South Africa · Pay equity

Pay gap analysis: method, legal frame and correction cost

Income differential reporting turns pay equity into a numbers exercise with legal consequences. This guide covers how to structure the analysis so the result is defensible: the right comparison unit, adjusted versus unadjusted gaps, compression and inversion, and how to cost a correction plan the business can actually fund.

1. Choose the comparison unit first

A gap number means nothing without the unit it was measured in. Organisation-wide averages mostly measure who works where. Pay equity lives inside the grade: same grade, same job family, same location band. Start there, then aggregate upward for reporting.

2. Run both the unadjusted and the adjusted gap

Unadjusted gap — raw median or mean difference between groups. This is the headline number and the one most often quoted externally.
Adjusted gap — the difference remaining after controlling for grade, role, tenure, location and performance rating. This is the number that speaks to equal pay for work of equal value.
Report both. A small adjusted gap with a large raw gap is a representation story; a large adjusted gap is a pay decision story.

3. Look for compression and inversion

Two structural faults distort almost every long-running payroll. Compression is when the pay difference between adjacent grades shrinks until promotion carries no real reward. Inversion is when a new hire earns more than a longer-serving incumbent doing the same work — usually because the market moved and internal increases did not. Both are legitimate findings even where no discrimination exists, and both cost retention.

4. Justify or correct — and write it down

Rational, non-discriminatory grounds include seniority and length of service, qualifications, demonstrated performance, scarcity of the skill, and a documented red-circle arrangement after a restructure.
Anything you cannot evidence at the time of the decision is unlikely to survive scrutiny later.
Where the gap cannot be justified, produce a costed correction plan with a date, not an intention.

5. Cost the correction properly

The rand gap is only part of it. Add the employer on-costs that ride on every adjustment — retirement contributions, SDL, and UIF where the employee is below the ceiling — and phase the correction across cycles so the annual budget absorbs it. Then re-run the diagnostic after the cycle to confirm the gap actually closed.

Frequently asked questions

What is the difference between an adjusted and an unadjusted pay gap?

The unadjusted (raw) gap compares average or median pay between two groups with no controls. The adjusted gap compares pay after controlling for job grade, role, tenure, location and performance. The raw gap describes representation; the adjusted gap isolates pay for like work, which is the measure the Employment Equity Act's equal pay for work of equal value principle speaks to.

What does South African law require on pay differentials?

Section 27 of the Employment Equity Act requires designated employers to report income differentials to the Employment Conditions Commission, and section 6(4) prohibits unfair discrimination in terms and conditions between employees doing the same work, substantially the same work, or work of equal value. Differences must be justified on rational, non-discriminatory grounds such as seniority, performance, qualifications or scarcity.

How do I know a pay gap is a problem rather than a structure?

Run the analysis at grade or job-family level, not across the whole payroll. A large organisation-wide gap driven by occupational representation is a workforce-profile issue; a gap that persists inside the same grade and role, after controlling for tenure and performance, is a pay equity issue that needs a documented justification or a correction plan.

What does it cost to close a pay gap?

Correction cost is the sum of the adjustments needed to bring under-paid incumbents to the defensible position for their grade, plus the employer on-costs (retirement, UIF where uncapped, SDL). Most employers phase this over one or two increase cycles and stop new hires entering below the band while the correction runs.

Diagnose your own payroll

The NPS equity module runs adjusted and unadjusted gap analysis, flags compression and inversion inside each grade, and estimates the rand cost of correcting the gap — in the browser, on your own data.

Open the NPS equity diagnostic