A New Approach to Pay Gap Analysis

What’s new?

At Gapsquare, we’re improving how we think about pay gaps.

What you’ve known before as the pay gap is actually called an unadjusted pay gap. This is the difference between the average pay of men and the average pay of women – this gives an overall overview of your pay gap, although outliers can impact the figure. However, this does not yet account for factors that can explain why the pay gap is there.

You can go beyond this and look at the adjusted pay gap. This is the pay gap after adjusting for factors that influence the pay gap – the Pay Determining Characteristics. The adjusted pay gap does take into account pay determining characteristics.

It is often much lower than the unadjusted pay gap. Some part of your unadjusted pay gap can be explained by pay determining characteristics, and the remaining pay gap is the adjusted pay gap. Therefore, the adjusted pay gap represents the unexplained portion of your unadjusted pay gap.

How this can help you

Analysing both the unadjusted and adjusted gaps is useful to pinpoint areas of improvement in your workforce. The unadjusted gap helps give you an impression of wider pay imbalances and disparities e.g. if the unadjusted mean gender pay gap is 20%, this means that on average, men as a group get paid 20% more than women as a group. In this example, this reflects a general trend that there is a lack of female representation in the higher paid roles and signifies to the company to question the distribution of their female workforce and the accompanying salary distribution. This is a very useful insight to improve representation of a certain group of employees.

Looking at the adjusted pay gap allows you to see if groups are being paid equally for the same work with the same experiences and backgrounds.

Any positive (or negative) adjusted gap means that the data cannot fully explain differences in pay among groups and further investigation is required. This can be because not enough data was analysed, there are unobserved variables (e.g. ability) or that there is some form of discrimination present e.g. unconscious bias.

How companies are using adjusted gaps to innovate change

On average men earn 30% more than women, however, when Glassdoor accounts for pay determining characteristics, their pay gaps drop to 0%; there is no evidence of gender pay gaps amongst employees. They found that one of the main contributors to differences in pay is location; employees living in Ohio have lower living costs than their colleagues in California. In addition, Glassdoor highlights the fact that the unadjusted gap reflects the lack of female representation in senior and higher paid roles (occupational segregation), so although pay factors can account for pay variances among genders, the male favouring demographic should be addressed.

Uber interestingly has reported their adjusted gaps by job function (not by the company as a whole); in 2019 women earned 0.07% less than men and employees from underrepresented racial backgrounds earned 0.53% less than their non-underrepresented counterparts performing the same role.

Payscale’s unadjusted and adjusted gaps in 2020 were 19% and 2% respectively. This means 2% of the unadjusted gap cannot be explained by their data; for men and women with the same employment characteristics performing similar jobs, women earn $0.98 for every dollar earned by a man for no justifiable reason. If all pay determining characteristics have been considered then the gap may be present due to forms of disciminiation like unconscious bias against women or assumptions that women will leave the workforce for child care responsibilities. Even though 2% is considered to be ‘good’ by global standards, it should not be forgotten that this will contribute to women’s lost earnings over their career and therefore evaluating lifetime earnings in this way can exhibit inequalities present at the firm level.

NB: Payscale call the unadjusted gap the uncontrolled gap and the adjusted gap the controlled gap.

Citi highlights the fact that the unadjusted gap reflects under/over representation of certain groups in the analysis. For Citi, the raw gap of  27% reflects that women need increased representation among senior roles. Citi’s adjusted gender pay gap was less than 1% and for Ethnic minority employees, the gap was 0%.

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