Key points:
- Pay equity analysis is about the why: a raw gap shows a difference, but an adjusted gap reveals whether your systems or just your role mix created it.
- The hardest part is defining "equal work" – get the comparison right and your analysis holds up legally and analytically; get it wrong and you'll invent a gap or hide a real one.
- Bias lives in the everyday machinery of hiring, promotion, and performance reviews, so unless you redesign those, the gap comes back.
- With regulators watching more closely, platforms like Figures help build equity into everyday pay decisions rather than a once-a-year report.
If you’re serious about paying your employees fairly, a pay equity analysis is the most crucial tool in your belt – you can’t correct inequities if you don’t know they’re there. And with the EU Pay Transparency Directive coming into force in June 2026, it’s now a compliance requirement for many employers, too.
In this article, we’ll take you through the process step by step, so you can go into your analysis feeling prepared and ready to banish pay inequity from your organisation once and for all.
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What is a pay equity analysis?
💡 Pay equity is the idea of paying employees the same if they do the same or substantially similar work. In law, the key concept is ‘equal pay for work of equal value’.
Many factors stand in the way of equal pay, and they’re not all easy to spot at first glance. For example, the way you promote employees or grant pay rises could be biased, even if you’re not aware of it.
A pay equity analysis is a statistical process that allows you to identify inequity in your pay structures by cross-referencing pay with various factors, including gender, age, ethnicity, education, seniority, tenure and performance.
This tells you whether any differences in pay between employees are due to justifiable factors (like better performance or longer tenure) or unjustifiable ones (like the employee’s race or gender).
Internal vs. external pay equity
Before we go any further, we need to define two key concepts: internal equity and external equity.
- External pay equity: This involves comparing your business with the external market to see whether your salaries are in line with industry standards. It ensures your compensation is competitive and helps you to attract and retain talent.
- Internal pay equity: This involves making comparisons between different groups of employees within your business to find out if there are any unjustifiable differences in pay. It allows you to ensure your internal pay practices are not influenced by unconscious bias or discrimination.
In this article, we’re focusing mainly on internal pay equity. But ideally, you should also conduct salary benchmarking to find out whether your salaries are competitive in the wider market – keep reading to the end to find out how we can help with that and more.
Why should you conduct a regular pay equity analysis?
There are many reasons why conducting regular pay equity analysis is important. For example:
- Improves your compensation and benefits structures.
- Demonstrates your commitment to diversity, equity and inclusion.
- Helps you attract and retain top talent.
- Ensures compliance with local or national laws around pay equity.
Most importantly, it’s the right thing to do. Paying some employees less than others simply because of who they are isn’t defensible – and not knowing about it isn’t an excuse.
👉 There’s also a clear regulatory direction of travel. The EU Pay Transparency Directive, which comes into force in June 2026, requires employers across the EU to conduct and report on pay equity analyses. For HR teams in scope, that turns analysis from a best-practice habit into a compliance requirement.
Companies with 100 or more employees face phased reporting obligations, a 5% adjusted pay gap threshold that triggers a joint assessment with worker representatives, and a reversed burden of proof in discrimination cases. If you operate in or hire across the EU, working through the EU Pay Transparency Directive requirements is now part of the job.
How to conduct a pay equity analysis: A step-by-step guide
Ready to conduct your first pay equity analysis? Here are the steps to take:
1. Establish your goals for the analysis
The first step in the process is to determine why you’re doing it in the first place. There are many reasons for conducting a pay equity analysis. For example:
- To eradicate pay inequity in your organisation.
- To update your pay practices and policies.
- To respond to shareholder demand.
- To promote diversity, equity and inclusion.
- To ensure you’re compliant with pay equity laws.
Of course, you may well have more than one goal. But it’s important to pin down your primary objective before you start, as this will shape the process and methodology you use.
2. Get buy-in from key stakeholders
Conducting a pay analysis requires time, people and money – and that’s just for the process itself. If you uncover any pay inequities, you’ll need to adjust pay to correct them. That’s the whole point of the exercise, after all.
That means you’ll definitely need the buy-in of your company’s leadership team and finance leads before you can move forward. To get it, you might need to present them with some of the benefits of conducting an analysis that we outlined above.
Because conducting a pay equity analysis is a complex process, you’ll likely need input from a few different parties. That means you might also need to secure buy-in from finance, payroll, legal, heads of departments and others to make sure they’ll be willing to collaborate with you.
3. Define "work of equal value" for your organisation
Pay equity is all about paying employees the same salary if they do work of equal value. But you can’t always tell this from a job title alone.
To define what counts as comparable work for your organisation, you’ll need to perform a full job analysis for all employees. That means analysing their roles and determining which ones require similar skills, responsibilities and input and involve working under similar conditions.
These four criteria – skills, effort, responsibility, and working conditions – are the standard job evaluation factors required under the EU Pay Transparency Directive and most national pay equity legislation.
For large organisations, you should also consider that employees working in different units or departments might have comparable roles, and group them together accordingly.
⚠️ Also, be sure to look into how the law defines comparable work in your country or jurisdiction to make sure you’re legally compliant.
4. Gather the data you need
The next step is to gather the data you need to conduct your analysis. This usually means extracting it from your HRIS or payroll databases, though you might want to include data from other sources too.
The actual data you’ll need to extract depends on your goals and the scope of your analysis. For example, you might decide to collect the following information for each employee:
- Job title and description
- Job level
- Team and department
- Work location
- Performance rating
- Educational level
- Hours worked (i.e. full-time or part-time)
- Starting salary
- Current salary
- Tenure
- Promotions
- Bonuses and benefits
The more data you collect, the more insights you’ll be able to draw from your analysis.
5. Conduct a statistical pay equity analysis
Once you’ve collected the data, it’s time to analyse it. This is the most important step in the process – and the most complex. The goal is to work out whether pay differences between employees are explained by legitimate factors like seniority and performance, or by characteristics that should have no bearing on pay.
Raw vs. adjusted pay gap: What’s the difference?
A pay equity analysis produces two figures.
✅ The unadjusted (or raw) pay gap is the simple difference in pay between groups. For example, women earning 87p for every £1 men earn across the UK. It’s a useful headline number, but it doesn’t tell you why the gap exists.
✅ The adjusted pay gap controls for legitimate factors like job level, years of experience and performance rating. It answers a narrower question: do employees in comparable roles, with comparable experience, still receive different pay?
The adjusted gap is the number that matters most for compliance and for identifying genuine inequity. The raw gap tells you about the shape of your workforce, while the adjusted gap tells you whether your pay practices are fair. Both are worth reporting, but treat them as answers to different questions.
What statistical method should you use?
💡 The standard method is multiple regression analysis. Regression modelling tests whether protected characteristics – gender, ethnicity, age – predict pay differences once you control for legitimate variables like job level, tenure, performance and location.
Most HR analytics platforms (Figures included) run this automatically against your workforce data. If you’re running the analysis manually, tools like R, Python or Excel can handle a basic regression model. What matters most is documenting which variables you controlled and why, so your methodology stands up to scrutiny. For a deeper technical walkthrough, see our guide to statistical methods for pay equity analysis.
A complementary method is comparative ratio analysis (compa-ratio). This evaluates each individual’s pay against the midpoint of their salary band. A compa-ratio below 0.9 suggests underpayment; above 1.1 suggests overpayment. Running compa-ratios across demographic groups can surface pay equity issues that regression alone may miss – particularly in organisations with defined salary bands.
⚠️ It’s also worth looking beyond single-axis gaps. Intersectionality analysis examines how multiple characteristics compound pay disparities. Black women, for example, may face a larger gap than either black men or white women analysed separately. The EU Pay Transparency Directive covers gender pay gaps specifically, but best practice is to examine pay equity across gender, ethnicity, age and disability status where data is available and can be collected lawfully.
Figures runs this regression analysis automatically across your workforce data – see how Figures handles pay equity.
6. Take action to address inequities
When you’ve finished conducting your analysis, you’ll need to address any discrepancies you’ve found.
Of course, the most obvious solution is to raise the pay of anyone that you think is being compensated unfairly.
But you might also want to look into how your processes could be better adapted to ensure employees are paid fairly in the future. For example, you could readdress your recruitment promotion and compensation review processes to make sure you’re giving equal opportunities to all employees.
Because you already got buy-in from the most important stakeholders in step #1, they should be willing to work with you to correct any inequities and build a more structured compensation policy.
Once you’ve remediated pay gaps, your next priority is monitoring. Use our post-audit pay equity checklist to track progress, capture evidence for reporting cycles, and prepare for the next round of analysis.
What’s next?
Conducting an internal pay equity analysis allows you to spot and correct unfair pay practices that have crept into your organisation – which can have huge benefits for you as a business.
But if you want to attract and retain top talent, you also need to know that the salaries you’re offering are fair and competitive compared to the external market. For that, you need a system that helps you make fair, data-driven compensation decisions every day… and we can help.
💡 Figures is your complete compensation platform. While our market data – built on real data from 1000+ companies across Europe – gives you a competitive edge, our platform makes it easy to structure policies, analyse gaps, and make fair offers.
Want to find out what Figures can do? Book your free demo to get started.
