Pay Equity Case Study

Proactive Study of a Company's Pay Practices

Pay Equity Case Study

Proactive Study of a Company's Pay Practices


A company will often decide to perform a proactive pay equity audit wherein they take a deep dive into their own pay data, as well as data about other forms of compensation, such as bonuses and commissions. The goal of such an examination is to ensure that similarly situated employees in similar roles—that is, employees with roughly the same levels of skill and experience, doing similar types of jobs—are paid comparably, without disparities that appear to be connected to race, gender, or minority classifications.

A company might perform a proactive pay equity audit if company heads have concerns about how their data will appear in the event of litigation or OFCCP/EEOC investigation, or simply to make sure that employee resources are used optimally, with individual employees being fairly compensated for their work and skills.

If the study reveals disparities in pay between men and women, or between employees of different ethnic groups or backgrounds, it is important that these data be examined more closely to understand the reasons for these disparities—and to correct any existing problems before they become potential causes of litigation.

The Challenge in Pay Equity Studies

Pay equity studies often bring up important questions for companies and the economic experts they retain, such as: What are similarly situated employees earning, and is it consistent across genders and ethnic backgrounds? What factors impact earnings—not only past experience or education level, but more unusual data points, such as geographic area, or unique terms at hiring?

It is important for companies to examine these data carefully in pay equity audits, to identify the reasons for differences in compensation, and to make proactive adjustments if needed.

Pay Equity Study Case Details

Welch Consulting economists were recently retained to perform a proactive pay equity audit for a national chain of clothing stores. The company was concerned that men and women doing substantially similar work might not be paid comparably, both in salaried and in hourly wage positions. They wanted to address any pay inequities before they caused problems.

In addition to the company’s pay data, our economic experts also examined other forms of compensation, such as bonuses, commissions, and hourly pay differentials. An initial analysis seemed to show that women received higher compensation in salaried roles, whereas men received higher compensation in non-exempt positions (paid hourly). Our task was to determine whether these differences were statistically significant, particularly after examining gender-neutral factors that may have impacted compensation.


Our Economists’ Approach

At the beginning of the process, our economic experts obtained extensive human resource (HR) and compensation data. We also met with individuals within corporate management who were knowledgeable about company pay practices.

After we connected with company personnel and processed the raw pay and HR data, we compiled an initial data set of all employees at the EEO-1 (managerial) level. We noted that there were two types of managers: Area Managers and Territory Wholesale Managers. There was only one male Area Manager, and his annual compensation was substantially higher than the average compensation that women in that position were earning. The reverse was true for Territory Wholesale Managers—women, on average, earned more than men.

We also compiled data on the Sales Associates, who were paid hourly; for these employees, there was a slight pay disparity favoring the male employees.

Our Analysis

We first looked at the Sales Associates, who were paid hourly. When we examined relative experience and skills held by each of the individual sales associates, we found that the male associates had, on average, more experience than the female associates (even if they performed comparably). Once we statistically accounted for this difference, the disparity in pay fell to only one cent per hour. No further examination was necessary.

Next, we focused on the Area Managers. After we accounted for experience, there was still a substantial average salary difference between the female employees and the one male employee. However, when we spoke with company representatives, they informed us that employees were paid a “geographic differential,” which varied based on the store location. The male employee with the high salary was working at a store in San Francisco, CA—an area with a high geographic differential. After accounting for geography, the negligible remaining pay gap was easily attributable to random fluctuations.

Finally, we examined the Territory Managers, wherein the female employees in this role seemed to be out-earning the men. We quickly noted that one specific female employee earned much more than any female or male employee, such that removing her salary from the study almost eliminated the gender pay gap. We subsequently learned that this Territory Manager oversaw a historically difficult set of stores and that the company had pulled her away from a competitor by offering her an exceptionally large salary. In essence, she had a special skill, and that earned her more pay. We found that the remaining Territory Managers (who were of comparable skill level) were all paid similarly.

Results of the Pay Equity Study

This case demonstrated an important point about pay equity studies: Outside factors—in addition to experience, seniority, and skill level—need to be carefully considered in order to get an accurate understanding of a company’s pay practices. In this situation, employees’ respective geographic locations played a role in impacting pay averages, leading to a false impression of gender pay inequity.

Once we accounted for these legitimate factors, the company found that their pay practices for these positions needed no further adjustments.

Contact us today to learn more about retaining our labor economists for a proactive pay equity study.