Best Practices for Ensuring Your Compensation Plan Is Fair

Making sure your company’s compensation plan is fair is critical to maintaining employee satisfaction, preventing morale issues and avoiding costly settlements with the OFCCP. A well-executed compensation plan will attract the best employees, keep them motivated, and ultimately increase productivity. Navigating the compensation systems is not easy, to say the least.

To create a fair plan, one must consider a variety of factors. Here are some of the best practices for ensuring your compensation plan is fair.

Perform an OFCCP Compensation Analysis

The OFCCP (Office of Federal Contract Compliance Programs) offers little guidance— and much scrutiny—on whether you’ve created a fair compensation plan. One of the best ways to ensure a fair compensation plan is to perform an OFCCP compensation analysis. This will help you identify disparities in pay by gender, race/ethnicity, and the intersection of gender and race that OFCCP may investigate in an audit.

Investigate Differences That Exist in Race/Ethnicity and Gender

It seems obvious that your pay rates should be based on employee skills and experience, not on personal characteristics such as race, gender, religion, or other protected bases. But even the most well-intentioned companies fail to perform compensation analyses to test whether their policies or practices have resulted, albeit unintentionally, in significant differences in pay that are unexplained by legitimate business reasons. While it may seem that never considering race and gender would be a defense against allegations of discrimination on those bases, solely focusing on internal equity or pricing your jobs at market creates a potential liability in an audit.

Analyses performed on any one dimension—solely considering race, gender, or tenure—will tend to miss issues or find issues that are explained by the other dimensions. At a minimum, account for race, gender, and tenure (in the company and in the job) in your initial analyses. If you have statistically significant differences in job groups or job titles that have at least 30 employees, consider running a regression analysis to see whether those factors explain the disparity. Once you start regressing for factors that affect compensation, you’ll need more than these 30 employees; you will generally need one additional employee for every factor you want to include in a regression model.

Test Whether Your Explanatory Variables Are Tainted

Companies expect that if they “pay for performance,” any differences in pay that can be explained by performance rating differences are acceptable. For this to be true, the performance rating system itself needs to be validated; in other words, you need to test whether your performance rating system is discriminatory. If it is, the ratings you’re using to pay your employees cannot be used to explain differences in pay. These are known as “tainted” variables in that they cannot be used to defend pay differences because they are at least one cause of the discriminatory pay differences.

Asking About Salary History

Companies can get into trouble by asking applicants about their salary history and using it to determine starting pay. In some states, this is now illegal to ask because it can essentially inherit discriminatory pay rates from other companies. If women are paid less than men on average, then asking about prior salary history and basing your decisions on that will lead to lower pay rates for women in your workforce. While your decision was not intentionally attempting to pay less to any group (a facially neutral policy), the implementation of that policy created discriminatory differences in pay based on gender (disparate impact).

Determining Starting Pay

Consider the example of two employees who start on the same day and are paid very similarly. Employee A Is paid $40,000 a year, and employee B is paid $42,000 a year. With identical performance ratings and merit increases of 3 percent over the next 10 years, their pay after 10 years will only be $2,687 apart, but employee B will have been paid $25,615 less over that same period. Now think about how OFCCP will look at your employees and years of data. Small differences add up over time and across your workforce, especially if you have many employees in the same jobs.

Pay Attention To Internal Equity, Market, and Race/Gender

During your annual merit cycles, integrate this type of analysis into your process and consider making equity adjustments where you cannot explain pay differences. This will help bridge the small gaps that tend to widen over time.

Equity Adjustments

Outside of a settlement agreement with OFCCP, you have a lot of leeway on how much to adjust (pay parity, just below the significance threshold, or somewhere between), when, and how. These are strategic decisions that should not be taken lightly. The last thing you want is to make adjustments that result in complaints or lawsuits of reverse discrimination by the employees who have not had equity adjustments. Some companies make adjustments over several years to alleviate budget concerns and build the adjustments into merit increases, thereby reducing the effects that large payouts may have on the morale of employees not receiving those adjustments. Other companies target the outlier employees first and re-run analyses once those salaries are adjusted to ensure there is no longer any impact.

Base Pay on Job Roles, Not Titles

It is vital to base pay on job roles, not titles. This will help ensure that employees are paid based on their skills and experience, not on their position within the company.

Seek Professional Help

Compensation is complex. Don’t be afraid to ask for help from a professional. The OFCCP Compensation Analyses from Kairos Services Inc. can help identify any disparities in your plan, and our team of experts will walk you through the steps needed to correct them. We understand the importance of achieving equity in your compensation practices, and we’d love to speak with you to learn how we can help you create a fair compensation plan for your employees.