Workplace

Pay audits catch your salary mistakes. Here's how to conduct one.

It’s not unlawful to pay people differently. You just have to be able to justify the difference.

 A magnifying glass examining pay

Pay audits reveal the truth about how you’re paying employees.

Illustration: Christopher T. Fong/Protocol

This story is part of our Salary Series, where we take a deep dive into the world of pay: how it's set, how it's changing and what's next. Read the rest of the series.

In 2015, Marc Benioff famously signed off on a salary review of every employee at Salesforce on the urging of then-Chief People Officer Cindy Robbins and another senior woman executive, Leyla Seka. They suspected that women employees at the company were being paid less than men for the same work.

He wrote about the experience candidly in his book, “Trailblazer: The Power of Business as the Greatest Platform for Change,” and agreed to the pay audit, as well as to rectifying any gaps discovered … if the audit turned up any.

To Benioff’s horror, the auditors found that 6% of the 17,000 employees at Salesforce would need their salaries adjusted upward. Most of them were women. The total cost of those adjustments: $3 million.

One year later, Salesforce ran another audit. Astonishingly, it uncovered another $3 million in pay gaps. That was when Benioff and his team decided to implement a new set of standards guiding everything from merit increases and bonuses to stock grants and promotions to “root out disparities” once and for all.

Salesforce’s lesson can be applied to every tech company, large and small. But the actual ins and outs of conducting a pay audit and, most importantly, doing it in a way that actually tackles pay inequity at its root can be complicated. Protocol spoke to compensation and HR experts about what to do — and not to do.

To start with, even the word “audit” could be reframed, according to Maria Colacurcio, CEO of pay equity software maker Syndio. It implies a “one-time checkup,” or a “nice green compliance checkmark.” Instead, a better way to think about pay audits is to embed them into the company’s pay practices to better prevent the root causes of inequity, she said.

Figure out why you’re conducting an audit

Despite the cost of correcting disparities, “now is the cheapest time to solve this because the remediation compounds over time,” Colacurcio said. According to research from Gartner, the cost of existing role-to-role pay gaps can grow by as much as $500,000 a year for a typical large company.

Plus, as tech workers are increasingly emboldened to disclose their salaries to each other, it’s getting harder for companies to keep potential pay gaps from becoming public knowledge.

Workhuman, an HR software company, recently conducted its own internal pay audit, and the experience was “eye-opening,” according to Chief Legal Officer Lauren Zajac. Part of the impetus for the audit was the recently enacted Massachusetts Equal Pay Act, but Zajac believes that even companies in states without this sort of legislation could benefit from salary reviews: “The world of attracting and hiring is shifting,” she said, and companies that do this can tout it as an example of their own transparency and commitment to equity.

Experts caution that audits typically make more sense for larger companies. Fewer than 500 employees, and you’ll start to lack statistical significance, according to Kaitlyn Knopp, CEO and co-founder of Pequity, a compensation software company.

Group your employees

Compensation experts agree that the first step to conducting a successful pay audit is to group your employees into buckets based on the work that they do.

Colacurcio warned that one way companies can “gerrymander” this step is by making the groups so small that “everybody is a special snowflake.” Say there are 30 SVPs at a company, but auditors decide that “Craig isn’t doing the same thing as Susan,” so he is separated out from the group and thus excluded from the pay analysis. Manipulating the data that way can be a surefire path to reinforcing pay inequity.

Analyze the data across groups

Companies usually start by analyzing salaries against the market at large: Are they paying competitively, and do they have outliers? Then they turn the gaze internally: Are people being paid the same for the same job? If there are differences in pay, can they be reasonably explained by factors like location, experience or performance? Does the outlier employee have a patent or a Ph.D., for example?

For many companies, it’s traditionally common practice to examine pay equity along gender lines. Before the murder of George Floyd in May 2020, only 50% of Syndio customers analyzed race. According to the company, 98% now analyze gender and race. Other factors to consider include sexual orientation, gender identity and disability status. Of course, to be able to do so requires that companies ask employees to report this data, and it also requires that employees actually do the self-reporting.

Identify moments where bias enters

According to compensation experts, one of the biggest pitfalls when it comes to pay inequity is starting pay — specifically, when companies find themselves paying individuals above prevailing rates in order to get them in the door.

That kind of maneuver is “lazy” and sets up “extraordinary challenges down the road,” according to David Buckmaster, author of “Fair Pay: How to Get a Raise, Close the Wage Gap, and Build Stronger Businesses.” He recommends that companies instead use a one-time cash reward, which is a good compromise that can help get that person on board without creating inequity down the line.

Another way of tackling disparities in starting pay? Consider a no-negotiation offer philosophy, said Knopp. Refusing to make concessions even when a potential hire is getting a larger offer elsewhere is hard, but it’s a good pay equity practice.

Merit raises can also be a huge opportunity for bias to enter into pay decisions, according to Buckmaster. If John is paid more than Suzy because he received a 5 rating and she got a 3, was that performance rating calibrated properly, or was their manager biased?

Performance scores may seem fair on the surface, but in a lot of places, women don’t move up as quickly as men, explained Knopp. Likewise, men are more likely to ask for retention bonuses, which can also result in pay inequities in the long term.

Ultimately, companies should expect to find disparities no matter how committed they are to equity, according to Leanne Langer, vice president of Customer Success and Community at OpenComp, a compensation software firm. Pay disparities are common because compensation data is always changing, from the moment a new hire is brought in to when that person leaves the company. Analyzing and interrogating compensation practices should be a process of “constant evolution and adaptation,” she said.

Educate your managers

Pay transparency is key to combating inequity, according to Knopp. Train your managers on ranges for their team, as well as how those pay bands compare to the larger population of the company. It’s rare that pay disparities are intentional. Rather, it’s usually “stacks of paper cuts and micro-biases that result in something egregious,” she said. Likewise, keep your employees informed with a total rewards portal, so that they know where they stand as well.

If you find a pay disparity, don’t hide it

Company leaders have two options before them when it comes to communicating pay disparities to employees: The first is to hide them, and the second is to be honest about the audit and its discoveries. Although the latter may seem frightening because leaders are “scared of being sued,” Colacurcio believes that employees trust their employers more when they come out in front of their mistakes.

Knopp recommends framing the remediation as a “market adjustment” if it’s under $5,000. If it’s a huge discrepancy, it’s better to “rip the Band-Aid off.”

Beware of stock inequities

Experts agree that one of the hardest things to fix when it comes to pay disparities is equity compensation. These disparities are tricky because “there’s no crystal ball,” and you can’t predict the value of the equity in the future, Langer said.

The best route is to set strict guidelines around how to award stock in the first place with low flexibility, an eligibility threshold and standards for different lifecycle events, said Buckmaster.

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