Woman looking at screens with reports

Pay Transparency: Why a Report is Not Enough

While I was at a recent HR tech conference, I noticed that HCM vendors are starting to include pay transparency reports in their offering. And that’s great because it makes it easier for organizations to understand their current position. These reports show you the numbers, highlight existing pay gaps, and give you charts to share with stakeholders. They help you create the documents to submit your mandatory reporting. But here’s the problem: while you need these reports, they only tell you half the story.

While these reports highlight the pay gap, they don’t explain the underlying issues or what actions you should take to address them. And when your pay gap is larger than 5%, you are legally required to take action. But where do you begin?

What’s missing from these reports?

What’s missing? The “why” and the “how.” When the report shows a 15% pay gap between different employees in your organization, that number doesn’t tell you if it’s because of biased promotion practices, inequitable starting salaries, or different negotiation outcomes. Also, it shows you the unadjusted pay gap. The report doesn’t tell you where the gap came from or what factors contributed to it.

What makes it even more complex is that pay gaps are often caused by a combination of factors. You can’t just look at the pay gap and spot its origin. Pay gaps can also develop over several years. Career decisions play into the pay gap, as do hiring and promotion practices. A report can’t show you that. And if you don’t know the root cause of the pay gaps, you can’t put any measures in place to prevent them from happening again.

How do I get a handle on the root cause?

This is where you need to work with a data scientist and perform what we call a “decomposition analysis.” Start by breaking down your pay data into smaller pieces. Look at it by department, job level, tenure, and performance ratings. Then you examine each component separately. For example, you might find that in your sales department, the gap is mainly driven by commission structures, while in engineering, it’s more about starting salaries. Collaborate with your HR and analytics teams to identify patterns and outliers, so you can report the adjusted pay gap. The adjusted pay gap is what you need to officially report on.

The key here is to use statistical analysis (e.g. multi-variate regression analysis) to isolate these factors and determine their relative impact on the overall gap. You might also want to conduct interviews or surveys to gather qualitative insights. Only then can you figure out the root causes and prioritize which issues you need to tackle first.

Depending on your pay policies, this analysis can become complex very quickly. Fortunately, there are pay equity solutions on the market that can help: they take your pay and compensation data, analyze it, and show you exactly (down to the employee level) what caused the pay gap and how you can remedy it. These solutions break down the gap in several factors (demographics, age, background, experience etc) and point out which one(s) contributed to the pay gap.

Do I really need to invest in a solution?

A solution is not mandatory, but I recommend that you at least consider it: ultimately it might save you money. If you only look at the unadjusted pay gap, and start remedying that, there is a high chance you are paying more than you should. For the simple reason that the unadjusted gap is typically larger than the adjusted gap. In other words, once you account for the factors that played a role into determining pay and compensation (e.g. difference in experience or education) the pay gap usually becomes smaller. Maybe it even gets under 5%, meaning you legally don’t have to remedy it (although ethically it might be a different answer).

Only when you have those answers can you create a plan to address the issues—whether that’s revising hiring practices, offering leadership training about rewarding, or rethinking your salary structures. If you don’t, your pay transparency report will continue to show a pay gap, and you will have to remediate this gap every time the report is published. That’s not a great look for an employer.

How can we go beyond reports to establish pay equity?

You should use the report as a springboard. When you see a gap, dig deeper. Conduct internal audits to uncover patterns. You can also engage employees in focus groups or surveys to understand their experiences. And don’t stop there—translate those insights into policies and practices. For example, if you discover a lack of a certain demographic in leadership roles, implement mentorship programs or revise your promotion criteria. Don’t forget to communicate what you’re doing. Transparency is also about keeping employees informed about the steps you’re taking and the progress you’re making. It counts towards becoming and remaining an employer of choice.

You don’t solve pay gaps with reports alone. Pay transparency requires a change in behavior: from hiring to promoting to rewarding. A report is a good start, but it’s what you do next that makes the difference.