Constructing and Conducting a
Compensation Analysis
2012 ILG National Conference
Waikoloa, Hawaii
August 28, 2012
Equal Employment Advisory Council
1501 M Street, N.W. | Suite 400
Washington, D.C. 20005
Presented by:
Chris Gokturk
Jeff Norris
The Equal Employment Advisory Council (EEAC) is a nonprofit
association of private sector employers dedicated exclusively to the
elimination of workplace discrimination through advancement of
practical and effective equal employment opportunity, affirmative action,
and diversity programs. The materials developed for this program and
the discussions based upon them are designed to provide accurate and
authoritative information regarding the subject matter covered. They
are provided with the understanding that EEAC is not engaged in
rendering legal, accounting, or other professional services. For legal
advice or other expert assistance, the services of a competent attorney
or other professional should be sought.
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 2
Seminar Overview
• Establishing a Compensation Analysis Process
– Preliminary Considerations
• Understanding Your Current Compensation
Structure
• Data Preparation and Review
• Conducting the Statistical Analyses
– Understanding Statistical Procedures
– Analyzing Compensation Practices
– What Compensation Should Be Analyzed?
– Analyzing Compensation Beyond Base Pay and
Performance
• Considerations in Making Pay Adjustments
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 3
Establishing a Compensation
Analysis Process
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 4
Preliminary Considerations
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 5
Purpose of Analysis
Narrow
Scope
Reactive
OFCCP Review
CSAL List
Proactive
© 2012 Equal Employment Advisory Council
Expanded
Scope
Litigation/
EEOC Charge
Proactive Analysis
“in anticipation of
litigation”
2012 ILG National Conference | August 28, 2012 | Page 6
OFCCP Review
• Evolving landscape
• Focus on current compensation
• Initial scope still USUALLY limited
to base pay
– Follow up request includes beyond
base pay dollars
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 7
Contractor Selection Advance
Notice Letter (CSAL)
• Still responding to a potential
review
• May have additional time to
analyze data or expand scope as
warranted
• Ability to address issues PRIOR TO
receipt of scheduling letter
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 8
Litigation or EEOC Charge
• Must stem from or be reasonably related
to charge
• Focus on defending the data and
practices in effect during the alleged
time period
• Questions:
– What is the alleged time period?
– What practices are being challenged?
• These may alter the scope of your
analysis
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 9
Proactive Analysis
• More options available, so
determining scope becomes
trickier
• Scope of analysis can be defined
more broadly
• Limitations usually data-related
• Counsel’s involvement is critical
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 10
Purpose of Analysis
• The company’s motivation to
conduct the analysis impacts
– Which types of pay practices to include
– Time period of analysis
– Whom to include in the analysis
– Roles and responsibilities
… more on these later…
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 11
Getting Started…
• Where to start
– Your Compensation Department
• What analyses are currently being performed
• Evaluate appropriateness for THIS purpose
– Base or total compensation
– Employee groupings
– Do you have a compensation structure in
place? What is it?
– How is pay determined?
– What influences what each employee gets
paid?
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 12
Understanding Your Current
Compensation Structure
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 13
Understanding Your Current
Compensation Structure
• What do you say that you do
– Compensation philosophy
– Compensation structure
• Grades, bands, other
– Company policies and procedures
• Both formal and informal
• How does it work in practice
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 14
Understanding Your Current
Compensation Structure
• Four keys to minimizing risk
– Alignment of policy and practice
– Data integrity
– Transparency
– Monitoring and analysis
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 15
Data Preparation and Review
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 16
The Key…Employment Data
• Preparing data for analysis
– Annualizing compensation for your parttimers
– Does everyone have a race/gender code
– Does everyone have data in the fields that
matter
– Review for any “garbage” in data fields
• Any field important enough to determine
or influence pay is important enough to
check for accuracy
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 17
The Key…Employment Data
• What data do you need
– Groupings and factors that influence
pay
– Fields that define THE JOB
– Fields that define “where the person
sits” organizationally
– Fields that differentiate an individual
from others in the same type of job
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 18
The Key…Employment Data
• What do you have in your system
– How reliable are the data in the fields
– Common data integrity issues:
• System conversion issues
– Example: Everyone has same “time in
grade” date
• Fields that are not kept up to date
– Example: Education data
• Fields that are important but not tracked
– Example: Prior experience
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 19
Dates
• Check for accuracy and incomplete
values
• Legacy System Problems:
– Senior employees: hire date is not actual —
mark or change date
– Errors in updating
• Decision date vs. Effective dates
• Rehires — how handled
• Missing parts of dates (e.g., no day)
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 20
Unexpected Data Values
• Inconsistent or misspelled text entries
• Missing values:
– Identify the cause
• Have you merged the data correctly
– Don’t mix with “zero” values or “No” entries
– Beware of conducting analysis only on the employees with
available data
• Outliers or misclassified employees:
– Unidentified demotions
– Erroneous entries
• Wide ranges in pay or grade values for given job
title
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 21
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 22
Using the Right Data
• General pay factor coding schemes:
– Yes/No – Convert to Dummy/Indicator Factor (0=No,
1=Yes)
– Multiple Category Factors: Use as scale or separate factors
• Ex: Education level (<HS, HS, BA/BS, MS+Phd) = > 3
factors
• Determine reference group and code dummies for others
– Continuous Factors (e.g., experience) — plot it by salary and
structure factor appropriately
– Correlated Factors — try to identify distinct components
• E.g., time in company and time in job => time in job and
time in company beyond the current job
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 23
Conducting the Statistical
Analyses
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 24
Understanding
Statistical Procedures
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 25
Topics
• Statistical test
– Mean/Median Analysis
– t-Test
– Regressions
• Examples of regression plots and results
• Using the right statistical tool
• Using the right data
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 26
Mean & Median
Mean Analysis
•
What is it?
−
•
The average or mean is another way of describing the mid point of a
group of salaries being analyzed. The average is computed by adding
the salaries in a grouping and then dividing their sum by the number of
salaries
The OFCCP is using means for the preliminary review and in
comparing groups that are too small to run a regression analysis on
Median Analysis
•
What is it?
−
The median is one way to describe the mid point of the group of
salaries being analyzed
•
Useful because it is not affected by very high or very low salaries
•
In the past has been heavily used by the OFCCP
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 27
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 28
t-Test
• What is it?
– The t-test assesses whether the means of two
groups are statistically different from each
other
– Does not consider other factors
• When should it be used?
– The t-test report in CompAuditor® II gives you
a listing of each grouping regardless of size.
This allows you to quickly see differences in
the means.
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 29
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 30
Regressions
• Regression is a statistical tool used to
understand the relationship between a
dependent variable and one or more explanatory
variables – simply a mathematical model of your
pay system
• Like prior comparisons, measures disparities in
light of (“controlling for”) other factors
• Simple Regression – one explanatory variable
• Multiple Regression – multiple explanatory
variables
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 31
Regression Analysis
Armed with the right tools … and the right data …
now we can develop the regression model
• In order to develop a regression model,
we need to determine three things:
– Dependent variable
– Grouping
– Factors that influence the dependent variable
within the grouping
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 32
Regression Analysis
Dependent variable
• This refers to the data we are
trying to explain
– Base pay
– Total cash
– Starting pay
– Whether or not someone received a
bonus
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 33
Regression Analysis
Grouping
• Balance “similarly situated” with
group size
• Typical groupings include:
– Job title
– Grade
– AAP job group
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 34
Regression Analysis
Pay factors
• Virtually anything can be coded as a
factor
– Some best practice companies check each
factor independently to determine its
influence in the absence of other factors
• Typical factors include:
– Time factors (seniority, time in job,
experience, etc.)
– Market factors
– Education factors to the extent they are
different within the selected grouping
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 35
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 36
Percentage of the variation in salaries that is
statistically explained by the independent variables
in the regression model, adjusted for the number of
variables and sample sizes.
Both measure the “significance” of each variable.
Look for t-stats > |1.96| and p-values < .05 to be
significant. Consider dropping variables that don’t
contribute to the model
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 37
Analyzing Compensation
Practices
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 38
What Compensation Should
Be Analyzed?
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 39
What Compensation Should
Be Analyzed?
• Base salary
– Historically what companies have
focused on, both proactively and for
OFCCP audits
• Total compensation
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 40
What Compensation Should
Be Analyzed?
• Base salary is only one of the many
elements of total compensation
– Base salary
– Short-term incentives
• Cash bonuses
• Annual bonus
• Sign-on bonus
• Referral bonus
• Retention bonus
• Holiday bonus
• “Other cash”
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 41
What Compensation Should
Be Analyzed?
– Long-term incentives
• Stock options
– Employee benefits
– Perquisites (“perks”)
• Varies from company to company
• Individual packages – product of negotiations
• Internal perks
– Luxury offices
– Executive dining rooms
– Special parking and cars
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 42
What Compensation Should
Be Analyzed?
• Merit Increases
– OFCCP is routinely requesting
– Do you give $$’s or percents?
– How does this tie into performance
evaluations?
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 43
Analyzing Compensation
Beyond Base Pay and
Performance
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 44
Why Monitor Beyond Base
Pay?
• The OFCCP is going to ask for it
• It’s where the real money lies
• It’s “discretionary”
• It’s an “in-house” function … generally
not outsourced
• It’s better to do so proactively today –
rather than defensively tomorrow
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 45
Evaluating Compensation
Beyond Base Pay
• Analyzing beyond base pay is
not always as simple as a
regression model. Many factors
to consider.
– Is a regression model the best test?
– Are the groupings you use for base
salary analysis appropriate for this
comparison?
– What employees are eligible?
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 46
Evaluating Compensation
Beyond Base Pay
• Two phase process
– Participation
• Impact ratio analysis
• Distribution and patterns
– Extent of Participation
• Regressions
• Mean analysis
• Distribution and patterns
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 47
Considerations in Making
Pay Adjustments
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 48
Key Questions
• Three key questions
Who should receive a pay adjustment?
How much of an adjustment should be made?
When should the adjustments be made?
• All are strategic decisions with legal
implications
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 49
Who Should Receive Pay
Adjustments
Individuals whose compensation is so low that they skew
the data and no legitimate explanations are identified
should be considered for adjustment
Consult with (as appropriate):
• Human resources and compensation staff
• Individual’s line management
• General counsel (risk/benefit analysis)
• Senior management
Full story rarely resides in the database or employee files
Should disadvantaged males and non-minorities be
afforded adjustments
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 50
How Much of an Adjustment
Should Be Made
•
Immediate elimination of entire disparity
•
Amount sufficient to reach bottom of range
•
Amount sufficient to eliminate statistical
significance
•
Additional considerations:
– Budget limitations
– Will adjustments create new disparities for
men/non-minorities
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 51
When Should Adjustments Be
Made
• During next scheduled compensation review
cycle
– Least likely to generate questions
• Immediately, mid-cycle
– What explanation do you provide employee
• Prior to submitting compensation data to
OFCCP or EEOC for analysis
– Conduct risk/benefit analysis
– What if OFCCP asks
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 52
Conclusion
Prudent employers will conduct
compensation analyses routinely as part
of a proactive, ongoing monitoring
process, and will make appropriate pay
adjustments — regardless of the race or
gender of the individuals affected
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 53
Wrap-Up and Questions
jnorris@eeac.org
cgokturk@easiconsultants.com
© 2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 | Page 54