Conducting an equal pay audit

Author: Noelle Murphy

Equal pay audits do not have to be daunting. Instead, they can be a practical exercise that benefits both the employer and employees; we spoke to Lorraine Paddison, managing director of TMS Consultants, to get her insight into the issues and practicalities around conducting an equal pay review.

Key points

"A lot of private sector organisations have positive and ambitious statements on various aspects of equality and diversity, and to have those facing outwards publicly, and yet not even being prepared to check that you are paying people equally for equal work, seems slightly at odds with this," Lorraine Paddison, managing director at equality and diversity consultancy TMS, tells IRS.

IRS's research in this area, conducted in July and August 2008, found that three-quarters (74%) of the 103 respondents in the private sector have taken, or intend to take, steps to review pay by gender. One in five (20.4%) has conducted a formal review process, and more than one in 10 (12.6%) has done so on more than one occasion.

Generally, however, our respondents feel that equal pay audits should not be mandatory for private sector employers.

Almost three in 10 (27.2%) respondents have adopted an informal approach to conducting equal pay audits, and this work is generally carried out during the annual salary review, as a result of benchmarking, or at employees' point of entry into the organisation.

Research published by the CIPD (PDF format, 896K) (on the CIPD website) in February 2009 found that only 54% of employers have conducted or are intending to conduct an equal pay audit, with the majority of these in the public sector. The report points to the business benefits of conducting equal pay audits, such as employees who feel disadvantaged in pay due to their sex, ethnicity or disability being less likely to be engaged and motivated to help the business succeed. Employees who are confident that there is equality of pay are more likely to be powerful advocates and motivated contributors in the future success of their companies. It also points to the current economic climate, and emphasises the importance of linking employee contribution to pay to demonstrate that limited financial resources are not wasted.

Paddison thinks that the economic climate will also affect some employers' motivation to conduct equal pay audits, but she also believes that the best employers will say "no matter how bad the economic climate, we will always want to attract and retain the best people and in order to do that we must ensure we give equal pay and we remain committed to it."

Taking the first steps to an equal pay audit

Paddison recommends employers consider the strategic implications of conducting an equal pay review, before embarking on an audit, "because you need to think pretty carefully about what you're going to do if you find pay gaps that can't be justified, particularly in the current climate where there is limited money to put the situation right".

One tool she points to, which she has co-authored, is the Equality and Human Rights Commission (EHRC) equal pay audit kit. This covers gender, ethnicity and disability as its main diversity strands, and is to be released in spring 2009. The web-based toolkit is comprehensive, and takes organisations through the process from first thoughts on conducting an equal pay audit - such as the type of data that will be required - to who needs to be involved, and any steps that can be taken as a result of the outcome.

Currently, the EHRC has information on conducting an equal pay audit, including a series of factsheets on equal pay in practice.

Paddison believes that it is the prospect of making significant changes on the discovery of pay gaps that puts employers off starting the process, but she argues that organisations should take a more measured approach.

"I think one of the really important things is to identify and remedy any practices that may be perpetuating the situation or making the gaps worse," she says. Organisations will not be required to immediately rectify any gaps, but by looking at policies in terms of starting pay, promotion increases or bonuses and progression, an organisation can turn around any discrepancies going forward and limit gaps for the future. The amount of discretion afforded to local managers should also be considered, and where there are areas of concern in terms of pay gaps, discretion should be limited.

At the very least, Paddison recommends, if an issue arises, then "you need to get some good quality, practical advice out there to line managers, or possibly control the discretion they can exercise a little more. That's not going to cost the employer financially, and it will at least stop things getting worse."

Once an organisation has completed an equal pay audit, and there are lists identifying people who appear to be paid less for doing work of equal value, Paddison believes employers will find the issue hard to ignore. She says that while it might not be possible to deal with all the issues at once, most employers will be prepared to prioritise the issues and have a plan to correct pay gaps within a couple of years.

Conducting an equal pay audit

The key to a successful and efficient equal pay audit lies with the data that is required. Paddison says that, in her experience, much of the data that is required - such as salaries, grades, job titles, and starting dates - needs to be "cleaned" and checked for accuracy and precision. "More time goes into cleaning the data than running the actual audit and what comes afterwards, but it is time well invested. Organisations usually find it very useful for other purposes, because the data is more accurate at the end of the process," she says.

Defining equal work for equal pay

Under the Equal Pay Act 1970, men and women are entitled to equal pay if they are performing equal work. That means:

• "like" work - work that is the same or broadly similar;
• work rated equivalent - work which has been assessed as equal under a job evaluation scheme; or
• work of equal value - work which would be rated as equal if it were to be job-evaluated.

Unless differences can be objectively justified, jobs that are equal should have the same pay, irrespective of whether the work is carried out by a man or a woman, by a white employee or by someone from a different ethnic background, by an employee with a disability or by one with no disability.

Problems can arise, for example, when companies merge but pay rates have not been harmonised. Alongside this, issues in terms of equal pay can come about when jobs have changed over time. If a job evaluation or other form of grading review has not taken place, the growing similarities between jobs may not be recognised. Other problem areas can arise when two similar jobs were originally paid the same because they were considered to be like work, but one of the jobs is now done by a part-time worker who does not have access to the same total pay package as her full-time colleague. For similar jobs to be excluded, the differences must be of practical importance.

In many organisations, identifying "like work" starts with job titles. For work rated as of equal value, organisations should look at roles within the same pay grades or bands.

In order to identify any pay gaps, organisations should look at the average or median salary or pay within a band or within a number of employees with the same job title. Paddison says that, "as a rule of thumb, and it's only a rule of thumb, the EHRC would say any gap more than 5% above or below the average should be investigated. But if there is a pattern of gaps favouring one sex or another, then you would look at every gap of 3% or more."

However, the software that is now available for running equal pay audits makes it easier to examine all pay gaps. Improvements in technology and software mean that running a pay audit is far easier now than it was five or six years ago, Paddison believes.

Common reasons for pay gaps and justifications

Paddison refers to the fact that an equal pay audit is a technical exercise with precise terminology. "If you're doing an equal pay audit, you should be comparing people doing equal work - men and women, ethnic minorities and other staff who are doing work that is the same or of equal value - so that you are comparing like with like. If you have really got that right, whether someone is part time or full time or had a career break, for example, should not make any difference. Those things affect occupational segregation and at what level people work. But an equal pay audit compares people who are working at the same level, so if there is a gap there it tends to be for different reasons," she says.

The most common reason for pay gaps - particularly between men and women - tends to be length of service. Paddison says, "Men just tend to be in the jobs for longer. And the legal position on that is that length of service as a reason for differing pay is probably justifiable up to a reasonable point."

In terms of justifiable pay gaps, Paddison also points to market rates. "If you talk gender, women tend to be in jobs that don't attract such high market rates even though they might be performing equal work to men. And providing an employer can genuinely show, through reputable data, that market factors explain the pay gap, then it could justify the gap and be a defence if there is an equal pay claim," she explains.

But she points out that an employer cannot offer affordability as a justification, or giving market rates that are not backed up by objective evidence.

On the whole, in Paddison's experience, reasons for pay gaps within organisations "can be quite subtle and are a reflection of practice that will have been in place for a number of years".

Starting pay

"Issues around starting pay are still contributing to the pay gap, particularly where there is flexibility around starting pay rates. A lot of private sector employers particularly are influenced by the salary the individual is currently earning so - fairly crudely - they will pay current salary plus a bit more to get them. So it could be that men are already earning a bit more at the point of entry or that they negotiate more strongly at the point of entry - there is a fair bit of anecdotal evidence that this is the case. Women don't push quite as hard at the point of selection," explains Paddison.

This tends to be more controlled in the public sector, where there are smaller margins for salary flexibility.

This is an easy area for employers to monitor, and does not require a complicated equal pay review. By reviewing starting salaries over the past year or more, and comparing salaries at the point of entry by gender and ethnicity, any issues in this area can quickly come to light.

Promotions and upgrading

Compared with the public sector, where there is often a formula in place to calculate an increase in pay as a result of a promotion, within the private sector this can be a point at which negotiation and discretion are involved.

"It is at any point in the process where there is the scope for managerial discretion and/or negotiation by job-holders that employers should be checking to see if pay awards are inadvertently favouring one group over another," Paddison recommends. The simple remedy, if discrepancies do come to light, is to control the level of discretion that line managers can exercise in these situations. It tends to be the case that there is more discretion and more negotiation in the private sector, she adds.

Performance bonus

Another area where gaps can creep in is in the payment of performance bonuses. Paddison identifies the two main issues around performance bonuses that need to be monitored - employers need to be sure that the bonus is justifiable and that access to the bonus is fair for all. Employers also need to be able to demonstrate objective criteria and measures of performance in place to justify the awarding of a bonus and the amount of that bonus.

Some criteria can be broad and generic by their nature, which makes it more difficult to measure. Not all work is easily quantifiable, but employers should be sure that access to the scheme is fair, and where a bonus scheme is in place, that all those doing similar work or work of equal value can access the scheme.

"That's not a difficult thing for private sector organisations to monitor. They can monitor performance increases or bonus by gender and ethnicity. Many organisations are doing this as a matter of course, and getting line managers to check the impact of the increase or bonuses before they are put in place," says Paddison.

She gives the following example as an illustration: "If you were a line manager with 40 people to assess and work out bonuses for, you should be informed by HR that once you've provisionally decided who is getting what, a check should be run to consider the gender impact or impact by race. And if the line manager is not required to do that, then it can be done centrally before bonuses are actually paid."

She makes the point that this should be good practice for starting salaries, bonuses and promotion - any area where there is discretion on the part of the line manager - and that these do not have to be heavily bureaucratic or technical exercises. "If you were doing an equal pay audit; they would be part of the audit, but if you were just wanting to dip your toe into the water fairly gently to start with, then these are the sort of things you can do," she says.

Next steps

While evidence shows that employers can be reluctant to conduct equal pay audits, once a gap has been identified, employers are generally keen to take proactive measures to ensure the gap is closed, according to Paddison. While this can take some time, she believes that the end result is beneficial both to the organisation and to all employees concerned.