Segal Company

Pay Equity

Recent legislation on pay discrimination, including the Lilly Ledbetter Fair Pay Act, has highlighted the importance of having sound methods for determining fair and equitable compensation.

Employers should anticipate an increase in pay discrimination claims as a result of this legislation. To mitigate litigation risks, Sibson can help employers improve their current pay decision-making process as well as assist in reviewing current HR processes. Sibson also has a team of experts that can help our clients identify inequities in pay and make recommendations for reconciling these inequities.

Improving Pay Equity and Other Compensation Outcomes

Pay equity issues arise from flaws in the compensation process that will continue to produce issues unless they are "caught" with audits and redesigned. Compensation process flaws can also impact employee morale and motivation because of a lack of trust in the pay system, and impact the bottom-line because of compensation cost creep versus competitors.

Signs of process flaws include:

  • Managers "gaming the system" or using favoritism
  • Decisions being made in "silos"
  • No visibility on what others are doing
  • No market or internal data for guidance
  • Lack of differentiation
  • Perpetuating or compounding old mistakes
  • Too many guidelines, no real discretion

Pay, Performance and HR Process Audits

Sibson can provide an objective and independent audit of the practices and programs that will receive the majority of scrutiny under this new legislation:

  • Compensation Process can be evaluated to determine if:
    • Compensation levels are based on a thorough job analysis and job evaluation
    • Compensation structure (e.g., bands, levels) is defined and closely governed by compensation personnel
    • Comparable pay levels exist for comparable jobs
    • Equitable pay levels exist for similarly situated employees
    • Clear ownership and governance has been defined for compensation adjustments
    • There is appropriate visibility on pay across units
    • There is calibration of performance assessment and pay actions across peer managers
    • Impact analysis is conducted before implementation
  • Performance Appraisals and Performance Management can be evaluated to determine if:
    • Performance feedback mechanisms enable the collection of valid job-related performance information
    • Performance ratings are behaviorally-anchored (e.g., differences between ratings are clearly distinguishable)
    • Performance management systems enable the collection of multiple data points on job performance
    • Performance calibration validates performance ratings within and between divisions, departments or functions
    • Clearly documented criteria on the relationship between pay and performance exist
    • Managers and supervisors have the skills and capabilities to deliver effective feedback, evaluate performance and make appropriate pay decisions
  • HR Policies can be evaluated to determine if:
    • Compensation and performance management policies, procedures and forms are documented, clear and easily accessible by employees
    • A governance structure that manages policy changes to ensure alignment and compliance is in place
    • Clear ownership and decision rights for managing compensation and performance management decisions exist

Pay Equity Diagnostics

Sibson uses several methods to evaluate pay equity and determine what the appropriate remedy may be to address the inequity. These methods include:

  • Descriptive statistics: These statistics evaluate pay levels across demographic variables to highlight areas where there are potential differences in pay — note that these analyses alone are insufficient to rule out inequities.
  • Forensic pay analysis: This analysis traces the accumulation of compensation throughout an employee's tenure with a company and compares this accumulation with a gender opposite peer or group of individuals (i.e., a "look-backward" analysis). This method is appropriate for organizations that have a small number of employees, which makes statistical methods such as analysis of variance and regression an unreliable tool.
  • Univariate Analysis of Variance (ANOVA): These can determine whether there are statistically significant differences in employee salaries between categorical independent variables such as gender and ethnicity; post-hoc tests can also indicate where differences within the variables are most pronounced.
  • Multiple Regression Analysis and Hierarchical Multiple Regression: These analyses can determine if there are significant differences in salary across demographic groups while controlling for the effects for other variables. For example, it can highlight whether there are differences in salaries across gender after controlling for the effects of title and tenure.

    Hierarchical Multiple Regression is an advanced form of regression that is particularly useful for estimating the incremental variance a target variable (e.g., gender) accounts for in the dependent variable (e.g., salary) after controlling for the variance accounted for by other independent variables in the regression model.

    Note that the Office of Federal Contract Compliance Programs (OFCCP) recently issued revised standards for pay equity audits. Specifically, they declared multiple regression as the new standard for its audit process, moving federal contractors to use this approach. Furthermore, the courts have leaned towards multiple regression analysis as the definitive defense against claims of pay discrimination.