Demystifying Pay Equity Terminology

Pay Equity, Pay Gap, Equal Pay – What Does It All Mean?

Understanding pay equity can feel overwhelming. Here’s a breakdown of some key concepts with an example that ties the concepts together to make it easier to understand.

Pay Equity

'Pay Equity' is a term that generally means substantially similar work deserves equal pay regardless of an employee’s race, gender, ethnicity, age, religion, or other non-job-related factors.

Pay equity does not mean that all employees are paid the same. There are a number of justifiable reasons for pay differences. Pay equity efforts address pay disparities that cannot be explained by legitimate job-related factors such as skills, years of experience, performance, location, etc.

A pay equity audit can help you look for pay disparities and determine whether they are justifiable or based on non job-related factors.

Raw Pay Gap

The raw pay gap (sometimes referred to as the "uncontrolled" or "unadjusted" pay gap) measures the average difference in pay between two groups. For example, the gender wage gap is calculated by comparing the average or median pay of men to the average or median pay of women. Some parts of the raw pay gap can be "explained" while other parts are "unexplained".

Calculation of the raw pay gap is referred to as a pay gap analysis. It tells you, in general, how one group of employees compares to another group of employees.

Explained Pay Gap

The explained pay gap reflects variations in compensation that can be explained by legitimate job-related factors such as job type, experience, and education.

Unexplained Pay Gap

The unexplained pay gap (sometimes referred to as the "controlled" or "adjusted" pay gap) is the portion that remains after accounting for justifiable job-related factors and may be attributable to gender, race or ethnicity, or other non job-related factors.

An Example to Tie It All Together

For example, imagine a video game developer conducts a pay gap analysis and notices the average pay of all male employees is significantly higher than the average pay of all non-male employees (the raw pay gap). Company leadership then follows up with a pay equity audit to understand what is driving the disparity.

The company finds that 75% of the disparity is attributable to the fact that most higher-paid jobs with management responsibilities are held by men (the explained pay gap). Company leaders decide to investigate the reasons why women are underrepresented in management or higher-earning positions within the organization. They use what they learn to create new career and opportunity equity policies that ensure women and people of color are provided with equal access to career development and promotions.

For the remaining disparity (the unexplained pay gap), company leaders work with legal counsel to make needed adjustments to individual compensation. They use the audit data to diagnose sources of pay disparities and adopt strategies to prevent those disparities from recurring, such as routine pay equity audits, bias blocking training, and reducing managerial discretion in compensation decisions.