The Unadjusted vs the Adjusted Pay Gap
When you look at my Pay Transparency Framework, one of the first steps is to measure the pay gap. I recommend that you do this to get a rough idea of how wide the gap is. It’s also a way to introduce your executives to the topics, and ask them to start creating a budget to bridge potential gaps.
The pay gap is one of the most discussed topics in pay transparency, but it’s also widely misunderstood. When you communicate the first results to your leadership team, it’s crucial to distinguish between unadjusted and adjusted pay gaps. These two metrics tell different stories about your organization’s compensation practices, and using them appropriately can make the difference between meaningful action and misguided interventions.
When you have these initial conversations, you are talking about the unadjusted pay gap. You’ve run a report based on existing data. You haven’t yet looked at the explanations that determine if you indeed have a pay gap. I’ve noticed that even experienced compensation professionals sometimes forget to be precise, which can lead to confusion and the wrong remediation strategies. In this article, I’ll break down what these metrics actually mean, how they differ, and why you should understand both perspectives. And from now on, whenever someone talks about the pay gap, remember to ask what you are looking at: unadjusted or adjusted!
Demystifying Unadjusted vs. Adjusted Pay Gaps
What exactly is the unadjusted pay gap?
The unadjusted pay gap (sometimes called the “raw” pay gap) is the simplest measurement of pay differences between groups – typically men and women, though it can be applied to any demographic comparison. Imagine lining up all your employees, calculating the average pay for each demographic group, and comparing them. When the European Union reports that the gender pay gap is 12.7%, they are sharing the unadjusted pay gap: they compare salaries from men and women taken from national statistics institutes.
This metric doesn’t consider any factors that might legitimately explain pay differences, like job level, experience, performance, or location. It’s a straightforward snapshot that tells you the overall economic reality in the EU. Think of it as a starting point – not the whole story, but necessary to calculate before you begin.
How does the adjusted pay gap differ?
The adjusted pay gap is a more “apples-to-apples” comparison by controlling for legitimate factors that influence compensation. After statistically accounting for variables like job role, experience, education, performance ratings, and location, is there still a pay difference between groups? And if so, how large is it? This remaining gap is what we call the “adjusted” or “controlled” pay gap. You typically use a multi-variate analysis to understand which factors contribute to the pay gap.
For example, after adjusting for these factors, you might find that European women earn 6% less than men in equivalent positions (hypothetical, there’s no data on this). And you might say, well, that’s not too bad. But keep in mind that even this smaller number represents unexplained differences in pay, that could indicate bias or systemic inequities in compensation practices. It’s essential to answer: “Are we paying people differently for the same work?” and if the answer is yes, do something about the cause. You could also find that you have a negative pay gap: women earn more than men for doing the same job. The pay gap can go either way, and you can’t let it stand.
Which metric is more important for transparency initiatives?
Neither is more important – they tell different stories that complement each other. The unadjusted gap gives you the big picture of economic inequality in your organization. It might reflect historical practices, hiring patterns, or advancement opportunities rather than direct discrimination. The adjusted gap helps identify potential current discriminatory practices in compensation decisions.
You need both for real transparency. Sharing only the adjusted gap (which is typically smaller) can come across as minimizing real economic disparities. When you solely focus on the unadjusted figure without context, you might inadvertently suggest more pay discrimination than actually exists. The most transparent approach acknowledges both realities and addresses the distinct challenges each represents.
What factors should we include when calculating the adjusted pay gap?
This depends on your compensation philosophy: what do you pay for in your organization? You’ll want to include factors that legitimately explain pay differences, but not those that might reflect bias. Standard factors can include:
- Job level or grade
- Years of relevant experience
- Education level (when relevant to the role)
- Geographic location
- Performance ratings
- Tenure within the company
Not all companies include all of these factors. Some pay people the same salary, regardless of location. Some do not include tenure in their pay rates. It’s up to you to determine what influences pay. And once you’ve decided, those are the variables that you can use to explain the pay gap. The more variables you control for, the smaller your adjusted gap will likely become – sometimes artificially so. As a rule of thumb, only include factors that your organization has explicitly established as legitimate bases for pay differentiation.
How should we communicate these metrics to employees?
Transparency requires context and detailed communication. When you share the pay gaps, spend enough time to explain both metrics and what they mean. A conversational approach might sound like: “When we look at our overall organization, women earn 87% of what men earn on average. This reflects several factors, including differences in representation at various levels. When we compare people in similar roles with similar experience, that gap narrows to 94%, suggesting we have more work to do on both equitable pay practices and advancement opportunities.”
Always pair your data with action plans. If your adjusted gap shows disparities, outline steps to address potentially biased pay decisions. Immediately schedule conversations with the employees who are most affected, and explain the remediation plan to them. If your unadjusted gap is large despite a small adjusted gap, discuss initiatives to improve representation at higher levels and remove barriers that prevent employees from advancing their careers.
Can a company have no adjusted pay gap but still have an unadjusted gap?
Absolutely! In fact, this is quite common. A company might pay equitably within the same roles and levels (small adjusted gap) but still have women or minorities concentrated in lower-paying positions or departments (large unadjusted gap).
Think of a retail organization where store associates are predominantly female and paid equitably compared to male associates, but management and corporate positions are predominantly male and higher-paying. The adjusted gap within each job category might be minimal, but the overall corporate reality still shows significant disparity.
This scenario highlights why addressing only one type of gap isn’t sufficient. Equal pay for equal work (adjusted gap) is essential but doesn’t solve the broader issue of equal opportunity for advancement and representation (unadjusted gap).
How often should we analyze the pay gap?
At a minimum, run a comprehensive analysis on an annual base just before your compensation planning cycle. This allows you to identify trends and measure the impact of your interventions over time. I recommend that you run quick-checks every quarter or after any significant organizational changes like mergers, restructuring, or large-scale hiring initiatives. Adding and/or removing people always changes the balance and thus the pay gap. These interim checks help you catch emerging problems before they become an issue. Pay special attention to how new hires and promotions affect both metrics.
Remember that analysis without action is just data collection. Each review should include specific recommendations and accountability measures to address any gaps identified. The goal isn’t just to measure the gap but to systematically reduce it over time. When you know there is a large pay gap and you do nothing about it, you run the risk of being sued for pay discrimination. You don’t want to be that employer, do you?