There are typically two different types of gender pay gaps. The unadjusted- and the adjusted pay gap. The unadjusted pay gap is the difference between the average salary of women divided by the average salary of men. Unadjusted pay gaps only consider gender and ignore other factors that could explain the salary. That’s where the adjusted pay gap comes in. It considers the pay factors you have selected in your pay philosophy to explain parts of your unadjusted pay gap. What can’t be explained is the adjusted pay gap.

We calculate your adjusted pay gap via a method called Blinder-Oaxaca decomposition. It’s a statistical method based on regression analysis to determine differences within groups.

We’ll explain how the method works by looking at an example where we check a group’s performance, look at the graph below for clarification. The method starts by doing a regression analysis for men and women. We’ll use the average performance of men (pm) and women (pw) to determine three different salaries. First, we’ll calculate the women’s salary for their average performance (sw). Secondly, we’ll calculate men’s salary for women’s average performance (smw). Lastly, we’ll calculate men’s salary for men’s average performance (sm). From here we check the difference between the values to determine what can be explained and what’s unexplained. Explained is the difference between sm and smw. Unexplained is the difference between smw and sw.

This example only used one variable, the principle remains the same for multiple variables but is harder to visualize.

As briefly mentioned earlier, the adjusted pay gap is based on your pay factors. These will be selected in your pay philosophy and should be based on what you as an organization think should affect salaries.

Adjusted pay gap is useful for explaining large parts of your pay gap but it ignores the gender distribution in higher and lower paid positions. Unadjusted considers this so it’s wise to check both pay gaps. A low adjusted pay gap but high unadjusted means that while your salaries might be fair within each work, how you recruit and promote might be problematic.