Examining Compensation Practices? 5 Questions to Get Started

Are you statistically examining your compensation practices? If not, you should be, because someone else will. And that someone else just might be the Federal Government.

Compensation, and gender pay equity in particular, is a top priority for the current administration. Last year, the National Equal Pay Enforcement Task Force was formed to study the issue of internal pay equity. This inter-agency task force consists of members from the EEOC, the Office of Personnel Management, the Department of Labor, and the Department of Justice.

From championing the Paycheck Fairness Act to recommending rescission of the OFCCP’s Compensation Standards and Guidelines to working toward greater interagency cooperation in enforcing laws prohibiting pay discrimination, the Task Force has been busy. One of their newer initiatives is the the collection of compensation data by demographic characteristics from private sector employees.

There are still some unanswered questions about this data collection: what the collection tool looks like, how the information will be analyzed, whether the information will be made available to the public, etc. But one thing is certain – the data collected will be studied statistically.

It’s important to know what story can be told by your data. The best way to find out is to statistically examine it. Not only will this help you prepare for what the government may find when they analyze your data, it will provide you with an opportunity to identify potential problem areas, and give you a chance to take corrective action where appropriate.

A full-scale compensation self audit is a lengthy and involved process. It can also be a scary process – it could expose potential vulnerabilities you woulod rather not know about. But being armed with this information will not only help you minimize regulatory problems and employment litigation, it can increase productivity and contribute to a better bottom line.

Here are five questions to get you started thinking about your compensation practices:

1. Is our compensation policy based on consistent and measurable factors?

Pay decisions should be based on a set of consistent and well-articulated factors. It should be clear to anyone reviewing the compensation policy what factors and metrics are used in the decisions. While there is room for some discretion, too much discretion invites the potential for discrimination, whether intentional or not.

2. Do we maintain compensation decision documentation?

Compensation decision documentation is more than just time sheets and pay stubs. Salaries and pay increases are (or should be) based on legitimate reasons that can be documented. If you’re using industry statistics, salary surveys, or other benchmarking information, copies of these surveys and statistics should be maintained. Performance metrics, copies of signed performance evaluations, and other performance-related information should also be maintained. It’s critical to create and retain a record of how specific pay figures were determined.

3. Do we provide compensation "extras" fairly?

Many employers are providing compensation "extras" to help their employees with work/ life balance. Flexible schedules, telecommuting opportunities, flex time and other "extras" should be offered equitably to employees.

4. How should our employees be grouped for comparison purposes?

Grouping employees is really the key to the whole self evaluation process. Unfortunately, there isn’t much guidance available. In my experience, the most logical way to group employees is by using similarly situated employee groupings. Employees are considered to be similarly situated if they have similar levels of responsibility within the organziation and have positions that require similar skills and abilities. Employee groupings should be constructed carefully and thoughtfully. Not only will the groupings serve as the foundation of the self evaluation, they memorialize the company’s view of which employees are similar to each other. This could prove to be critical in the event of a regulatory investigation or litigation.

5. Are similar employees paid similarly?

This is the launch point into the compensation self-audit. In most cases, you’ll use statistics to answer this question. Without getting too deep into a very complex process, the central question is whether there are legitimate reasons for pay differences among similar employees. Some common reasons include company seniority, time in job or time in grade, certifications and licenses, and relevant prior experience. Pay differences aren’t necessarily problematic if they can be explained by legitimate non-discriminatory factors.

These five questions are a jumping-off point for a comprehensive compensation self audit, not a replacement. They’ll get you started thinking about your compensation policies, and help you identify what information and data will be needed for a full scale self audit. Now is the time to think about what story your compensation data tells – find out what it is before the regulatory agencies do!