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Pay Equity: What It Is and Why It’s Important

Despite the many advances in equity, pay inequity for women and people of color still exists, resulting in a significant pay gap among people holding down similar jobs. This means women and minority groups often receive lower pay than their white male counterparts for performing identical work. Understanding the basics of pay equity can help you eliminate discrimination based on gender and race when setting wages for your positions.

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What is pay equity?

What is equal pay? Pay equity means employees receive equal pay for equal work, regardless of their demographic. That includes base pay, bonuses, overtime, benefits and advancement opportunities. Many equal pay laws expand the pay equity meaning to include work that’s considered substantially similar.

Pay equity also encompasses systemic issues, biases, social norms, educational opportunities and other factors that may lead workers in certain demographic classes to pursue higher-paying jobs.

Pay equity applies to, but is not limited to, the following demographic classes:

  • Age
  • Race
  • Gender
  • Disabilities
  • National origin
  • Sexual orientation

For many employers and legislators, however, pay equity is an umbrella term covering all issues related to fair and equitable compensation. For example, pay equity may refer to the methods businesses use to eliminate pay disparity among different groups.

What pay equity doesn’t mean

Pay equity doesn’t mean equal pay for every employee. Differences in wages may reflect legitimate job-related factors, such as:

  • Education
  • Experience
  • Skills
  • Location
  • Job performance
  • Length of time with the employer

It only refers to a pay disparity based on demographics—when two people perform similar work and have similar work backgrounds but experience significant differences in salaries. 

Pay equity: an overview and history

Pay equity has been an ongoing struggle throughout U.S. history. For decades, lower pay for women and minority groups was accepted as the norm. In fact, in the wake of the Great Depression, although women were entering the workforce in increasing numbers, their pay was often substantially lower than that of men.

This was due in part to the recently created National Recovery Association, which established wage codes that set lower pay for women. For women of color, this often meant even smaller wages and fewer benefits.

The fight for pay equity: looking back through the decades

The fight for salary equity started in the 1930s. Each subsequent decade brought new attempts at closing the pay gap. Here’s a look at the history of the pay equity fight:

  • The 1930s: In 1938, U.S. workers saw one of the first attempts to create more pay equity, The Fair Labor Standard Act. This legislation set a minimum wage for workers in certain industries that couldn’t be changed based on age or gender.
  • The 1940s: As World War II brought even more women to the workplace, the National War Labor Board sought to erase the gender pay gap in 1942. However, the war ended before the rule was enforced.
  • The 1950s: In the 1950s, several additional pay equity bills were introduced in Congress but never became law.
  • The 1960s: The 1960s brought the Equal Pay Act, which President John F. Kennedy signed into law in 1963. One of the nation’s first federally enacted antidiscrimination laws, the Equal Pay Act made it illegal for an employer to pay men and women differently for the same work. That was followed in 1964 by Title VII of the Civil Rights Act, which forbids pay discrimination based on gender, race, skin color, religion or national origin. It was later amended to prohibit discrimination based on disability.
  • The 1970s: In 1979, the National Committee on Pay Equity was founded. This committee, which consisted of unions, professional organizations and prominent women’s groups, sought to further pay equity through education and lobbying.
  • The 1980s: The 1980s brought numerous lawsuits and workplace strikes, with employees fighting for pay equity. The decade also saw individual states undertaking pay equity studies, with some of those states making pay adjustments or passing relevant legislation.
  • The 1990s: In 1996, President Bill Clinton declared the first National Pay Inequity Awareness Day. Now known as Equal Pay Day, this date—which changes each year—represents how far into a given year, women, on average, must work to earn what the average man earned the prior year. The day is meant to raise general awareness of the gender pay gap.
  • The 2000s: After the turn of the century, federal efforts to create pay equity seemed to stall, leaving attempts to close the wage gap to states and localities. Several states passed stronger protection for equal pay, promoting transparency and banning companies from asking salary history questions during the hiring process.

Where pay equity stands today

In addition to federal laws, nearly every state has equal pay protections. Unfortunately, many don’t target the discriminatory pay practices used by some companies and organizations. In 2020, women received only 84% of the salary that men earned—and that gender pay gap had been fairly consistent for 15 years prior.

For women of color, the gap is even wider. According to research done by the Economic Policy Institute, wage gaps between black and white workers were larger in 2016 than they were in 1979.

However, from social media to celebrity activists, pay equity has become one of today’s hot-button topics, and it’s getting more and more attention. Perhaps because of this, changes are still being made at the state and local levels.

Why pay equity is important for businesses

For businesses, pay equity is an important consideration when setting wages. By creating a workplace that promotes pay equity, you can attract a diverse workforce and reduce turnover. Providing equal pay for equal work may also help widen your labor pool and improve worker loyalty.

As an SMB, it’s also important to remain compliant with state and local pay equity laws to avoid equal-pay litigation brought about by workers. These cases have increased dramatically in recent years and often take the form of costly collective suits or class actions.

How you can improve pay equity

If you want to avoid pay disparity in your business, you first need to recognize that pay inequity still happens. Businesses don’t always intentionally pay certain groups less, but it still happens.

Here are some pay equity examples and practices you can implement to reduce pay issues in your company:

  • Analyze your pay. Conducting a pay equity analysis can give you a better idea of how well you do with pay equity. 
  • Practice transparency. Pay transparency means you’re not secretive about how much you pay your employees. When others can find out what their colleagues make, it encourages the company to focus on salary equity. 
  • Create salary bands. Using a salary band system creates standard pay levels based on the ranks of the positions in your company. This stepped system can create more consistency in pay based on job-related factors instead of demographics.
  • Write a pay policy. Work with HR to create a pay policy that addresses pay equity. 
  • Work on overall DEI efforts. Addressing diversity, equity and inclusion across the board in your organization can help reduce pay gaps and other inequities in how employees are treated. 

Frequently asked questions about pay equity

What is the difference between pay equity and pay equality?

Pay equity and pay equality both refer to wage disparities between genders and workers of different races, but the terms don’t have identical meanings. Pay equality means equal work warrants equal pay, regardless of who performs it. Although pay equity promotes a similar idea, it also explores the reasons why individuals who fall into certain demographics are more likely to pursue higher-paying occupations. Conversations surrounding pay equity also tend to explore systemic issues, biases, social norms, educational opportunities and other factors impacting women, disabled workers, people of color and other marginalized groups.

How is pay equity calculated?

You can easily calculate how equitable your company’s wages are by following several simple steps:

  1. Add together the annual salaries of full-time, year-round workers in the demographic you wish to compare. That could be gender, ethnicity or another factor you choose.
  2. For each demographic, find the median salary. That’s the salary that falls exactly in the middle, with 50% of the demographic earning more and 50% earning less.
  3. Once you’ve determined the median salary for each of your demographic groups, you can compare them side-by-side to determine the pay gap.

However, some companies may find this method overly simplistic and can calculate pay equity using average salaries by demographic. Companies may also opt to calculate using weekly salaries, which may net slightly different results. Although this calculation is a good starting point, a single statistic isn’t a good basis for assessing pay inequities. It may be helpful to explore other factors that might cause wage disparities.

What is a pay equity audit?

A pay equity audit (PEA) is a comparison of wages among employees doing identical or substantially similar work in a company. It typically involves a calculation of pay equity, followed by an investigation into the causes of pay disparities that can’t be justified by legitimate factors, such as education, experience level, job performance or length of employment.

PEAs may focus on a small group of people or explore wage fairness throughout the entirety of your organization. As an employer, you may initiate a pay equity analysis to satisfy shareholder demands or ensure compliance with federal, state or local wage laws. Employers often initiate audits simply to ensure that they’re paying all employees fairly.

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