What is Pay Gap at Work and How to Fix It?

Women only make 77 cents for each dollar earned by men worldwide, according to UN Women. This is an example of the gender wage gap, where women earn less than men due to various factors.

In general, this situation is part of the pay gap, a concept that details pay differences between various groups of employees. In this article, we will simplify wage gap, its types, implications in an organization, and how to fix it at work.

1.0 What is pay gap?

The pay gap, or wage gap, is the average difference in earnings between different groups of people in an organization. It takes a closer look at how compensation is distributed across job levels, families, and structures.

Here is the distinction between key concepts surrounding wage gap:

Concept	What it means
Pay gap	Overall differences in pay between groups of people in a company
Gender pay gap	Most common measured and regulated wage gap
Equal pay vs wage gap	Equal pay checks fairness within the same role; wage gap focuses on structural outcomes

1.1 What are the drivers of wage gap?

Wage gaps in organizations are not built overnight. They accumulate through everyday compensation structures and decisions, so it is important to effectively govern them to avoid persistent gaps.

Here are the core drivers of wage gap in a compensation structure:

• Job architecture design

  • How roles are defined, leveled, and grouped establishes the foundation for pay outcomes across the workforce

• Pay grades and grade overlap

  • Wide or inconsistent pay ranges allow pay differences to grow within the same level

• Range penetration patterns

  • Where employees belong within their assigned pay range shows who is progressing faster and who is not

• Starting pay practices

  • Initial pay decisions usually become long-term anchors that determine future pay growth

• Promotion pay increases

  • Differences in how promotion increases are applied can magnify wage gaps as career progresses

Small inconsistencies at hire or promotion accumulate over time, widening the wage gap within the structure. With the help of Pay Equity, pay inconsistencies and potential disparities will be reviewed and flagged proactively by capturing different factors like gender, race, age, performance, and tenure.

2.0 What are the types of wage gaps in a pay structure?

Here are classifications of wage gaps that occur within a company’s compensation structure:

Type of wage gap	What it means
Structural pay gap	Differences caused by the overall job architecture and how pay grades are set up
Vertical pay gap	Gaps due to underrepresented at leadership positions
Horizontal pay gap	Differences across job families, even at the same level, such as between departments or functions
Occupational pay segregation	Employees from certain groups are concentrated in specific roles, creating unequal pay outcomes

2.1 What are the implications of wage gap in a company?

Wage gaps are not only about compliance; they can also affect an organization’s strategy, finances, and reputation.

Here are key areas where wage gaps have an impact:

Key area	What it means
ESG reporting	Wage gaps are part of environmental, social, and governance disclosures and companies must demonstrate fair pay practices
Workforce cost risk	Ignoring gaps can lead to unforeseen costs if remediation is needed later like pay adjustments or legal settlements
Total rewards strategy	Gaps reveal whether the total rewards strategy is delivering equitable pay outcomes

3.0 What are the elements needed for pay gap analysis?

In analyzing gaps in employee pay, important elements need to be present for a credible and defensible analysis.

Here are required data inputs and why they matter in your organization’s wage gap analysis:

Data element	Why it matters
Base pay data	Serves as the baseline in comparing pay outcomes across employee groups
Total cash compensation	Makes sure bonuses and incentives are included, not only fixed salary
Job level/grade	Acts as the primary control for comparing employees with comparable work
Job family	Provides segmentation across similar roles and functions
FTE normalization	Adjusts pay for part-time or reduced schedules for a fair comparison

4.0 How do you fix wage gaps at work?

Fixing wage gaps in an organization is about understanding and repairing systems that created them. To do this, there must be a data-driven diagnosis, financially effective remediation, and strong governance.

Here are steps to fix gaps in your employee compensation:

1. Step 1: Conduct pay equity audit

   Wage gaps are usually signals of risk building inside the entire compensation structure. Through pay equity audit, a systematic analysis of pay structure is done to identify and correct unjustified gaps based on gender, race, and other groups.

   Diagnose root causes within pay structures by looking at common pay risk indicators:

   Indicator	What it tells you
   Pay compression	Little-to-no differences in pay between job levels regardless of experience, skills, or seniority can hide underlying inequities and limit fair progression
   Pay inversion	Roles at lower level receiving same or higher pay than higher-level roles can signal a breakdown in the pay structure
   Legacy pay decisions	Outdated salary structures that were not corrected often result in significant pay disparities

   Eliminate unfair pay practices and protect your organization from wage disparity with a comprehensive pay equity audit through Pay Equity Software. This tool will help you:

   • Ensure compensation is internally and externally competitive

   • Pinpoint and address gaps immediately

   • Ensure fair pay raises

   • Create a transparent and equitable workplace culture

2. Step 2: Measure wage gap using metrics

   Calculating gaps in compensation is a layered process, and every metric addresses a different question that answers how pay is distributed across the organization.

   Unadjusted wage gap metrics

   Metric	Purpose
   Unadjusted pay gap	Provides overall difference in average or median pay between demographic groups without accounting for differences in job-related characteristics
   Median pay comparison	Reduces the impact of extreme pay values and shows typical employee experience
   Mean pay comparison	Highlights the impact of high earners

   Adjusted wage gap metrics

   Metric	Purpose
   Adjusted pay gap	Represents pay disparities between groups considering factors that can influence pay like education, experience, and location
   Regression analysis	Models compensation against factors like job level and education instead of comparing raw averages
   Like-for-like analysis	Compares employees in equivalent roles or grades
   Pay distribution analysis	Reveals how employees are positioned within pay ranges

3. Step 3: Establish regulatory and governance framework

   Here are requirements you can apply in your organization to ensure pay structure is aligned with external regulations and internal governance:

   Governance element	Why it matters
   Pay transparency regulations	Establish expectations on what to disclose and how
   Mandatory wage gap reporting	Requires consistent and repeatable measurement across reporting periods
   Audit trail	Ensures that the gap analysis is explainable and defendable if challenged
   Internal pay equity policy	Defines decision rules, roles, and accountability

4. Step 4: Adopt pay gap remediation strategies

   Here are tools on how your organization can correct pay issues through a fair, financially controlled, and sustainable way:

   Tool	How it helps
   Pay adjustments	Address urgent inequities
   Targeted equity increases	Focus resources on specific gaps instead of broad increases
   Structural pay realignment	Repairs flaws in grades, ranges, or architecture
   Promotion calibration	Ensure consistency to promotion decisions
   Budget modeling	Helps plan remediation without financial shocks

5. Step 5: Continue monitoring and control mechanisms

   To ensure gaps will not reappear in your pay structure, establish key control mechanisms, such as:

   • Ongoing pay equity monitoring: Regular reviews to mitigate emerging issues

   • Annual wage gap review: Formal checkpoint aligned to pay cycles

   • Compensation controls: Guide pay decisions

   • Hiring pay guardrails: Controls that prevent gaps from forming at entry

   • Promotion governance: Ensures consistent promotion decisions

   Manage your pay equity processes as frequently as needed and archive all results for audit purposes through Continuous Pay Analysis.

5.0 FAQs

Here are frequently asked questions about wage gap:

5.1 Why does a wage gap exist even when equal pay rules are followed?

Gaps exist even with equal pay rules because laws usually mandate equal pay for the exact same roles, not across different groups. For example, when considering 2 gender groups, occupational segregation in the labor market has men overrepresented in high-paying work (lawyers and bankers) while women are overrepresented in low-paying work (childcare and tipped workers), leading to higher pay for men than women.

5.2 How often should companies review their wage gap?

Companies should have an annual review but can be more frequent when fast-paced industry changes or rapid company or expansion occurs.

5.3 How does the wage gap relate to total rewards strategy?

Through pay equity analysis, finding gaps helps maintain the equitability and competitiveness of total rewards strategy by gauging current pay practices, identifying room for improvement, and allowing objective decision-making in support of fair pay.