Pay equity laws in the United States have existed at both the national and state levels for decades. And yet the historically-vast disparity between gender groups and ethnicities regarding salaries, or the “pay gap,” persists. Most recent estimates by the US Census Bureau indicate white women make only eighty-three cents for every dollar white men make. For African-American women, Latinas, and other marginalized groups, the gap is larger.

To address this pay gap, a number of jurisdictions have enacted more stringent pay equity laws in recent years. These new laws have made pay equity a growing concern for many companies.

A pay equity lawsuit, especially if it is styled as a class action, can be expensive. Recent lawsuits alleging pay inequities have sought damages in excess of US$100 million. Stated another way, a pay disparity of five, four, or even three percent means a potential for a damages award equal to that percentage of a company’s payroll, plus liquidated damages, penalties, and attorney’s fees. Hence, lawsuits seeking to recoup even a small pay disparity for a portion of the company’s employees can potentially damage an organization.

Pay equity lawsuits can also tarnish a company’s reputation and polarize offices, pitting groups of employees against each other. Likewise, the negative attention a company receives as a result of such a matter can drive away current employees and discourage new ones from applying. A recent study revealed that 97 percent of women and 82 percent of men said knowing a company had a pay gap would, or might, impact their interest in working for that organization.

But even before a lawsuit is filed, the existence of a pay gap in an organization can be problematic. Employees perceive their compensation as a measure of how the company values them. If an employee is paid less than a colleague who performs similar work, then the latter might feel unappreciated and migrate to another organization. When those pay differences break along gender, racial, or ethnic lines, they not only create recruiting and retention issues, but they can also undermine any diversity and inclusion efforts by the company.

An organization that makes pay equity a priority can avoid potential pay equity claims while improving diversity and inclusion efforts. But beyond those benefits to the organization, taking proactive steps to reduce pay gaps also is just the right thing to do.

Paying people based on the job they are doing, as opposed to who they are or what they made in the past, creates objective standards under which employees often flourish. And, when employees believe they are being rewarded fairly for their work, they are more likely to work harder and improve their teamwork skills, all to the greater benefit of the company. This higher level of commitment can lead to better morale, job performance, and productivity from all employees.

So, is 100 percent pay equity possible? It can be. But half the battle is finding out where and how big the pay gap is. A good way for employers to determine whether a pay gap exists — and whether legitimate factors explain that gap — is to proactively conduct a pay audit. An audit will help a company identify where pay differentials exist and help remedy those gaps before they turn into larger issues.

A pay audit also can help an organization go beyond analysis and into action. An audit can help a company analyze how pay decisions are being made, where there is subjectivity, and help the company move toward more objective pay practices. A pay audit also can test the company’s pay philosophy to determine whether it is being followed by those making compensation decisions, thus enabling the organization to adjust — either in philosophy or practice — if it is not.

An audit also can provide an organization with an understanding of the jobs being performed within the organization and identify cross-functional comparisons that can strengthen the organization and improve overall productivity. Even more importantly, an audit of compensation practices can lead an organization toward a diversity strategy by helping not only to identify areas where there currently may be barriers to certain groups ascending into leadership roles but why that is the case.

Gaining that understanding can present an organization with opportunities to think about talent pipelines and develop strategies for giving all employees similar development and promotional opportunities.

The bottom line is that how an organization thinks about and implements its compensation philosophy can help it attract and retain quality talent. Taking steps to discover and address any pay gaps that do exist can help an organization avoid the risks of non-compliance and build a culture where all employees thrive.

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