Common Compensation Terms Explained: Pay Transparency, Pay Equity, and Wage Gap

In today’s constantly changing HR world, there are many articles and conversations revolving around the concept of fair compensation. It is not unusual for employees, HR professionals and outside stakeholders, including the media, to confuse common terms such as Pay Equity, Pay Transparency and Wage Gap. Each concept has its own distinct meaning and implications, so it is important for there to be clarity when discussing these topics. Below we will discuss each of these three concepts and how they are related to one another.

Wage Gap

Wage gap, also known as pay gap, refers to the disparity in earnings between two groups, typically gender or racial differences. The most discussed wage gap in the news tends to be the Gender Wage Gap, which highlights the average difference in compensation between working men and women. This is typically reported as a percentage; for example, in 2022 the gender wage gap was reported as women earning on average 82% of what men have earned. Race wage gaps are also often investigated with recent reports of Black workers earning 21% less than White workers.

In recent years, companies have been evaluating and reporting on their wage gaps to employees, shareholders, and the public. Evaluating wage gap may help identify whether there is opportunity segregation at a company such as men holding higher level, thus higher paid, positions. However, the raw wage gap, also referred to as the unadjusted wage gap, does not consider other factors that influence compensation. While raw wage gap can provide some insight into possible pay inequities, it is not powerful enough to determine whether there is gender-or race-based discrimination until further analyses are conducted that consider more job-related factors. Overall, investigating the wage gap can be incredibly useful for understanding and determining DEIA objectives, and can be a first step in your journey towards pay equity.

Pay Transparency

Pay Transparency refers to the practice of an organization openly sharing information, internally and/or externally, about the compensation, compensation ranges, and/or factors that contribute to compensation decisions. While some companies may choose to be transparent regarding compensation in their efforts to foster a transparent culture, many companies are required to post salary ranges under new state laws that have recently passed. For example, Hawaii recently passed a pay transparency law that requires covered employers to post salary ranges in job advertisements. The level of transparency required varies depending on state/local mandates. Pay transparency laws are becoming increasing popular at the state and local level as part of a broader public policy effort to increase pay equity. Many employers are responding to this push for pay transparency by re-examining their job architecture, salary grades and overall compensation structure to ensure they can explain their pay practices to employees, interested applicants and the broader public.

Pay Equity

Pay Equity refers to the concept of ensuring that individuals receive equal pay for equal work, regardless of gender, race, or other protected characteristics. Equal pay for equal work has been federally legislated since 1963 with the Equal Pay Act. Title VII of the Civil Rights Act and many state and local pay equity laws also prohibit employers from discriminating in pay and benefits for similarly-situated employees based on a protected characteristic such as race or gender. Updated pay equity laws are becoming more common, and it can be challenging to navigate the different federal and state laws that provide slightly altered definitions for how to group and measure pay equity. The overall goal of pay equity is ensure that there are no significant racial or gender pay differences between similarly situated employees when controlling for job related factors (e.g., time in company, time in job, external experience, education/certifications, and other legitimate factors). Pay equity litigation can have enormous financial and reputational ramifications for an organization, so it is imperative that organizations understand the regulations they are required to comply with. For a more in depth explanation regarding the differences between proactive and defensive pay equity check out our blog.