Pay equity is the concept of paying employees comparably for similar work. This includes base compensation, as well as bonuses, overtime, opportunities for promotion, and other employee benefits.
Although relevant pay considerations should be considered, pay equity is intended to correct discrepancies based on race, gender, national origin, and sexual orientation and prevent wage discrimination. Ensuring your company has equitable compensation is not only the right thing to do but also required by law.
Pay equity does not mean equal pay for every employee. Differences in pay between workers can exist and are often based on the following:
- Experience
- Tenure
- Skills
- Education
- Location
- Performance
Pay Equity Laws
Implementing & Improving Pay Equity Policies
To implement pay equity policies, you first need to complete a comprehensive review of each job, the tasks involved, the job market, and current compensation structures. Your pay equity implementation should also include the creation of policies covering the factors you consider in setting pay bands, like experience, qualifications, performance, and other relevant factors.
Basic Steps to Auditing Your Policies
After you’ve set up your pay equity policies, you need to audit them regularly. This will help ensure that changes in the job market and company structure do not lead to significant disparities in pay between workers.
Here’s how to do that:
- Define your goals. Are you trying to limit legal risk? Are you trying to provide a pay gap analysis for owners or shareholders? Are you actively seeking to ensure pay equity across your organization?
- Review your current job descriptions for every employee. Make adjustments if their job duties have changed, and make sure they sign off on any changes.
- Examine your existing policies. How does your company decide pay bands? What criteria do you consider for compensation?
- Collect data on each employee. Determine each one’s job title, department, job level, hire date, protected class status, job location, hours worked during the last year, base salary or hourly wage, overtime pay, bonus, and other relevant information. This is often the most time-consuming step.
- Conduct a pay equity analysis for every employee. Collect data showing job market trends (choose from one of our recommended salary comparison tools to collect market pay data), performance reviews, and qualifications of employees in similar positions. Use your internal data to compare with the external research. The goal is to determine whether your employees are being paid similarly for similar work and to compare those pay ranges with the external data you’ve collected.
- Take corrective action, where necessary. If you find that you’re paying workers doing similar jobs different wages but you cannot find a lawful reason for doing so, make adjustments to compensation.
Fair Pay Best Practices for Small & Midsize Businesses
- Do not ask for salary history. Even if your state allows you to request salary history for job applicants, it is not a good idea to ask for this information because the applicant may not have been paid appropriately at their previous jobs. Having an established compensation plan for your jobs will help ensure that you have pay equity among all of your employees. Using the market-level salaries along with your projected revenue compared with your competitors is a good place to start.
- Decide on salary negotiation. You should decide whether you want applicants to negotiate on their job offer. If so, then you, as the employer, should bring it up in the interview process. Studies show that women and minorities are less likely to negotiate salaries, contributing to their wage gap.
- Publish salaries or salary ranges in job posts. Establishing a salary band at the beginning sets up an open communication line between prospective employer and employee. Not only will that ensure employees with the same job are paid equitably, but it also helps you avoid applicants with higher expectations and puts new hires at ease that they are comparable to their peers. Plus, about a dozen states already have pay transparency laws on the books, with many more proposed.
- Do an internal review. You should periodically compare your employees’ salaries by protected class (if possible) to ensure that unconscious biases are not at play for raises, promotions, and bonuses. Use salary surveys to evaluate your internal employee compensation. You should also keep performance reviews over a period of years and review the decisions made by your performance managers to ensure there is adequate justification for any difference in pay.
- Work with a professional employer organization (PEO). Besides helping with day-to-day HR functions, PEOs can help ensure pay equity across your organization by providing you with informed advice on pay structures, compensation packages, and industry data. It will monitor changes in the labor market to identify potential pay discrepancies between similarly situated employees and advise how to rectify these issues. It can also provide legal guidance and ensure that you’re compliant in every state.
Apart from the best practices above, I recommend having internal pay transparency at a minimum. It helps employees understand that pay decisions are made fairly and based on objective criteria like experience, skills, and performance. This builds trust, reducing the suspicion or resentment that can arise when pay scales are hidden. Beyond that, it is also a powerful tool for addressing and preventing wage gaps, as it becomes much harder for systemic biases to persist unnoticed.
Ultimately, pay equity and transparency leads to greater employee satisfaction and retention. When employees feel confident they’re being compensated fairly and in line with their colleagues, they’re more likely to be engaged and committed to their work.
Brief History of Pay Equity & Why It’s Important
Since 1963, the Equal Pay Act has prohibited pay discrimination on the basis of sex. Between 1963 and 2016, advances on pay equity were fairly stagnant. Starting in California, New York, and Massachusetts in 2016, however, state-level pay equity laws started taking hold. Partly a result of public pressure building over several years, states enacted laws requiring similar pay for similar work, along with related laws banning salary history questions during the application process and requiring pay scale disclosures.
Every US jurisdiction has some form of pay equity law, even if it mirrors federal law. Still, most states have laws more expansive than the federal law, so it’s crucial that you understand the laws where you’re hiring employees.
Pay equity is important mainly because it’s the right thing to do. Paying your employees similarly when they’re doing similar work can prevent discouragement among your team if they learn of vastly different pay rates.
Pay equity laws are also important because they ensure fairness for both you and your employees. These laws help companies maintain a competitive environment where no employee is underpaid or overpaid.
These laws provide employees with a sense of security that their wages reflect their experience and value to the organization. It also helps employers attract and retain talented workers by offering fair compensation based on the employee’s abilities rather than race or gender.
Employees Affected by a Lack of Pay Equity
A lack of pay equity can have a major impact on employees, particularly those from marginalized backgrounds. Employees from certain backgrounds are more likely to be underpaid, with the gap being even greater for women and other minorities. This can lead to financial insecurity and create an unsafe working environment where employers are able to take advantage of their workers without consequence.
When pay equity is not in place, employees may feel they don’t have the same opportunities as their peers or be unhappy in their current positions because they feel undervalued or mistreated. This can lead to lower morale, reduced motivation and productivity, and decreased job satisfaction and loyalty.
Did you know?
- Black men earned 76% of the wages white men earned in the second quarter of 2024. Latinos earned 75%.
- Women earn 84 cents for every dollar a man makes and earn less at every level of education attained.
- Women of color start further behind in pay at the beginning of their careers, worsening with career progression.
- Hispanic and Latina women earn about 52 cents for every dollar a white man earns.
Pay Equity Frequently Asked Questions (FAQs)
Your pay structure should be equitable, fair, and legal—and having properly established pay equity policies can help with this. When designing compensation structures for your company, consider job duties and qualifications, employee experience, market rates, and individual performance. Whatever you decide, you should establish written policies so your employees know what to expect.
To ensure equal pay for jobs with similar duties, compare salaries across departments, locations, and your industry. Where gaps are identified, review your practices and make any necessary compensation adjustments.
Detecting and preventing wage discrepancies takes work—you must set regular annual audits to ensure your company is achieving your pay equity goals. During these audits, it’s vital that you collect relevant data to ensure you’re meeting pay equity laws.
Bottom Line
Pay equity is an important concept for your business. Not only is it required by law, but sound and fair compensation can help retain employees, boost employee morale, and encourage workplace diversity. Having honest conversations about wages, establishing a compensation plan, and reviewing your employees’ salaries will go a long way in ensuring people are paid fairly.
