Step-by-Step Guide on How to Model Internal Equity

Internal equity isn’t a one-and-done exercise. It requires comprehensive solutions to what’s happening externally and internally at your organization. At Salary.com, we want to ensure that people are getting paid fairly.

This is no longer an annual review process. It’s something that needs to be happening all the time in your organization.

So why does internal equity matter?

1. Employees are demanding it.
2. There are state and federal pay equity laws.
3. It’s the right thing to do.

Today, you need to look at your employees and decide what jobs have comparable worth because they’re doing comparable work. As you collect and group this data, you may find holes and pay discriminations that will take a lot of work to remediate. Though it’s a tough process, if you achieve pay equity, you will attract and retain employees, and grow as a company.

You’re not alone if you’re thinking this seems like a daunting task. Based on the research from experts and customers, Salary.com has designed the Plunkett Pay Equity Framework. It is a prescriptive approach to addressing pay equity with step-by-step guidelines.

In this article, we’ll take a look at the third stage of the framework – Model Internal Equity. This stage involves grouping your employees by jobs, reviewing how they’re paid against each other, and modeling solutions with the guidance of your legal counsel.

Now let’s break it down into four steps.

Step 1. Assess Pay Gaps

The first step is to assess any pay gaps you’re identifying. You need to look at unadjusted pay gaps by certain variables. “Unadjusted” means the average or median pay regardless of legitimate job-related factors. A pay gap between two groups doesn’t automatically mean you have an internal equity issue; it may be a representation issue.

These are the variables that can influence pay and should be reviewed when assessing pay gaps.

• Gender
• Race
• Ethnicity
• Age
• Union status
• Disability
• Tenure
• Veteran status
• Remote work status

You should be careful with the data you input here because replacing the information you need with something you think is comparable (e.g., inputting years of experience as someone’s age + years spent studying) could create noise and affect your results. You also need to have the same data on each individual to have accurate calculations.

Step 2. Run Multivariate Regression Analyses

For the second step, you need to run multivariate regression analyses. Compensation Consultant Anthony Luo explains, “A multivariate regression analysis is an advanced statistical tool that can be used to develop models that allow for predicting pay.”

You can do this in Excel, by hand, or by using software. First, establish your similarly structured groups and then select the variables from Step 1.

Key considerations:

• These analyses are made significantly easier when done through a system.
• You need a sample size of 30 or more employees.
• Your resulting model will identify pay gaps and whether they correlate to a particular variable.
• The threshold for statistical significance is a p-value below 0.05 and the closer you are to 0 the better.

Step 3. Conduct Cohort Analyses

The third step is to conduct group/cohort analyses. The point is to review any internal equity issues that you’ve identified deeper. You’ll also be able to ensure that different job groupings get paid fairly against each other. At the same time, you can evaluate permissible reasons for paying people differently, such as experience, qualifications, or tenure, which can explain away some of the issues you find.

“It’s not about eliminating gaps, it’s about being able to explain them,” Salary.com’s Vice President of Product Marketing Carol Ferrari said.

As mentioned previously, pay gaps don’t necessarily equal pay discrimination. However, they could be a good warning sign that you need to do some digging. Doing these analyses will help you gain a better overall understanding.

Key considerations:

• The number of variables you add can’t be too little or too many to avoid insufficiency or excess noise, respectively.
• You should run another analysis once you’ve applied an increase in compensation to ensure you haven’t created other issues in the organization.

Step 4. Model and Remediate

When you do find a statistically significant non-defensible difference in pay, you’ll need to model a solution. In this step, you’ll want to contact your legal counsel. You need to strategize with them how you’ll remedy these differences through compensation adjustments.

You should model potential adjustments and rerun your multivariate regression analyses to measure their impact. The tricky part is finding a way to offer each employee the right salary without creating issues in other groups. You can call this “what if” modelling, as it’s unlikely you’ll find a simple solution.

This step will take time. Your regression analyses will offer predictive pay, but you can’t just increase every negatively impacted employee’s salary. Determine an amount, run additional modelling exercises to confirm it, and ensure you haven’t created other issues.

Key considerations:

• You’ll need to work with your CFO to make rules for what will work in your organization – e.g., a limit of 15% pay increase in one cycle.
• You will need to model everything before and after you make changes.
• Compression issues can arise if you’re offering high starting rates but can’t afford to increase compensation for those with longer tenure.
• Get your legal counsel involved so you don’t run into unintentional discrimination lawsuits.
• Seek outside services or software to assist with the remediation if your internal team is unfamiliar with this process.

In Summary

Pay equity is probably going to get even more complicated. You need the skills and tools to be able to achieve it.

“Whether you’re doing it in Excel or using the Salary.com tool, you’re going to need to have someone who understands not just the impact of the models you’re creating and the results of them, but also someone who can offer consultation to managers as they’re making their decisions, and to your legal counsel and leadership teams to be able to interpret the results,” said David Turetsky, vice president of consulting at Salary.com.

Pay equity is a constantly evolving process that can steer out of control very easily. With appropriate resources, it is achievable. Remember, it is the right thing to do.

To watch the full webinar, listen to our experts answer your questions, or find out how to get a free consultation from salary.com experts, follow this link - Why Internal Equity Matters and How to Achieve It - Salary.com (wistia.com).