Is There Hidden Liability in Your Compensation System? Identifying and Eliminating Pay Inequity

Webinar Objectives 1.Create a pay analysis project plan 2.Understand basic statistical concepts 3.Recognize the steps of a thorough pay analysis 4.Plan for salary equity adjustments

Equal Pay in the US Workforce Reputation – Negative PR Employer of Choice – Retention – Recruitment Potential Corporate Liability – Fair Labor Standards Act – Equal Pay Act of 1963 – Title VII of the Civil Rights Act of 1964 – Executive Orders and 11375

Suggested Project Plan  Get buy in from key decision makers  Obtain attorney client privilege Collect data Conduct pay equity analyses Make adjustments Establish and maintain equity Plan for the future

Get Buy-In Notify and get approval from key decision makers Finance Department Managers Executives Legal HR Other process facilitators

Obtain Attorney- Client Privilege Protects your analysis from discovery by a plaintiff’s attorney Privilege will apply when all of the following elements are asserted: A communication Made in confidence To an attorney By a client For the purpose of seeking or obtaining legal advice Privilege and outside consultants

Suggested Project Plan Get buy in from key decision makers Obtain attorney client privilege  Collect data Conduct pay equity analyses Make adjustments Establish and Maintain Equity Plan for the future

Collect Data How will the analysis be structured? What will be the level of analysis? What data do we have in our system? What variables are most relevant? How will other data be collected?

Basic Data to Get Started Employee ID Employee name Gender Race Age Annualized base salary Grade Job title Date of hire FT/PT status Location Other compensation

Legitimate Factors Influencing Pay Time in company Time in grade Time in job Performance ratings Education level Field of expertise or study Starting Salary Years of relevant experience Certifications Market data Promotion history Geographic location

Suggested Project Plan Get buy in from key decision makers Obtain attorney client privilege Collect data  Conduct pay equity analyses Make adjustments Establish and maintain equity Plan for the future

Conduct Pay Equity Analyses Preliminary AnalysisCohort AnalysisMultiple Regression AnalysisStatistical Cohort Analysis

Preliminary Analysis t-test Large groups at least 30 employees with 5 in each comparator group Applied to mean Significant at 2.0 or greater Fisher’s Exact Test Small groups fewer than 30 employees with 3 in each comparator group Applied to median Significant at or less

Significance Levels Defined Variation is expected with any dataset Use significance testing to determine if variance is within an acceptable range 95% confidence level – 95% attributable to chance – 5% not attributable to chance

Standard Deviation 1 SD 2 SD Probability difference occurred by chance 68.27% 95.45% 2.5%

Standard Deviation with Variance Little VarianceLots of Variance 2 SD

Salary Variance $35,000 $33,000$37,000 1 SD = $1000 $33,500 2 SD = $2000

Cohort Analysis A visual comparison of salaries for employees in the same group (i.e. job title) to help determine if there are pay equity issues and, if so, the reasons for variance in pay Non-statistical review of non-discriminatory factors that are likely to explain differences in pay

Cohort Analysis

Multiple Regression Analysis A statistical analysis to identify the percentage of pay variance explained by and significance of merit variables Analyzes the impact of a combination of multiple factors, as well as the protected predictor, on pay

Multiple Regression Analysis

Predicted vs. Actual Salary

Statistical Cohort Analysis Determine expected compensation Compare actual to expected salary Determine probability that difference occurred by chance Determine “corrected” salary

Statistical Cohort Analysis

Suggested Project Plan Get buy in from key decision makers Obtain attorney client privilege Collect data Conduct pay equity analyses  Make adjustments Establish and maintain equity Plan for the future

Planning and Budgeting for Adjustments Calculate total annual impact – Underpaid or overpaid – Annual salary increases – Red-circle savings Review / re-negotiate budget Differentiate “equity” increase from “merit” increase Consider the timing – With normal pay increase – Outside normal pay schedule

Communicating Increases “We routinely review our compensation programs to make sure we are internally and externally competitive. From time to time we may determine that an increase is appropriate to maintain a competitive and fair compensation system.”

Communicating Red-Circles “We routinely review our compensation programs to make sure we are internally and externally competitive. From time to time we may determine that a salary is adequate for the role and responsibilities of the job and does not need to be increased.”

Compensating Red-Circles Offer other options for increasing salary through additional responsibilities, promotion or bonus Differentiate red-circle decision from performance Are you prepared to lose the person?

Suggested Project Plan Get buy in from key decision makers Obtain attorney client privilege Collect data Conduct pay equity analyses Make adjustments  Establish and maintain equity Plan for the future

Establish and Maintain Equity Establish value – Define three to ten factors that impact pay for each position (for example, time in company, market rate for job, performance) – Assign a value to each compensable factor, e.g. education may be very important for some jobs, less important for others, or not relevant at all Group jobs into grades or bands – Group jobs with similar compensable factors and values of those factors

Calculate Base Pay

Suggested Project Plan Get buy in from key decision makers Obtain attorney client privilege Collect data Conduct pay equity analyses Make adjustments Establish and maintain equity  Plan for the future

Plan for the Future Review salaries regularly to mitigate future inequities Analyze decisions related to compensation: – performance ratings – merit increases – promotions – starting salary Start tracking data that is not in HRIS – prior years relevant experience – field of study Develop process for avoiding red-circles – before someone is at 1.5 compa-ratio

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