How to run an internal pay equity audit (and why you should)

Despite the passage of major legislation and an arduous fight for parity in the workplace, women still make less than their male counterparts. Why women make less is clear: unfair systemic policies prevent women from reaching their fullest potential. What’s less clear is how we can unravel decades-long disparities in the workplace — and how we can implement equitable policies for all employees. 

Progress towards equal pay between men and women has slowed considerably since 1980. As of 2019, it’s estimated that white women will not see pay parity until 2059, Black women can not expect to see pay parity until 2130, and Hispanic women will not be on par with white men until 2224. 

And it’s not just one industry that’s impacting this inequity; in fact, women earn less than menacross the top 20 occupations for women and in all top occupations for men.

At first glance, your organization might seem equal: Women sit in leadership roles. Campus cohorts are increasingly diverse, Salary bands are in place. You offer robust maternity leave. But, without digging into the data, how can you know the state of your business?

The most comprehensive method for understanding the internal state of your company is conducting an external Pay Equity Audit (PEA), which provides insight into policies and current standards, identifies critical areas of risk or fault, and highlights where improvement is needed.

The practical framework of an external Pay Equity Audit

The following touchpoints are adapted froma comprehensive guide compiled by expert attorneys from Skadden, Arps, Slate, Meagher & Flom LLP in coordination withPractical Law. The following is not legal advice and should not be used as a substitute for consulting with a legal expert on employment law and audit best practices. 

A Pay Equity Audit takes careful planning across multiple departments and often requires assistance from outside legal counsel. The following is a preliminary list of action items you’ll want to consider internally before initiating an audit.

Review current federal and state laws (and what’s on the docket post-election day)

Before looking at the nuances of compensation at your firm, you must make sure that you are up to date on any requirements by law.

In the United States, three Federal laws primarily regulate pay equity: Title VII of the Civil Rights Act of 1964 (Title VII), which prohibits discrimination based on sex, among other characterizations, The Equal Pay Act (EPA), which prohibits sex-based discrimination in the payment of wages for equal work, and The Lilly Ledbetter Fair Pay Act, which requires employers to adhere to equal wages for equal work and broadens the term “wages” to include all forms of compensation or payment. 

Individual states may have additional or complementary laws, and so it’s best to seek consultation from an employment lawyer, as well as a state-level policy expert on any legislation that may be in place, or that may be passed in the near-term.

Be prepared to address (internally and externally) any disparities that may come to light 

One drawback, per se, of conducting a PEA is that it may result in unfavorable feedback about your firm. Your team must be prepared to not only right any inequities that exist, but also communicate why outdated policies were in place — and what your plan is moving forward —  to the greater company, community stakeholders, shareholders, and potentially, any media inquiries that may come through if you are a publicly traded or public-facing company. 

Given the unknowns of the results of Pay Equity Audits, seeking counsel is imperative to preventing wide-spread disclosure of any compensation information or data.

Define your goals, audit scope, and key players 

Before diving into a Pay Equity Audit, make sure your executive team defines primary and secondary goals for the exercise, sets parameters for the breadth and scope of the audit, as well as the data and depth of information shared with the audit team. You’ll also want to appoint a representative committee to lead the audit alongside the third-party legal team. 

There are three types of audits that you can put into place: Foundational, Remedial, Causal analysis (or root causes). (Quoted from Conducting a Pay Equity Audit)

• Foundational Audit: Identifies “any potential pay disparities” and isolates “the issue to specific departments or groups. The focus is on data collection and analysis to determine … significant pay disparities…”. If you are a smaller business with well-documented, fair compensation policies, but you lack the resources to immediately remedy any potential disparities, this is likely the appropriate audit for your team. 

• Remedial Audit: After reviewing key data and identifying any disparities, the company will take “the additional step of creating a remediation plan.” If you have generous financial resources and the ability to act on any identified disparities in the near-term, this is the appropriate audit for your team. 

• Causal Analysis Audit: The most comprehensive and long-term audit, this option will go beyond initial findings and will examine internal systems and processes that may be contributing to pay disparities. If your business has the resources and flexibility to undergo months or years-long systemic reviews and changes, this is likely the best audit option for your team. 

Determine transparency and have a communication plan in place

Before initiating any sort of audit, you must decide the level of transparency that you will provide different players within your organization. Note that some aspects of the audit may fall under client-attorney privilege, and must not be shared with additional parties. 

The communication strategy 

After you determine the parameters of your audit, your key players, and the level of transparency that you wish to provide to different stakeholders, you must set a communication strategy into place. This will require coordination between your executive team, your legal team, HR, and your third-party counsel (if retained). 

C-Suite and Leadership’s responsibility

The strategy at the C-suite sits at two prongs. First, you must have buy-in from your leadership team. If the CEO and their colleagues do not see value in the audit or in learning from the audit, it will be difficult to provide any impactful change in the organization. Second, the executive team must serve as the guiding voice for any audit decisions, or any changes that come from the audit findings.

HR and Legal’s role

The Human Resources and Legal teams will be on the front lines as the audit plays out. Make sure that communication standards are in place, and then any confidentiality agreements are signed and set prior to rolling out an audit (or audit results). Work with your HR and Legal teams to set procedures for how and when any disparities will be addressed, how compensation conversations will happen, among other complex and nuanced issues or conversations that will inevitably play out post-audit. 

Shareholders (and external stakeholders)

If you are a publicly-traded company, you will have specific standards (and potential paperwork) that you must fulfill and uphold in working through an audit. You should seek counsel with appropriate parties on what this might look like for your team.

Where you do have flexibility, however, is in the narrative that you are creating with your internal and public-facing communication (written and oral). This is especially important if you are performing an audit because of any potential outdated policies or if the audit returns ill-favored results. 

Take the initiative to drive your narrative, get ahead of the story, and, if there’s not much press or attention around a faulty policy or outcome, do not “fuel the fire”!

Company-wide

From the get-go, you must know how and what you plan to share with your employees. Will the audit be public knowledge? Will a survey be part of the audit? How and when will you share the results of the audit? Do you have a plan in place for employee feedback once the results are available? 

Spend time thinking through the potential questions employees will have about the audit, and then set protocols in place for managers and your executive team.

Addressing the “what now” or “what’s next” of an internal audit — especially if results are alarming 

Deciding to move forward with an audit means that you may have to address unfavorable results and feedback about your organization. Therefore, be prepared to immediately address these issues and have a plan in place to communicate progress with your team. 

This might include: Considering change within the leadership team, implementing forward-looking policies, staging goal setting across multiple departments, and providing active timelines and transparent next-steps with all parties. 

How to address the state of pay equity within your organization when you can’t afford an external audit

Even if a Pay Equity Audit is not something you can drive forward within your organization, there are steps that you can take to address any potential inequities or disparities.

1. Put the data in front of you: Take a look at what you are paying your employees. 
2. Consider ALL compensation factors: This includes benefits and equity, among other items or activities that provide value to your employees.
3. If there are disparities — look for the (unbiased) WHY: If someone has more equity than their (equal) counterpart, why is that the case? Did they negotiate their offer? 
4. Address and change what you can: If you do find any disparities, use this as an opportunity to update bad policies or reassess compensation packages.  
5. Have a plan in place for doing better: Moving forward, determine how you can create a more equitable environment for current and future employees.

Addressing systemic inequities in your company is a necessary, albeit complicated, and nuanced, first step in creating a more inclusive and fair workplace for your employees — current and future. Investing resources, be it time, personnel, or financial, in driving change and overhauling outdated policies and practices will make your business stronger in the long run. At the end of the day, you want to attract the best talent possible. And an equitable workplace will do just that.