How to conduct a pay equity analysis

Grant-funded nonprofit organizations such as Head Starts are required to conduct regular wage comparability studies, or pay equity analyses, to ensure their compensation is comparable to positions of like value within the communities they serve. Understanding how to conduct a pay equity audit is crucial for these organizations.

There are distinct benefits to performing a pay equity study beyond those of complying with the regulations. The analysis can help your organization navigate not only how to establish salary ranges and how to develop a pay structure that is competitive and equitable, but also on how to administer individual employee rates of pay. A comprehensive pay equity review can address issues related to the gender pay gap and ensure fair pay practices.

We are in an unprecedented labor market, where more jobs exist than there are people to fill them. As a result, we are seeing significant competitive pressure on wages at all levels of the organization. Nonprofit organizations, like employers across all industries, are finding it increasingly difficult to not only attract but also retain employees. This makes pay equity assessment even more critical for employee retention.

The Bureau of Labor Statistics announced in October that the number of individuals quitting their job increased in August to 4.3 million. A Gallup analysis in March 2021 found that 48% of America’s employees were actively job searching or watching for new opportunities. Some believe that the number of employees ae potentially in play for new jobs could be closer to 55% or more.

Whatever the reason, an employment shuffle is occurring. It is imperative your organization clearly understands the competitive pay rates for employees.

How to perform a pay equity analysis

If you have the capacity and expertise on your human resources team, it is possible for your organization to conduct your pay equity analysis internally rather than working with a third party. You might use a pay equity analysis spreadsheet or a pay equity analysis excel template to assist in this process.

When conducting the analysis, you generally follow these eight main steps:

1. Form a compensation committee

This is an internal committee made up of senior leadership that represents a cross section of the organization (e.g., HR, fiscal, Head Start and major department heads). Committee members must be able to be impartial during the wage comparability process and be able to distinguish between the position itself and the incumbent filling the position. If they cannot separate the role from the person, they cannot effectively serve as a member of the committee. This committee will be crucial in addressing any unadjusted pay gaps identified during the analysis.

2. Develop and/or update job descriptions

Performing this step well, and thoroughly, is critical to the success of your pay equity assessment . While it can be a difficult step in the process to complete, it is imperative that managers review and ensure the job descriptions are an accurate reflection of the roles and responsibilities of the position. When making the request, it’s helpful to communicate to managers exactly why you’re asking — they will be used in the compensation equity analysis process to evaluate the value of the job in the communities you serve.

3. Conduct an internal equity analysis

Once job descriptions are reviewed and updated as needed, you can move on to conducting an internal pay equity analysis. To bring objectivity to the evaluation process, it’s helpful to use a point factor system. This allows you to apply compensable factors to categories such as skills, responsibilities, working conditions and education experience. The internal equity process helps you to determine the relative value of each position to every other position in the organization. It helps to identify positions that may look very different in terms of roles and responsibilities as having comparable work value.

This step in the process can also help you to identify where you may have unclear or inconsistent requirements (e.g., education, experience, job level). A thorough job evaluation is essential for an accurate pay equity study.

4. Conduct an external market analysis

Following the internal equity analysis, it’s time to conduct external market analysis. At this step, you use published wage and salary data sources. Identify what demographics factors (e.g., geography, budget size, number of employees, organization size) are important to ensure you gather the right data. It’s also critical to focus on each position’s role and responsibilities (not the title, as titles may be inconsistent across organizations and don’t make for good comparisons). A best practice is to price each unique position within the organization. In this way, you convey that all positions are important and should be considered in the pay equity review.

5. Design the salary structure

Once you’ve identified like-valued positions by grouping like-valued midpoints through your analysis, you can begin designing your salary structure. Start with the highest paid position, which sets the upper limit within your salary structure, and then build ranges underneath of like-valued positions. You should take into account progression between midpoints as well as a +/- spread around midpoints in order to establish your salary range. The result will be series of overlapping ranges that have all positions within the organization placed. The number of ranges will depend on the size of the organization. 

6. Conduct a comparative ratio analysis

Up until this point, all steps in the process have been non-incumbent specific. The comparative ratio analysis provides the opportunity to evaluate individual employee pay rates in consideration of determined salary structure midpoints. Factors that may influence placement within range include: performance, tenure, unique skillsets, flight risk, full-time or part-time status and other factors important to the organization. These factors and other decision points may influence where an employee is placed within a specific salary range. This step is crucial in identifying any gender pay gaps or other pay inequities.

7. Develop administration policies

This step is your opportunity to define your compensation philosophy. What will you do when: an employee is outside of range (either above or below midpoint), performance has changed overtime, or an individual has changed positions? By developing your administration policies and procedures, you are anticipating how you will address specific situations in a proactive, intentional manner. These policies should align with your organization's commitment to DEIB (Diversity, Equity, Inclusion, and Belonging) initiatives.

8. Create and execute a communication plan

Without proper communication, your pay equity analysis project can fail. Today, people have different levels of expectations around pay transparency and communication. Your compensation philosophy and degree of preferred transparency will influence communication. Compensation is a very emotional topic to employees. You must be able to appropriately and effectively convey how you are managing compensation. Communication should extend to not only base compensation but also any type of unique benefits and other rewards that are important to employees. 

What’s the value of a third party?

While you can conduct a pay equity analysis internally, leveraging a third party can save your team months of time — especially if you’re staffed lean like many nonprofits.

A third party also brings significant expertise and experience in evaluating job descriptions, gathering wage and salary data, building compensation structures and accessing valuable resources and tools. Plus, when it’s hard for leaders to fight human nature and truly separate the person from the role being performed, a third party can come in without bias and provide the objectivity needed to make the project a true success. They can hold difficult conversations, taking pressure off your team.

Lastly — a big note of caution — while you may be tempted to reach out directly to “like” organizations to pulse them on wages — avoid doing so. It may be perceived as engaging in activities that are considered or associated with collusion. In its simplest form, collusion occurs when organizations work together to establish wages at predetermined levels. Using a third party can help you avoid even the appearance of such activities.

Sample wage comparability RFP

The Wipfli team has decades of experience working with nonprofit organizations and performing wage comparability studies. We understand the unique challenges nonprofits face, including how to help them attract and retain employees in the current market. Contact us to learn more about how to conduct a pay equity audit and ensure fair pay practices in your organization..

We’ve also developed a sample RFP to assist you with securing a third party to help you analyze your organization’s compensation structure and practices. Click here to download this free sample RFP.

Related content:

• Wage compression: Navigating the wage squeeze
• Always be nurturing: Using data to keep association members engaged
• 3 ways Head Starts can respond to the NPRM’s call for pay equity