In the past few years, addressing systemic pay inequities has been a goal for many companies. Not only does improving equity protect companies from legal liability, but it also helps build a better, fairer workplace. How to achieve pay equity, however, isn’t always obvious. When we present our research on pay equity analysis to business leaders, we’re often asked for advice on how to identify and address the gaps, especially when resources are limited.

The answer may not be as obvious as you might expect and depends on the organization’s motivation when considering closing gaps. Does the company want to build an equitable workplace, minimize regulatory risk, or both? We draw upon our research to offer firms a way to think about their pay gaps and determine which to close depending on priorities.

Start With a Pay Equity Analysis

The first step is to run a pay equity analysis. This is a systematic analysis of employees’ compensation to determine whether one or more demographic groups (e.g., women or a racial minority) are underpaid. A pay equity analysis gives us a measure of a pay gap after accounting for pay drivers like job roles and qualifications. For example, a 5% pay gap between men and women across a company means that even after factoring in the differences in responsibilities, experience, education, or other factors that legitimately affect compensation, women are paid 5% less than men on average.

Once you’ve identified the pay gaps, you have to figure out what to do about them. The size of the gap is just one consideration. Companies must also weigh their specific regulatory environment and how important gaps are to their stakeholders when deciding how to address pay gaps.

Understanding Regulatory Risk

Companies concerned about reducing their legal liability should focus, at least initially, on their pay gaps’ statistical significance—that’s often what courts and regulators look at to determine potential discrimination or inequity.

Statistical significance denotes the likelihood that something (like a pay gap) happened by chance. In many settings, the threshold for statistical significance is 5%. (Note that we are discussing two different numbers here, one is the size of the pay gap (e.g. 1.5%) the other is its statistical significance (e.g. 5%)). Companies whose gaps are deemed statistically significant are likely discriminating against a group of employees in the eyes of the court.

If you conduct a pay equity analysis, one of the outputs—in addition to the size of the gaps—will be your gaps’ statistical significance. This figure is influenced by a number of factors, including the size of your organization and your firm’s pay structure.

The more employees there are, the more confident you can be about whether a pay gap happened by chance. To see why, imagine flipping a coin. If it comes up heads 3 times out of 4, you might attribute that to chance. If it comes up heads 30 times out of 40, you would be more convinced the coin was weighted toward heads.

‍

Read the full article here.