Compensation equity is an important part of attracting, developing and retaining a qualified and diverse workforce. Companies can review their compensation practices and address differences before pay equity issues lead to important team member loss.
In addition to being important for workforce diversity and retention, staying on top of employee pay has become more important as a legal and regulatory process. The Lilly Ledbetter Fair Pay Act passed in January 2009 and increased the Equal Employment Opportunity Commission’s focus on systemic discrimination and increased the Office of Federal Contract Compliance Programs’ attention on pay equity in the workplace.
Examining Organizational Pay Practices
Effective pay equity studies involve a number of important considerations. There are two common reasons why companies study their pay practices. First, companies audit to understand and address potential areas of risk and mitigate the potential for costly litigation. Knowing where group pay differences are prepares the company in case of an investigation. The necessary level of preparation means having the data available or knowing how to gather the data in the event of an audit by a government agency or as part of discovery.
Second, companies may examine their pay for business purposes. Through a self-audit of pay, a company can make sure actual pay across all organizations and locations aligns with its compensation philosophy around pay-for-performance, paying competitively relative to market and rewarding employees with more responsibility. A pay audit provides a company with insight into whether, for instance, employees performing similar levels and types of work with similar performance and experience are paid comparably.
When companies undertake a pay equity review, they typically engage legal counsel to provide guidance and advice throughout the process. Engaging counsel allows for a privileged review of sensitive compensation issues that may arise during the course of the review. The expert who conducts the pay equity review is typically engaged through legal counsel. Company compensation professionals, who are critical to the pay equity review process, should use caution when conducting pay equity reviews without the input and guidance of counsel, as those reviews may be subject to discovery in litigation. Even when pay equity reviews are conducted through counsel, the dissemination of findings should be limited to employees who are a part of the review process and to key employees who will provide input into what can and will be done with the pay review findings.
It’s All About the Data
Gathering the appropriate data is critical to any examination of pay. In addition to employee compensation, it is important to identify and collect relevant employment information about employees.
The data collected forms the basis for the pay analysis. The key to an appropriate pay review is to compare employees in similar positions and to account for differences in skills and abilities that affect pay. Generally, the information used to understand pay differences can be divided into two broad categories.
First, there are factors that represent where in the organization an employee works. These are typically captured by the company or sub-company, division or department and location.
Organization is important because pay varies across different parts of a company and lines of business, often reflecting the relative productivity or profitability of those areas. It is also important that a pay review align with the organizational structure, as budgets — including compensation — are also based on the organizational structure.
Location reflects the impact of local labor markets on compensation. For example, one might expect an employee working in New York City to be paid more than one working in Mobile, Ala., even within the same organizational structure. When it comes to the labor market’s role, however, not all employees are alike — the level of the employee within the company can matter.
For example, an executive’s pay may be less affected by local labor market conditions because executives compete in a national labor market, while a non-exempt employee’s wages may be strongly tied to local labor market conditions. Thus, both location and an employee’s level within the company should be considered in a pay study to account for differences in market opportunities.
The second category of data necessary for a pay study is information specific to the employee. Employees perform different roles within a company, and because those roles differ in value, pay differs from employee to employee. Work differences are usually captured by measures such as job title or function.
Even in the same job, employees will have different levels of skills and experience. To account for these differences, employee history data can be used to measure time with the company, time in job or grade, age at hire as a proxy for potential prior work experience, and education and training.
The measures of organization, job and experience that end up being used in a pay study will vary by company, depending upon the employer specifics and the information available.
Analyzing the Data
With the necessary data identified and collected, the next step is analyzing pay considering account-specific, relevant information. There are a number of potential analyses that can occur during a pay review, from broad overviews of the pay differences within the company’s workforce to detailed analyses of the pay differences within specific sub-organizations of the company. In any of these analyses, the pay for protected employee groups is compared to that for non-protected employees. A company-wide analysis provides an overview of pay differences, but it is important to go beyond this level to understand critical patterns. Following a broad study of pay differences, additional analyses can drill down to finer levels — specific geographic areas, sub-organizations, job functions or job levels such as grades or bands within the organization. These more detailed analyses are useful to pinpoint where within the company any enterprise-wide observed differences may come from.
Drilling down to the employee level can be useful, such as identifying specific individuals who are paid more or less than predicted by the statistical model. By reviewing the pay for employees who are paid more or less than the prediction from the statistical model, the organization can identify important characteristics that have not been accounted for or are missing. If that information is readily available in the data, the model can be refined and group differences in pay better explained.
When differences in average pay between groups are found, there is no simple, right answer or fix, but an employer has options. Some companies choose not to make any changes based on pay study findings. For these companies, the risks of losing valued employees or facing legal action might be deemed low relative to the costs of making changes to pay and policies.
Some companies choose to make managers aware that pay is being studied, and some share results of the pay study with managers. Often monitoring and awareness by those responsible for determining employee pay can lead to decisions that are more attuned to broader pay differences. By providing visibility, managers become aware of how their incremental decisions impact pay relationships among a broader group of employees. Knowing that their decisions are being reviewed in this broader context also can affect the decision-making process. For example, the head of a sales group might seek more information about the employees’ pay relative to peers within the sales division.
Some companies choose to make adjustments to select employees’ compensation. Companies that take this approach find it important to implement rules for adjustments that take into account the employees’ skills and abilities and that conform to the company’s compensation philosophy. They pay close attention to where each salary is relative to their compensation grade ranges, and most companies will implement rules that prevent employees with poor performance ratings from receiving pay adjustments. Companies are also attentive to other aspects of their compensation guidelines, such as pay ranges for bands and maximum increase amounts during the salary review process.
Any proposed adjustments should be carefully reviewed by those who are familiar with company compensation policies and the pay and performance of employees being considered for adjustment — typically those who manage pay, talent managers and legal counsel. For smaller companies, this is a more straightforward task and, in some cases, each adjustment is based on individual review. For large companies, the task is more time consuming unless the process is limited to specific parts of the company. Regardless of how adjustments are determined, all companies should pay close attention to how they are implemented and how communications regarding the adjustments are delivered to employees.
The following strategies may be employed to make effective compensation adjustments:
• Review the proposed adjustments carefully to make sure that inappropriate business decisions are not being made. For example, companies should not provide a pay adjustment to an employee who is about to be terminated for performance.
• Make changes as part of an annual compensation review process or job reclassification. Out-of-cycle adjustments may draw attention to the compensation review and increase litigation risks for the firm.
• Develop a communication strategy for managers so they can partner in the process. Explain the adjustments to managers providing pay change information to employees. Without their buy-in, the pay adjustments may be undone during the subsequent merit review cycle.
Ongoing Compensation Reviews
The workplace is often a dynamic environment, with hires, promotions and terminations occurring regularly. Once a company has invested resources in reviewing and possibly adjusting employee compensation, maintaining pay equity can be achieved by monitoring pay decisions going forward.
There are three primary employment decisions that determine employees’ relative salary relationships and account for the majority of salary adjustments: starting salary, merit increases and promotional increases. Employers can manage the risk of pay differences recurring after adjustments have been made by monitoring these decision-making processes regularly:
Starting salary: Employers can develop tools to monitor starting salary decisions and provide guidance to managers about salary ranges. Employers may want to document exceptions to the starting salary guidance so that information can be used to explain starting salary decisions.
Merit increases: As with starting salaries, employers can develop tools to monitor and review merit increases during annual salary planning processes. These tools, which can be relatively simple, are effective at assessing whether the merit increase process adversely impacts a protected group.
Promotional increases: Monitoring promotional increases is more difficult than monitoring starting salary or merit increases because the events are typically more complex and occur less frequently. The promotional pay increases employees receive often depend on both the position to which they are promoted and their prior position. While monitoring may be more difficult, employers can develop guidance.
There is much for a company to consider when conducting a pay study, but the need to attract, develop and retain a qualified and diverse workforce makes staying on top of compensation issues an important, ongoing endeavor.
The number of employment discrimination charges received by the EEOC increased from 75,768 in 2006 to 99,947 in 2011 — the highest level in the agency’s 46-year history. They secured more than $364 million in settlements in 2011, an increase of more than $45 million from the previous year
Source: EEOC Performance and Accountability Report, FY 2011.
David Lamoreaux is co-head of the labor and employment practice at global consulting firm Charles River Associates. Wayne Strayer is also a member of the firm’s labor and employment practice. They can be reached at firstname.lastname@example.org.
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