Five Ways to Analyze Your Compensation Data for Fairness

Fair pay doesn't happen by accident - it requires organizations to take a close look at their compensation practices and understand what their data is telling them. As pay transparency expectations grow and regulatory requirements evolve, compensation analysis has become an essential tool for identifying potential inequities, mitigating risk, and building employee trust. In this blog, we'll explore five ways to analyze your compensation data to help create a fair, competitive, and compliant compensation program. We'll begin with some of the most foundational compensation analyses and then progress to more advanced and sophisticated methodologies.

1. Unadjusted Wage Gap Calculation

The unadjusted wage gap is a straightforward calculation of the difference in average pay between groups, often expressed as a percentage or ratio. For example, the U.S. Census bureau periodically reports an unadjusted wage gap in the United States, which typically shows that females earn .82-.84 cents for every $1.00 males earn.  When computed within a single organization, the unadjusted wage gap shows the overall difference between male and female average wages across the organization. This analysis can also be done for race/ethnicity as well as a combination to review the pay for intersectional groups (e.g., Black Female vs. Asian Male). 

There are some benefits of conducting an unadjusted wage gap analysis:

• The computation is very simple and does not require advanced statistical training.
• The unadjusted wage gap does require statistical significance testing, limiting the potential risk if the information is made public.

While this metric is easy to understand and communicate, there are several potential drawbacks to it:

• It does not take into account obvious factors that determine pay for each employee, such as their job title, tenure, or experience.
• There is no information produced by the analysis to inform the statistical significance of the size of the gap.
• It is extremely challenging to use the results to evaluate the fairness of a compensation system.

2. Adjusted Wage Gap Analysis

Adjusted wage gap analysis takes the unadjusted wage gap further by accounting for legitimate factors that affect pay differences. This method helps isolate the portion of pay disparities unexplained by job-related variables. The adjusted wage gap is often reported in the same manner as an unadjusted or raw wage gap as a percentage or as cents on the dollar earned. Typically these numbers are much tighter being reported as females earning .97-.99 cents for every $1.00 males earn. Like the unadjusted wage gap, these analyses can evaluate wage differences for a variety of different protected traits, such as race/ethnicity, age, national origin, and Visa-status.

Using special data modeling, an adjusted wage gap can:

• Account for differences in tenure, experience, job level, location, performance, or other job-related factors.
• Identify pay gaps that warrant more in-depth and precise analyses.
•  Create data-driven narratives for internal and external stakeholders.

Like the unadjusted wage gap, there are some potential drawbacks:

• There is no information produced by the analysis to inform the statistical significance of the size of the gap.
• The analysis does not provide adequate information to make pay adjustments; simply raising the median salary of one group could create fairness problems.

3. External Equity (Market Analysis) and Flight Risk

External equity focuses on how your compensation rates compare to relevant labor market benchmarks (i.e., other similar organizations). Aligning compensation with market data ensures your organization remains competitive and can attract and retain top talent. Market benchmark data is also very commonly used when creating pay grades and compensation structures. A companion analysis referred to as a Flight Risk analysis allows you to quickly compare what each employee could command in the market vs. their current pay to identify underpaid employees who may need market adjustments. Doing this analysis and doing market adjustments to retain talent, can significantly impact pay equity without any analyses by race and gender. 

Organizations must pay attention to several considerations in an external equity analysis:

• Utilizing reliable market data tailored to your industry and geography.
• Accurately mapping jobs within the organization to jobs in the market data, going beyond just title-to-title mapping and considering job duties performed and scope of the position instead of “levels”.
• Identifying flight risk employees who could easily find the same or highly similar work at another organization for a much higher salary.
• Adjusting compensation strategies to address under- or over-market pay situations.

Maintaining external equity can be a lever for attracting and retaining top talent. However, an external equity analysis is not a substitute for an internal pay equity analysis. Organizations should carefully examine both external and internal equity to achieve an overall fair and competitive compensation program.

4. Individual-Level (Outlier) Pay Equity Analysis

Not all pay disparities are systemic or appear among groups of similarly situated employees – some arise at the individual level. An outlier analysis identifies employees whose expected pay significantly deviates from peers with similar qualifications and roles, regardless of their protected group status.

By leveraging statistical modeling, this analysis can:

• Identify individual outlier employees for further review, separately from a group-level analysis.
• Support proactive pay equity management by addressing employee-level discrepancies before they escalate and aggregate to systemic issues.
• Provide insights on pay equity from a merit-based perspective, regardless of protected group status.

Potential challenges with individual-level outlier analysis:

• By itself, this analysis will not flag statistically significant differences between protected groups of similarly situated employees.
• Like the systemic analysis described below, data that reflects the organization’s pay practice is necessary to compute a reliable estimate of expected pay.

5. Group-Level (Systemic) Pay Equity Analysis

This approach evaluates compensation differences between defined groups, such as sex or race, to uncover pay gaps among similarly situated employees within the organization. By grouping employees and comparing their pay for similar roles and responsibilities, you can determine if protected-group-based disparities exist and whether they are consistent across your workforce.

There are several advantages to conducting group-level pay equity analysis, including:

• The ability to account for the influence of factors like tenure, education, and performance on pay.
• Statistical significance testing, which allows you to identify if the observed differences are happening due to random chance or not.
• The ability to identify specific adjustments to employees who are paid lower than their similarly situated peers after accounting for legitimate factors.

Potential challenges in running a group-level pay equity analysis include:

• Large sample sizes are needed, typically with a minimum of 30 employees in a grouping and at least 5 employees from the groups that are being compared.
• Accurate data is a necessity; to the extent that the organization does not have data that reflects their pay practices or is not accurate (clean), it can be challenging to statistically control for those factors.

This method provides a valuable snapshot of organizational pay equity and highlights areas requiring deeper investigation. These types of analyses typically highlight potential legal risk exposures that can be investigated and remedied, if necessary.

In Summary

Depending on the current needs of the organization and concerns of leadership and legal counsel, one or more of these five methodologies can provide a robust understanding of pay equity within your organization. Whether identifying systemic disparities or individual outliers, unadjusted or adjusted wage gaps, or ensuring market competitiveness, these tools empower your team to promote fairness and transparency in compensation. Our team of experts on compensation, pay equity, and statistical analysis can support your organization in identifying the best approach to managing fair pay in your organization.