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Look beyond statistics to truly understand pay gaps

What’s best? Raw v. adjusted pay? Average v. median? We sort it out

Compensation Strategy & Design|Employee Engagement |Health and Benefits|Inclusion and Diversity|Talent|Total Rewards
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By Mariann Madden | July 9, 2021

With no mandated approach or methodology, communicating pay gaps in your workforce requires an understanding of the finer details.

More U.S.-based companies are communicating their pay gaps, and the pressure to report gender and racial pay gaps is mounting. However, because there is no mandated approach or standard methodology, it is important to look beyond the statistics that companies publish and understand what organizations are voluntarily disclosing.

Raw vs. adjusted pay gap

First, let’s review the terms you may have read when reviewing pay-gap disclosures on a company’s website:

Raw pay gap

Compares the pay of men and women or white and minority groups in an organization and highlights the distribution of the population in the higher-earning roles. This measure or calculation is a popular statistic because of reporting requirements under the U.K.’s Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 and increasing shareholder expectations of more environmental, social and governance disclosures.

Adjusted pay gap

Narrows the comparisons of men and women or white and minority groups by reflecting influences or drivers of pay such as job, job level, education, experience, location, performance and so on.

Keep in mind that pay gaps are more a result of gender and minority representation at different pay levels rather than differences in pay at the same job. These gaps also can illustrate the differences in pay of men and women or white and minority groups across certain job categories, industries or job levels, for example, in management roles.

Essentially, when you see an adjusted pay gap, it means the company took the results from its multivariate regression model to calculate it. Generally, the adjusted pay gap is less than the raw pay gap. However, the Economic Policy Institute warns in its article, “What is the gender pay gap and is it real?,” that “while multivariate regression can be used to distill the role of discrimination in the narrowest sense, it cannot capture how discrimination affects differences in opportunity.”

The adjusted pay gap has become a popular means for U.S.-based companies to communicate their pay gap — but often at the expense of appearing to hide their gaps. In conducting a simple Google search of one global company, there are four different ways that the organization is reporting its pay gap statistics. This can be confusing, so it is important to read the description and footnotes associated with the statistics carefully to understand if the organization is sharing its raw or adjust pay gap as well as if the statistics represents the entire employee population or a subset of the population (e.g., country specific, salaried only, excluded executives, etc.).

Average vs. median pay gap

Overwhelmingly, the median pay gap is disclosed to or required by governments and shareholders focused on ESG issues. However, only looking at the median can dilute the pay gap, especially in companies that have large populations of lower-level jobs (e.g., restaurant, retail, manufacturing). In these organizations, the median is heavily influenced by those lower-level and lower-paid jobs.

Consider the example of a large global restaurant chain that has a small percentage of employees in corporate roles and more than 95% of employees are restaurant workers. Not surprisingly, in reviewing its most recent U.K. Gender Pay Gap report, the median base pay gap is much more favorable than the average pay gap:

Hourly wages pay gap

Women earn £1 for every £1 that men earn when comparing median hourly wages. Their median hourly wage is 0% lower than men’s. When comparing mean hourly wages, women’s mean hourly wage is 4% lower than men’s.

Bonus pay gap

Women earn 93p for every £1 that men earn when comparing median bonus pay. Their median bonus pay is 7% lower than men’s. When comparing mean bonus pay, women’s mean bonus pay is 64% lower than men’s.

Remember to not unconsciously share a mix of raw and adjusted pay statistics or median and mean values in your communications. If anything, communicate both and outline why understanding these statistics is important to your organization. Your goal isn’t to explain away your pay gaps; it’s to connect how you will make impactful changes within your talent and reward programs and policies to create a more inclusive culture where underrepresented groups can thrive and grow.

Author

Director, Talent and Rewards

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