights on pay equity trends within your organization so you can identify key areas of risk, understand where pay gaps are explained by non-monetary factors, and track remedial actions and progress toward pay equity where they aren’t.
2. Define Purpose + Scope
Before you can dive into the data and analysis, you have to define what is driving the audit. At the foundation of the purpose and scope is the company’s compensation philosophy. A well-defined compensation philosophy is necessary for pay equity.
Ultimately, why are you conducting a pay equity audit?
- Attract and retain top talent
- Ensure legal compliance
- Support DEIB initiatives
- Deliver on the board of directors’ commitment to equal compensation
Whatever the reasons, and there might be several, everyone needs to be on the same page. To help align the team, have these discussions:
- Are you trying to align pay equity to the overall organizational goals and objectives?
- How often does the organization plan to conduct pay equity analyses going forward?
- Are there any specific local, state, or federal reporting requirements?
- Are there any internal priorities or competing projects that might impede the pay equity project?
Next, figure out the scope. Are you analyzing the entire company or specific teams? Is this an endeavor for a specific location or global? Different locations may have different pay determinants so make note about what you want to include and exclude.
Also, decide which protected characteristics to include. Are you analyzing by gender only?
In the U.S., organizations typically analyze by gender, race, and ethnicity because of EEOC reporting requirements and readily available data in HR information systems. Outside of the U.S., pay equity audits focus on gender because race and ethnicity information isn’t typically collected or documented.
Finally, determine employee population segments that should be excluded. For example, you may want to exclude the C-suite, interns, temporary or seasonal employees, or employees whose pay is determined by a collective bargaining agreement. Or employees covered by a CBA can be analyzed separately. Employees on long-term leave may also be excluded because their pay may not have kept pace with their peers during the period of time under analysis.
As a best practice, pay equity audits are recommended before annual cycles, at the time of hiring, or other circumstances. Audits are never a single event. It’s an always-on activity that takes precedence over salary adjustments.
3. Collect + Clean the Data
You’ve defined your team, goals, and scope. Now you need the data. The conundrum is that often organizations don’t maintain the pertinent data, or it’s unreliable.
Over time, system implementations or upgrades may reset original hire dates that are needed for tracking tenure. Even though job or position start dates are sometimes updated, they’re not useful for identifying time in role. Some of the compensable factors like prior experience and education get fuzzy because they’re rarely tracked after hiring. Organizations sometimes find themselves digging into old resumes to fill data gaps.
To help collect the right data, ask these key questions:
- Does the organization have structured data in support of the organization’s compensation influencing factors?
- Does the HRIS or combination of other platforms capture all of the necessary data?
- What is the quality of the data? Is it routinely audited for accuracy and cleaned?
- Is like-work defined for roles of similar skills, effort, and responsibility in the organization?
- How is like-work identified and captured in the data to be provided for the audit?
Once the data is gathered, it’s time to organize it. Segment employees by country, location, department, division, job family, job grade, and reasons for pay variance. This is key for the pay equity audit.
Missing or bad data can throw off an entire analysis. This step may be the most important in the entire audit process.
Pro-tip: Group time-based data into buckets rather than exact years. It gives you better sample sizes for analysis.
Missed it? Rewatch Payscale's Compference Session on " Using Data to Combat Misinformation in Salary Negotiations".
4. Run Statistical Analysis
When running the statistical analysis, tools like Payscale Pay Equity use a multiple regression analysis to reveal the factors that influence pay in an organization.
These influential factors include:
- Job classification
- Pay grade
- Tenure
- Performance
- Time in position
- Management level
The analysis looks at all of these factors to figure out what’s really driving pay differences, whether you’re interested in a controlled or uncontrolled analysis. Since compensation data can be skewed by a few high-earners, the model normalizes the pay data to give you a percentage-based result that is easier to interpret and act on.
5. Turn Insights Into Action
When your organization embarks on the pay equity journey, you don’t just want to create noise. You want to make sure it leads to actions that move the needle and instill trust across the organization.
Don’t let the analysis gather dust. Start by following these three steps:
1. Conduct regular monitoring and assessment.
Don’t let your hard work slide backward. Set up regular check-ins to monitor progress and make pay equity part of your ongoing compensation decisions. The goal is sustainable change, not a one-time project.
2. Implement corrective actions.
Develop a remediation plan for the disparities found. This might mean immediate pay adjustments, updating your compensation policies, or changing how you hire and promote people.
3. Communicate the results.
Share your findings with the organization — leaders, managers, and employees. Work with legal counsel to figure out what you can and should communicate to each group. Transparency builds trust, but you also need to protect sensitive information.
Remember, a pay equity audit is about making progress towards pay equity.
Key Pay Equity Metrics You Should Track
Unadjusted pay gap
Sometimes this is called the raw or uncontrolled pay gap and it’s exactly what it sounds like. It’s the difference in average pay between two groups (like men and women) without any adjustments.
Here’s the simple math: take the average pay for one group, subtract the average pay for another group, then divide by the first group’s average. That’s it.
This number tells you about opportunity gaps in your organization. You might discover that women are concentrated in lower-paying administrative roles while men dominate higher-paying management positions. That’s not necessarily about unequal pay for the same work. It’s about unequal access to higher-paying opportunities.
This number can help you spot problems like:
- The motherhood penalty – when women’s careers stall after having kids
- The male leadership blueprint – when leadership roles skew heavily male
Tools like Payscale will show you this data as both a percentage and in “cents on the dollar”, so you can easily see and communicate the gaps.
Adjusted pay gap
The adjusted or controlled pay gap is what you get when you account for all of the legitimate factors that can influence pay. These are things like job level, tenure, performance, and experience.
This is the closest measure to actual equal pay for equal work. Alarm bells should go off if you still see significant gaps after controlling for all of the valid reasons pay may differ.
The key to this metric is making sure the statistical model is solid. Make sure to:
- Include variables that actually matter for pay decisions
- Remove factors that don’t explain pay variance
- Make sure your compensation philosophy aligns with what you’re measuring
Percentage Outside pay bands
This metric shows you what percentage of employees fall outside of their designated salary ranges. This could be either above the maximum or below the minimum for their pay band.
Why does this matter for pay equity? Systemic bias often shows up as certain groups clustering at the bottom of pay ranges, or even below them, while others sit at the top.
If you consistently find women at the lower end of salary bands and men at the higher end for similar roles, that’s a red flag. It suggests that even within the approved pay range, biases exist and need to be addressed.
Also, pay attention to employees who fall completely outside of their pay bands. They’re often clear cases of pay inequity or that there is a need for job re-evaluation and possible re-banding.
Remediation cost
What’s the cost to fix this? That’s the number your finance team cares bout.
Start by aligning with finance on budget constraints and realistic remediation scenarios. When you find statistically significant pay gaps for protected groups, you’ll need to address it.
The process usually works like this:
- Group employees who do similar work together
- Calculate what each person should be earning based on your model
- Figure out the gap between current pay and fair pay
- Add it all up to get your total remediation cost
Don’t panic if the number seems big. You might need to phase the fixes over time. Many companies tie remediation to their annual review cycle, addressing the most critical disparities first.
The key is comparing people who should actually be compared to each other. You wouldn’t compare a junior developer to a senior director, but you would compare junior developers to each other.
Transparency index
An estimated 40% of U.S. workers are covered by pay transparency laws.
With pay transparency laws increasing, this metric tracks how well you’re complying with disclosure requirements.
The transparency index measures things like:
- Whether you’re posting salary ranges in job listings
- How detailed those ranges are
- Whether you’re following salary history ban rules
- Overall compliance with local transparency laws
Fifteen states already have pay transparency regulations and more are coming. Getting ahead of this trend protects you from legal risk and shows employees you’re committed to fairness.
Plus, transparency helps with pay equity. When salary ranges are public, it’s harder for unconscious bias to creep into pay decisions.
The Business Case for Pay Equity
Doing the right thing should be reason enough to fix pay gaps. But here’s the business argument: pay equity isn’t just ethical. It’s strategic.
What pay equity actually gets you
When you close pay gaps, you’re not just making employees happy. You’re solving real business problems like these:
- Keep your best people. Nothing makes top performers jump ship faster than finding out they’re underpaid compared to their peers. Word travels fast. Fair pay keeps your best people working for you.
- Higher trust and employee engagement. Employees who believe they’re paid fairly are more invested in their work and employer. They’re not spending energy on their exit strategy. Instead, they focus on doing great work, boosting the organization’s bottom line.
- Improve productivity. Organizations that pay their people more can expect higher productive output from their workforce. Alternatively, employees who feel that they are neglected due to unfair pay levels will be less incentivized to give 100 percent effort to an organization that doesn't reciprocate.
- Strong employer brand. Pay equity isn’t just internal. It’s part of your reputation to prospective employees. Job seekers research companies’ pay practices. When you can say you pay people equitably, recruiting is easier.
- Build a competitive advantage. While your competitors are dealing with turnover, low morale, and reputation hits, you have an engaged workforce and a culture of trust. That translates to better performance, innovation, and customer service.
If business reasons aren’t motivation enough, consider the legal implications and resulting fines of pay discrimination if an employee files a claim and the organization is found at fault. Any pay disparities compounds year over year, which increases any settlement resulting from a claim not to mention the reputational damage.
Pay equity laws from over half a century ago lays the groundwork for equitable pay in the workplace. These federal and state laws ensure that everyone in the workplace is given the fair payment they deserve. Organizations that implement pay equity programs provide organizations with the assurance to their employers and government regulators that they are abiding by the law.
Getting Started
Pay equity audits aren’t optional anymore; they’re essential to a credible People strategy. The good news: you don’t have to do it alone.
At livingHR, we partner with organizations to design and execute equitable, human-centric compensation strategies that build trust with employees and resilience into the business. By combining our expertise in pay equity consulting with the power of Payscale’s compensation software, you gain the insights, benchmarking, and analytics needed to uncover gaps faster, act with confidence, and measure progress over time. Together, we can accelerate your pay equity journey, transforming compliance into a strategic advantage and creating a workplace where fairness fuels performance.
