The Future of Pay Equity: A Webinar with Craig Leen and Thomas J. Carnahan

What are the top trends emerging in the Pay Equity Space?



Posted by Berkshire on March 16 2022
Berkshire

What are the top trends emerging in the Pay Equity Space?

  • The focus on equity is higher than ever: This is because it is critical to employees, and therefore, companies are seeking to investigate and proactively manage it. This is also partially due to continued social movements and because this is an area of potentially high liability.
  • Intersectionality: Traditional pay equity focused on minority vs. non-minority, or simply looking at one demographic group vs. another (e.g., White vs. Black). Compensation analysis continues to develop more standard and mature processes/procedures and as a result, it is becoming more important to not just review the relationship of gender or race but to also review the impact of gender AND race on pay (e.g., comparing White Males to Black Females).
  • Disparity alone is problematic: It used to be that regulatory agencies focused on disparate treatment; however, disparate impact alone can cause liability for companies. Companies should be using regression analysis that control for appropriate job-related variables to investigate equitable application of the organization’s compensation philosophy across all demographic groupings with a plan to remediate any unintended disparate impact identified.
  • A potential new focus on age discrimination in pay: Market forces have changed due to the pandemic. Employers are hiring new employees at rates commonly seen in more senior/tenured employees in the same job title/job family at the organization. When an organization uses tenure/seniority as an explanation of pay, this can create an inverse effect for older workers where younger/less experienced workers who have been hired over the past 2 years are making higher salaries than their more tenured colleagues. This may lead to claims of disparate impact against those ages 40 and over and add a new level of potential liability to organizational pay analyses.
  • Set up all compensation audits/analyses under Attorney-Client privilege: Don’t get boxed in by the results of a public analysis. If you investigate without privilege and find unexplained disparity, that information is discoverable in a lawsuit.

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How would you recommend that employers document legitimate reasons for wage disparities?

  • Ensure you are collecting and storing all pay related factors for all employees: Make sure you are documenting and storing the factors that are important to your pay philosophy. For example, if the organization offers (or is willing to pay more) for an individual who has an educational level higher than the minimum qualification for the position, you must document and update each employee’s job-related education. All possible reasons for pay disparities must be investigated prior to providing remediation as there is liability for adjusting pay on the basis of demographics if the organization incorrectly applies the adjustments.
  • Document each step: Ensure you have documentation of each step you have taken in pay analyses so that you have everything in order in the case of a pay audit.

How is the Great Resignation impacting pay practices and how should employers monitor this?

  • Update your compensation philosophy for all employees: Review your current plans, processes, and procedures for compensation to ensure that the organization isn’t just reacting to changes in the market for new employees, but that all employees are treated equitably. An organization’s focus should be on both recruiting and retaining. Consider what the new mobile workforce means to you and your cost-of-living adjustments. Do you pay one rate throughout the entire country? Do you create pay zones based on regional cost of living? Do you pay by zip code?
  • Seek a partner with market data that updates more than once per year: Staying as current as possible with you market data reduces the risk that you are missing significant changes. Berkshire’s market partner updates their data every quarter, which in this quickly changing environment is much more accurate than market data based on the previous year’s median.
  • Consider Pay Equity: The only way to truly track how recent hiring trends are affecting the organization’s philosophy and to determine if these forces have impacted disparate impact at the organization is to commit to a privileged equity analysis.

Advice for employers navigating different state pay reporting & transparency laws:

  • Consider seeking out an expert partner: There are many differences between federal and state laws, and because of this you cannot just use invariant national pay practices. Making sure you have an expert means that you have someone who is knowledgeable and willing to defend their analysis should it be challenged. Overly relying on software and internal analyses do not provide the same level of analysis or protection.
  • Start nationally and then investigate other jurisdictions like states, counties, and cities with unique equity laws: Start with a holistic approach to organizing, evaluating, and interpreting national data for unintended disparity. Then you will be able to apply that philosophy and process to smaller jurisdictions regionally, by state, by OFCCP Plan location, etc.

OFCCP Compliance

What can an employer do to prepare for a Regulatory Audit/review of their compensation practices?

  • Analyze your pay data yearly: It is highly recommended that you work with a compensation expert to understand your compensation philosophy and address any potential issues that may be identified by an OFCCP Compliance Officer and statistician. Remember that federal contractors need to do at least a basic compensation review as part of your Affirmative Action Plan, and OFCCP may request it during an audit.

If the organization has not completed a proactive pay equity and, therefore, have a strong basis as to how to create Pay Analysis Groupings, etc. the Agency will revert to AAP Job Group and EEO Category to run pay analyses during an audit. Therefore, the best place to start may be to look at the pay data in this manner. Identify the organization’s level of risk in an Audit and then decide.

  • Store relevant data: As stated earlier, but of increased importance here, if you’re going to tell the OFCCP during a compensation manager interview that you take into account a variable like job-related certifications when deciding starting pay (e.g., CPA, SHRM-SCP, etc.) you need to have that data collected and available for all employees who are in jobs/groupings where certifications matter to pay.
  • Be prepared to defend certain pay factors: Performance-based (performance management) and revenue generated pay factors (sales commissions) can have their own issues for unconscious bias and potential race/gender-based steering. It is important to separately review these factors for potential disparity before including them as part of your defense.

How would you advise a smaller organization that are not large enough for a regression analysis?

  • Other statistical options: An expert can do a cohort analysis to determine if there is evidence of disparity. The expert would use a combination of small-n analyses, look for patterns in data that appear to be attributed to demographics, and can also run what are called “pooled regressions” to identify disparity that cannot be explained by available demographics. Disparity flags in all three of these analyses may indicate that the organization has some past inconsistencies in how their compensation philosophy was applied across different demographic groups.
  • Starting pay decisions: It is important for organizations to remember that a majority of pay disparity exists because of starting pay decisions that are then exacerbated by performance management and other comp programs. Starting pay has a lasting effect on a person’s lifelong earnings. That “good business decision” of offering someone a lower pay then you would be willing to pay them could lead to later disparity issues for your organization. When starting pay of a man and woman differ by $20,000 it can take the woman over 10 years to equal his pay, even if she receives a 5% yearly raises while he receives only 3%. Starting pay decisions are the most important decision. Employees don’t have market data at their disposal. Their worth is defined by how much their last organization paid them and your offer.

It’s important to note that some states currently prohibit consideration of prior pay when setting starting pay. An executive order released by the Biden administration suggested that the administration may soon prohibit this consideration for federal contractors as well.

Culture-Fit Assessments for Hiring

Explain why they don’t fit:

  • (Craig Leen) Culture-Fit is a commonly referred to hot topic that organizations take into consideration when hiring. However, culture-fit is an unmeasurable variable, which can disguise stereotypes or unconscious bias and agencies will not accept “they did not fit well” as a reason for rejection/termination. Although fit is an important part of succeeding in an organization, there should be legitimate reasons why someone did not fit in. So, “culture-fit” or “fit” should not be the sole reason that someone is rejected or fired; instead, it is better to explain why they did not fit. For example, the applicant/employee did not support the companies’ principles in their answers to questions.
  • (Thomas J. Carnahan) Further, culture fit is also used as a catch-all for personality-based assessments and interview questions. Unfortunately, many of these assessments are created based upon current workforce which are most likely not reflective of the future goals of the organization when it comes to diversity metrics and inclusivity. By no means should an organization abandon the use of assessments to identify high-potential candidates, but most assessments are based on the Big 5 personality traits and other measures that were developed by white men. Organizations thrive when everyone has a voice. Just because an assessment doesn’t create disparity doesn’t mean that the assessment was developed for diversity.

Final Advice for Viewers

  • Consider proactive pay equity: Pay Equity will help you keep up with the changing regulations and especially consider it if you want to do the right thing and promote equity within your organization.
  • Market analysis and job evaluation: Market data is biased against females and racial minorities, especially in job titles/families that are female/minority dominated. Job evaluation methodologies ensure that you are paying titles based upon the compensable worth of that job to your company in addition to market forces. Also, ensure that your job evaluation/market analysis partner uses a methodology that doesn’t use a canned “proven” system that they applied to you. Instead, your partner should be working with you to create a compensation structure customized to your unique organization.

Webinar Q&A:

 

Q: Is it necessary to run pay equity regression analysis for each AAP establishment? Or is it sufficient to run annual pay equity regression analysis for all associates in the US (using location as one of the control factors) or based on how our company groups employees geographically (i.e. geo-differential regions)?

A: In addition to doing an overall pay equity to ensure equity across your entire organization, you should also focus on what an OFCCP audit would be like at each of your AAP establishments (if you are a Federal Contractor).

 

Q: What happens when you have a 'one-off' position, so you don't have another position in the organization to compare it to? How do we ensure that position is being paid fairly?

A: When pursuing equal pay for equal work by job title you can end up producing orphan job titles (positions with no comparators). However, when grouping by similarly situated employee groupings (SSEGs), you produce larger job groups that limit the number of positions that cannot be analyzed by regression. For the jobs that cannot be analyzed by either job title or similarly situated job grouping, doing a job evaluation may reveal that the “worth” of this job is more similar to other jobs than previously thought. In the event that even that fails, doing an external market analysis combined with ensuring that the individual is paid fairly inside of their grade based upon their years of experience, education, and unique qualifications can help ensure that the organization is reviewing and adjusting pay equitably.

 

Q: If you identify through a pay equity analysis that females within a certain grouping are underpaid by an average of $5K, and you pay these employees to eliminate this disparity, isn’t that an illegal gender-based pay decision?

A: If you were to give $5K more to every female, even those not identified as underpaid in your analysis, it would be a gender-based decision and not a best practice. However, if you identify those who were impacted by the lack of consistency in the application of your compensation philosophy and remediate based on those affected (which could be both women and men), then it is a remediation plan and is not a gender-based decision. The crucial aspect is consistency in applying your compensation philosophy and applying it equally to all those who are impacted by that lack of consistency, not just one demographic over another.

 

Q: What type of data would support controlling for a factor?

A: A best practice process for performing a defense or proactive pay equity is to identify and collect objective/unbiased factors that predict pay at an organization: time in job, external experience, education, and training/certifications. Depending on organizational size and industry, there may be additional job-related factors that would help predict pay to determine if your compensation philosophy has been applied across all demographics. The best factors are those that are inherent to the employee’s qualifications and performance. Factors that are more in the nature of labels or grouping by the organization, such as pay grade, should be evaluated to determine if they are representative of actual differences in jobs. All factors should be investigated for unconscious bias or to determine if they are “tainted” by inconsistent application of the organization’s compensation philosophy.

 

Q: Does conducting a pay equity analysis open up a company to additional liability?

A: Maybe…it all depends on how you do it. This is why it is highly encouraged to do any analysis of compensation under privilege with an attorney who is knowledgeable about pay equity and a pay equity expert who would be willing to defend their work in court. There is also significant risk in not conducting an analysis. It is up to the organization to weigh these two risks and determine which one is less palatable. It is important to note, though, that upcoming generations are using Diversity, Equity, Inclusion, and Accessibility as a baseline for determine if they want to work for an organization. Having evidence of “doing the right thing” is an important tool in recruiting workers who see fairness as a necessary standard. OFCCP requires an annual compensation review as part of your AAP.

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