Understanding Your Adjusted and Unadjusted Gender Pay Gap

By Syriah Ami: Product Analyst at Gapsquare 

The Case for Equal Pay

The Gender Pay Gap is a measurement of the difference in pay between men and women. While useful, it is not the same as Equal Pay. Equal Pay ensures that those doing the same work, or work of similar value, are being paid equally.

The Gender Pay Gap does not provide context on the type of  job employees are doing. The only way for a Gender Pay Gap to indicate potential discrimination is if we look at the different type of work men and women do in a specific company and control for it accordingly. 

It is important for companies to look at not only their Gender (or Ethnicity) Pay Gaps, but also at Equal Pay. This sends an important message about your organisation’s values. From a business perspective, you’re able to avoid legal risk such as Equal Pay claims or lost productivity as a result of losing employee trust.

What are Unadjusted and Adjusted pay gaps?

The Gender Pay Gap is commonly interpreted as the raw difference between the average pay of men and the average pay of women. This is called the Unadjusted Pay Gap: it gives you no information about the pay structure, the nature of work, or even employees’ skills and performance – all of which contextualise pay in the real world. In other words, it doesn’t account for factors that explain why the pay gap is there.

In the workplace, factors such as job level, department, and tenure characterise how much an employee is paid – these are called Pay Determining Characteristics. If we take the Unadjusted Pay Gap and control for Pay Determining Characteristics, we get the Adjusted Pay Gap. This is the portion of your Unadjusted Pay Gap that is unexplained by Pay Determining Characteristics:

Adjusted Pay Gap = Total Unadjusted Pay Gap – Explained Unadjusted Pay Gap

Looking at the Adjusted Pay Gap allows you to see if demographics are being paid equally for the same work with the same experiences and backgrounds.

Consider a hypothetical company of 2 men, 2 women and only 2 job levels. A man and the 2 women are all being paid equally, but the other man has a higher salary as he’s in the topmost job level. The mean unadjusted pay gap for this company would seem very large. But we know that the highest paid man’s salary can be mostly explained by job level, so the Adjusted Pay Gap is actually far smaller.

This case only considers two variables, pay and job level. In reality, multiple pay determining characteristics will be at play, and each one will impact pay to a different degree. This is where Multivariate Regression comes in.

Multivariate Regression is a statistical method that draws trends between multiple independent variables – your Pay Determining Characteristics – and pay. The concept is the same; using these trends, you can explain part of your Unadjusted Pay Gap to give you your Adjusted Pay Gap. 

Since the Adjusted Pay Gap is the remainder unexplained by Pay Determining Characteristics, it may imply discrimination. However, discrimination is not always represented by the Adjusted Pay Gap. There are non-quantifiable Pay Determining Characteristics that are often omitted from employee data, such as contract negotiations and employee skillsets. Due to these non-quantifiable variables, an Adjusted Pay Gap cannot conclusively be linked to discrimination.

The Adjusted Pay Gap also does not explain why there are differences in Pay Determining Characteristics for different employee groups. For example, if more men are in the top job levels compared to women, that can be used to explain part of your Unadjusted Pay Gap – but it does not explain why women are confined to lower job levels. The Adjusted Pay Gap can therefore indicate where a company can improve in terms of workplace segregation or disparities.

 

Why is it useful to understand your Unadjusted and Adjusted Pay Gap?

The Adjusted Pay Gap provides context on the factors that affect pay in your organisation. Using this information, you can tackle your Unadjusted Pay Gap and form part of an Equal Pay Audit. For instance, if differences in tenure between men and women represent most of an Unadjusted Pay Gap, then the company should focus on women’s retention and progression.

For example, Citibank highlighted the fact that the Unadjusted Gap reflects the under/over representation of certain demographics in the analysis. For them, the raw gap of  27% reflects that women need increased representation among senior roles. Citibank’s Adjusted Gender Pay Gap was less than 1% and for Ethnic Minority employees, the gap was 0%.

Unadjusted and Adjusted pay gaps around the world

Swiss Gender Pay Gap legislation requires companies with 100 or more employees to report on their Unadjusted Gender Pay Gap and their Adjusted Pay Gap – known as their Equal Pay Gap. Employees can use this Adjusted Pay Gap to back up an Equal Pay claim in Switzerland.

The 2015 California Fair Pay Act requires Equal Pay for employees who perform substantially similar work. The legislation further recommends that employers perform group analysis, breaking down into smaller cohorts based on their department or job roles, and running a regression analysis to ensure that there are no employees being discriminated against. 

While the UK hasn’t included the Adjusted Pay Gap in its legislation, it is still vital for companies to analyse and understand it. This allows employers to avoid legal risk, such as Equal Pay claims and ensures that there are not discriminatory practices in the workplace.

By examining the Unadjusted Pay Gap alone, you only see half the story. Large companies like Uber, Glassdoor and PwC have all started looking at their Adjusted Pay Gap. To achieve Fair Pay for all employees, it is important that companies move towards proactive data-driven action. The Adjusted Pay Gap is just the right place to start.

We develop software that will revolutionise how you measure and end pay gaps in your company. Generate gender pay gap reports, ethnicity pay analysis, equal pay audits and beyond at the touch of a button.

For more information, visit our website or get in touch via email.

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