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How to Conduct a Pay Audit

Conducting regular pay audits can help you pay your employees fairly. Find out why you might conduct a pay audit and how to do so.

Why you might conduct a pay audit

A pay audit lets you identify pay disparities among your workers.

Pay audits are becoming commonplace as the gender pay gap becomes more publicized and as more states create state equal pay laws. Employers want to ensure that women and men are paid equally.

Beyond gender, a pay audit can help you identify other types of unequal pay at your business, such as pay disparities due to race, religion, disability, etc. Your biases might sneak into your business and affect how you pay your employees.

A pay audit can also help you make sure your workers are paid fairly based on your business’s industry and location.

How to conduct a pay audit

Conducting a pay audit can be a lot of work. But, you can conduct an equal pay audit at your business. Use the following steps to conduct a successful pay equity analysis.

How to Conduct a Pay Audit

Determine the scope

Before you can dive into the data of a pay audit, you need to make some decisions.

Determine who will be involved in your wage analysis. Depending on the size of your business, you might be the only one involved in the audit. If your small business is a little larger, you might involve your HR and finance personnel. You can also hire an outside firm that specializes in doing pay analyses if you don’t want to handle the wage analysis yourself.

You also need to determine what information you will analyze. Based on what you decide to look at, you need to gather the information. You might need to collect information about each employee’s pay, gender, race or ethnicity, job title, hours of work, length of service, education, and performance evaluation results. Gather the most up-to-date and accurate information available.

Conduct the audit

After you’ve made your decisions, it’s time to conduct the audit.

Organize your information so it’s all in one place and easy to read. It might be helpful to list all the same information about employees in a spreadsheet.

Title Sex Age Highest Education Performance Evaluation Score (0-5) Length of service (in years) Average hours worked per week Pay
Cook F 37 High School 5 4.42 35 $13.00 per/hr
Shift Manager M 31 College 4 1.58 40 $16.50 per/hr
Cashier F 17 Some High School 2 0.34 15 $8.75 per/hr
Cook M 28 High School 3 1.16 45 $11.0 per/hr
Cashier M 24 College 4 0.92 20 $9.50 per/hr

During this step of the audit, you should also review your methods for determining employee compensation. How do you decide what to pay your employees? Document this information. Do you use a consistent job evaluation system, such as small business performance reviews? Do you set pay grades or ranges for each position? How do you factor in things like education, seniority, and length of service?

You should also consider how competitive your business’s wages are. Take a look at your industry and how other businesses in it pay their employees. If you can, get information on pay ranges for specific positions.

Check out wages in your local area, too. Consider the cost of living and what other businesses in the area pay. For example, if your business is in a large urban area, you might need to offer higher wages than a business in a rural area.

Review your findings

After you have all the data and it is organized, it’s time to review and analyze it.

Look for differences between your employees and their pay. Document any potential differences you see.

Consider the following questions as you analyze your data:

  • What pay do employees typically receive when they start at your business?
  • Do different positions start at different pay levels?
  • How does negotiation affect wages?
  • How do the wages of new hires compare to people who have been at your business for a while?
  • Do you have a consistent method for awarding raises?
  • Do employees have an equal opportunity for commission pay and bonus pay?
  • How do you determine how much to award in commissions and bonuses?
  • Are there pay differences based on gender, race, age, etc.?

After you identify differences, investigate the causes of the pay differences. Determine why there are differences. Some causes might include:

  • Gender
  • Race
  • Age
  • Length of service
  • Education
  • Experience
  • Performance evaluation scores
  • Job title and duties

Determine if the causes are justified or whether you might need to make changes. Not all causes are bad. In fact, some differences might be justified as long as they are legal and fair. For example, let’s say you have two nearly identical employees, but one has more years of experience than the other. You could likely justify paying more to the employee with more experience.

But, let’s say you have two nearly identical employees, but one is Caucasian and one is Hispanic. You realize that the Caucasian employee has significantly higher wages, despite the employees doing the same work and having similar backgrounds and performance. In this case, you may need to reevaluate your employee’s wages.

Take action

Now that you’ve identified the pay differences and causes, you need to decide what actions you are going to take. You need to eliminate instances of illegal and unfair pay differences.

Adjust any wages that need to be changed. This might include pay raises, or even pay reductions. You might also give bonuses to help make up for pay gaps. You may want to explain to employees why you are adjusting their pay so there isn’t any confusion.

Document what new pay decisions you made and why you made them. Include the date of your decision. It’s good to get into the habit of doing this any time you make a pay decision.

You might also need to create a new system for evaluating employee wages. If this is the case, carefully determine how you will determine employee wages in the future. Document your policy so you can follow it in the future.

Having accurate and clear payroll records will make your pay audit easier. When you use Patriot’s online payroll services, you can quickly and easily run payroll. And, you have access to your payroll records. Start your free trial!

This is not intended as legal advice; for more information, please click here.

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