Pay equity explained: What it is and why it’s important

You’ve probably heard the phrase “equal pay for equal work.” On paper, pay equity sounds like a no-brainer. Two employees who perform similar job responsibilities should have similar salaries to match. 

Unfortunately, workers of different genders, races, and sexual identities often see disparities in their paychecks due to factors unrelated to their jobs. It’s not always malicious—unconscious biases and cultural standards can interfere with fair wage negotiations. Still, a commitment to pay equity doesn’t just ensure compliance with local laws. It also enhances employee satisfaction, brand reputation, and worker retention.

Addressing inequalities requires more than surface-level solutions. Employers must conduct a thorough review and adjust compensation practices, company culture, and ongoing equity initiatives. In this article, we’ll address what pay equity is, review equal pay laws regarding wage gaps and pay inequity, and explain how to conduct a pay equity analysis.

What is pay equity? 

Pay equity is a legal concept that employees receive equal compensation for work of equal value. If two employees perform similar jobs with comparable responsibilities, skills, and effort, they should be paid similar wages and benefits.

Employers that practice pay equity think decisions regarding total compensation shouldn’t consider personal characteristics, such as an employee’s gender, sexuality, age, or ethnicity. Instead, disparities in pay range should be based on job-related factors, like experience, skill set, or seniority.

Today’s workforce values organizations committed to equitable and inclusive policies. When businesses commit to compensation equity, they foster a culture of trust and mutual respect. Steadfast ethical standards enhance organizational integrity, boosting employee morale, retention, and motivation. 

In the United States, pay equity is more than a positive compensation philosophy or ethical hiring practice. It’s a legal requirement. Labor laws protect employees from discrimination, including unequal pay based on factors unrelated to work. 

What laws regulate pay equity in the U.S.?

In the U.S., the Equal Employment Opportunity Commission enforces several pay equity laws that guarantee employees’ right to fair, nondiscriminatory compensation practices. 

Here are three labor laws that protect pay equality:

Equal Pay Act of 1963

This landmark law addresses the gender pay gap, mandating that employers provide men and women equal pay and benefits for equal work. Although men and women don’t have to have identical job roles, “equal work” is any job that requires similar skill, effort, and responsibility performed under similar working conditions. The Equal Pay Act allows exceptions for wage gaps based on seniority or merit, as well as pay based on quantity or quality of work (e.g., incentive-based compensation). 

Title VII of the Civil Rights Act of 1964

Another landmark law, Title VII, prohibits employment discrimination based on race, color, religion, sex, or national origin. It addresses bias during every step of the employee life cycle, from recruitment to termination. In 1991, Title VII was amended to provide guidelines for recovering lost wages due to intentional employment discrimination.

Lilly Ledbetter Fair Pay Act of 2009

This law extends the statute of limitations for filing pay discrimination claims. Before this law, employees had 180 days from the time a discriminatory wage decision was made to file a claim. The Lilly Ledbetter Fair Act extends the time frame, allowing employees to file a claim within 180 days of their most recent discriminatory paycheck.

Your state or local government may enforce additional pay equity regulations. They may mandate pay transparency for new hires or bar potential employers from asking about salary history.

Benefits of pay equity

Following the law isn’t the only reason to maintain pay equity. It’s also a wise business practice. Here are a few benefits: 

• Boost employee engagement: Fair pay fosters respect and recognition. When workers feel they’re fairly compensated, they’re more likely to be loyal, motivated, and satisfied with their jobs.
• Increase retention: Your employees want to feel connected to their workplace. Compensating employees based on gender, age, or ethnicity rather than skill and experience will harm worker retention. Conversely, employees who believe they’re treated fairly are more likely to stay with the company, increasing organizational stability and minimizing turnover costs. 
• Attract better talent: Job seekers perceive companies that take a stand on pay equity as fair and progressive. A reputation for equitable practices will attract high-quality candidates who value fair and inclusive workplaces. 
• Enhance reputation: Customers, clients, and colleagues want to do business with organizations with strong ethical standards. Employers stand out when they fight to close the gender pay gap, support pay transparency, or create equal opportunities for all employees. Your company’s reputation could be the competitive edge that supports growth and success.

What is a pay equity audit or analysis?

A pay equity audit or analysis systematically reviews your compensation practices. HR examines the workforce’s pay data, analyzing pay scales against criteria like gender, race, job value, or seniority. The goal is to identify and address pay disparities that cannot be justified by legitimate factors (e.g., tenure or skill set).

Pay disparities can arise in many ways—not all of them suggest malpractice. For example, male employees may ask for raises more often and negotiate more aggressively than their female counterparts. Regular pay equity audits are a way to ensure compensation remains fair and equitable. They help maintain compliance with legal requirements, support a positive work environment, and reinforce your commitment to fair pay practices.

How to conduct a pay equity audit

Pay audits are complicated endeavors that require clear guidelines and oversight from HR, legal teams, and financial planners. Here’s how to get started: 

1. Build a dataset: Collect and organize information about your workforce, including employee compensation, job roles, titles, pay raises, and performance evaluations. 
2. Define legitimate compensation determinants: Create a list of characteristics that impact pay, such as required skills, education, experience, or performance. For a distributed workforce, you might also include regional adjustments based on geography, industry, and competitiveness.
3. Define “comparable” work: Read through individual job descriptions and look for commonalities like required skills or overall value. 
4. Set wage equity standards: Define internal standards for equitable compensation. You might consider wage trends within your industry or market segment as well as internal salary ranges. Use these standards to judge whether current pay practices are fair. 
5. Crunch the numbers: Now you can analyze your data. Compare pay for employees in similar roles with comparable responsibilities and experience. Check for discrepancies that may indicate inequities. 
6. Create a plan to address pay discrepancies: Develop a strategic plan to address pay inequities. This should include specific actions and deadlines for implementing salary adjustments. 
7. Refine compensation policies: If you uncover discrepancies, look for common patterns. Standardize your approach to salary setting and reviews to ensure that your compensation model is based on objective, job-specific criteria. Consider providing training to hiring managers and HR staff to help recognize and eliminate unconscious biases. 
8. Repeat: HR should regularly monitor compensation data, conducting audits to ensure ongoing pay equity. 

How to implement a pay equity policy

When in doubt, clearly defined policies and best practices are a surefire way to avoid pay inequity. Here’s how to implement a program:

1. Set pay based on clear criteria

Develop objective criteria for determining pay, such as job responsibilities, skills, and performance. These criteria should be well-documented and consistently applied across your workforce to promote fairness and transparency in compensation decisions. 

2. Be transparent

Even if local laws don’t require you to share compensation information, pay transparency builds trust. In addition to sharing information about pay structures, share the criteria for salary decisions. Sharing how your company determines total compensation will reduce perceptions of unfairness or bias. Likewise, shared expectations regarding pay scales provide a reference point that motivates employees to deliver good performance for future pay negotiations.

3. Develop clear criteria for raises

Often, raise policies are reactive and based on individual negotiations, which can lead to pay inequality. Establish a policy that outlines objective criteria for raises or bonuses. For example, you can implement a system where all employees are evaluated for additional compensation during annual performance reviews or set specific targets that must be met to qualify for a raise. 

Build pay equity policies with Oyster

If you want to hire the best talent the global job market has to offer, you’ll need to understand local compensation laws. Oyster lets you focus on creating an equitable work environment while we maintain your pay policy compliance in more than 180 countries around the globe. Check out how Oyster keeps you compliant with employment laws around the world.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.