How to Conduct a Pay Equity Audit

Why Pay Equity Audits Matter Now

Pay equity has moved from aspirational goal to legal obligation in many jurisdictions. State laws requiring equal pay for substantially similar work have expanded beyond the federal Equal Pay Act, and new pay transparency requirements mean compensation practices face increasing scrutiny from both regulators and employees.

A pay equity audit is a systematic analysis of your compensation data to identify unexplained disparities based on sex, race, ethnicity, or other protected characteristics. Conducted proactively, it allows you to identify and correct issues before they become lawsuits.

Preparing for the Audit

Assemble Your Team

A credible pay equity audit requires collaboration between HR, compensation specialists, legal counsel, and ideally an outside statistical consultant. Involving legal counsel from the beginning may allow portions of the analysis to be conducted under attorney-client privilege, which protects the results from discovery in litigation.

Gather Your Data

Collect comprehensive compensation data for your entire workforce, including:

• Base salary or hourly rate
• Total compensation including bonuses, commissions, and equity
• Job title and job level
• Department and location
• Years of experience and tenure
• Education and certifications
• Performance ratings
• Protected characteristics (sex, race/ethnicity)

The quality of your audit depends on the quality of your data. Clean and standardize your data before running any analysis.

Define Comparable Groups

The critical step in any pay equity audit is determining which employees should be compared to one another. You are not comparing all employees across the organization; you are comparing employees who perform substantially similar work.

Group employees by job function, level, and location. The groupings should reflect employees who have similar responsibilities, required skills, and working conditions. This is not simply grouping by job title, since titles can be inconsistent. Look at actual job content.

Conducting the Analysis

Statistical Methods

A robust pay equity analysis uses regression analysis to control for legitimate, non-discriminatory factors that explain pay differences. Common legitimate factors include:

• Job level or grade
• Years of relevant experience
• Tenure with the company
• Geographic location and cost of living adjustments
• Education or credentials directly relevant to the role
• Performance ratings (if consistently applied)
• Shift differentials

After controlling for these factors, the regression identifies whether a statistically significant pay gap remains that is associated with a protected characteristic. If it does, further investigation is warranted.

Interpreting Results

Not every pay difference is a problem. A disparity that is fully explained by legitimate factors like experience and performance is not an equity issue. The concern is unexplained gaps, meaning differences that persist after accounting for all legitimate factors.

Look for patterns, not just individual outliers. A systematic pattern of underpayment for a protected group is more concerning than a single employee who happens to be paid below their peers for identifiable reasons.

Taking Action

Remediation

If the audit identifies unexplained disparities, develop a remediation plan. This typically involves targeted pay adjustments for affected employees. Avoid reducing anyone's pay. Equity adjustments should bring underpaid employees up, not bring overpaid employees down.

Process Improvements

Audit results often reveal systemic issues in how compensation decisions are made. Common findings include:

• Inconsistent starting salary practices, with some managers negotiating more aggressively than others
• Different raise practices across departments
• Promotion-based pay increases that compound historical disparities

Address these root causes to prevent disparities from recurring.

Documentation

Document your methodology, findings, and remediation actions. This record demonstrates your organization's good faith commitment to pay equity, which is valuable both culturally and legally.

Ongoing Commitment

A single audit is a starting point, not a solution. Build pay equity analysis into your annual compensation review process. Monitor starting salaries, raises, and promotions for equity on an ongoing basis. The employers with the strongest pay equity records are those who treat it as a continuous practice rather than an occasional project.