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Compensation Compliance
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Looking at the Gap Between Expectations and Reality


For many years, compensation compliance has been discussed ad nauseam in Industry Liaison Group (ILG) meetings, webinars, and in articles by the hundreds that included topics on OFCCP expectations/enforcement, data collection and suggested analyses. In related fashion, EEO/AA professionals have attended the National Industry Liaison Group (NILG) conference held in various major cities in the U.S. each year for a few decades now and every year attendees arrive at the conference brimming with questions surrounding the great mystery that is compensation compliance and I would argue that more often than not, those attendees are leaving the conference disappointed. Why? For several reasons.
  1. Year after year we witness a continuous, and ever changing, stream of discussions on OFCCP expectations and how to conduct compensation analyses. When the rules keep changing, people get frustrated.

  2. The regulations are entirely too vague. People have detailed rules to follow for conducting availability and adverse impact analyses. While the rules for compensation boil down to one, vague line under Title 41 CFR Chapter 60-2.17 “(3) Compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities;” That’s it, that’s all we get in the form of a formal regulation. Yes, we have Directive 307 now, but that is a directive and not a codified regulation. The timeline of changing directives and expectations has been shifting for years, and the expert advice regarding appropriate analyses to conduct and how to group data would result in the old adage “If you ask 10 different people what to do you, will get 10 different answers.”

  3. Last and certainly not least, I believe there is an element to this process that is being left out of the discussion and it’s one of the most important. That element will be the focus of this article.

    After all this time there is an important element that has not been fully supported, at least from my perspective. As a consultant who supports many contractors who are trying to determine a plan for compensation compliance the question goes something like this, “How on earth are contractors supposed to prepare for this ever changing compensation compliance landscape and most importantly, how do we get leadership to approve a budget for such an open-ended process?”
So, what exactly is the problem and what is the solution?

As I prefaced earlier, it seems that contractors across the country are still trying to understand the dynamics of compensation as they sift through the pieces of the puzzle in the struggle to attain compliance and avoid OFCCP scrutiny. I think people are very aware of the general expectations laid out by both the Department of Labor and the industry experts. OFCCP and EEOC see a wage gap that they want to close and consultants/attorneys are working tirelessly to help contractors fulfill that expectation, but I am not at all convinced that contractors fully understand the challenge of defining and executing the process and then selling it to company executives.

If a contractor struggles to define the need, the process and what is required to execute it, then why would leadership approve the very significant (and often open-ended) expense of seeing it through?

Why is getting leadership on board difficult?

Gaining leadership support is a challenge. I speak to clients weekly who are trying to determine a course of action and to develop an accurate budget, but several questions continue to provide stumbling blocks in coming to concrete conclusions:

What exactly is a contractor going to analyze and what result are we seeking? OFCCP eliminated the restrictive guidance provided in their 2006 compensation guidelines in favor of a broader approach that relies upon Title VII principles. The result being that OFCCP can pursue analyses in most any way they see fit which, in turn, poses a huge problem in creating an action plan to defend the company from potential findings. So, exactly what issue are contractors supposed to identify? We have jobs, job groups, grades, bands, and now we have “Similarly Situated Employee Groups” evolving into “Pay Analysis Groups,” and the endless levels of analysis that could be developed.

This doesn’t even address the issue of steering where OFCCP is looking for jobs where a group may be directed into lower paying positions than their counterparts. While steering is arguably more of a hiring and placement issue than a compensation issue it is still a concern that mandates attention. An example that resonated with me is one where men were being given higher paying janitorial positions while women were being fed into lower paying housekeeping positions. Are they similarly situated? They may be and this is the type of discussion being held right now in audits.

What is the budget needed to complete a comprehensive study? How can you answer this in advance if you have to go through the process to obtain an answer? Company leaders want concrete information to go on. They want a beginning and an end, especially when it comes to a cost without an easily identified return on investment (ROI). To tackle the process of conducting meaningful analysis, contractors have many needs ranging from:
  • Using Subject Matter Experts (SMEs) to conduct hiring/promotion process review to look at what the process is and what data is needed to identify starting pay AND pay progression post hire.
  • HRIS adaptations for collecting the needed data.
  • Utilizing an expert to conduct the iterative process of running multiple regression or other statistical analyses.
  • Finding potentially significant results that need to be addressed with a potential identification of pay liability. Followed by more analyses to look at what post pay-change results look like. Remember, making changes to address one group could lead to problems for another group. Are we having fun yet?
Maybe a contractor could get a positive response from leadership by stating that they will know how much the process will cost after the fact but it’s difficult to sell an open-ended project.

What is the risk associated with doing or not doing this? This is a tricky one because if there was a significant finding during an OFCCP audit in the analysis then the damage could be anything from a few thousand dollars to seven figures or maybe even more. Another complexity here is that, in reality, OFCCP has not consistently found systemic pay issues in contractors that would generate the type of fear in leadership that hiring issues do.

Frankly, pay gaps are often found to be very small and not the type of impact dollars that would drive a CEO/CFO to want to spend large sums to diagnose a long-shot of an issue. John Fox, an experienced labor attorney with Fox, Wang and Morgan touched on the issue of a lack of findings not long ago in this article written for The OFCCP Digest. How do you get leadership fired up to spend money on something that is rarely identified? Does a contractor tell a CEO that there is a small chance we get audited (noting that audits are by single locations) and an even a smaller chance of a systemic issue being discovered so “Can we spend $100k to have a look at different establishments knowing that does not include addressing any found concerns?” I am aware that as of this writing there is a new press release posted by OFCCP identifying a recent six-figure compensation settlement, but again, those are uncommon if not genuinely rare.

What internal and external resources will be needed and how long will it take? I am going to break this down a little more in the next section but in terms of resources needed, contractors could easily require a whole litany of items to get a meaningful analysis off the ground including, but not limited to, a review of existing data available, a subject matter expert panel reviewing how pay is applied to jobs within the company, adjustments to an HRIS to accommodate needed data input, contracting with a consulting expert and/or attorney with access to a Ph.D. in statistics, etc.

Determining how long an analysis will take is an even bigger challenge as each step has to be completed before the next can begin. This is another challenge that impacts time and budget. People ask me all the time “How long does a regression analysis take?” The answer cannot be a fixed timeframe because regression can be an iterative process that loops through layers of data and analyses. Some groups may require one analysis while others may need additional data and analyses resulting in three or four or five revisions.

In addition to the challenge of answering the questions above, the following thoughts make the process even more complex:
  • OFCCP is no longer sharing their definition of a threshold/trigger test so no one really knows how OFCCP identifies an issue with initial audit submissions. This is convenient because it opens the door for OFCCP to collect more information and conduct interviews. This is one of several activities where contractors want answers.

  • OFCCP’s attorney at the NILG stated in the pre-conference session that they are analyzing data using regression at the national office using different groupings as they seek to create Pay Analysis Groups (PAGs). This is done behind the scenes and OFCCP is deciding how to group the data. Will OFCCP accept PAGs defined by the contractor? We don’t know for sure. Again, a major concern to contractors.

  • In OFCCP audits, contractors are undergoing all kinds of scrutiny with compensation related interviews, questionnaires, submission of detailed data elements and then being told that the files are being sent to the national office for review. My favorite part of this (sarcasm by the author) is how OFCCP utilizes a template letter to contractors stating that “results suggest possible indicators of compensation discrimination.” This is a very unsettling statement for contractors to receive from the government. There is no detail provided as to what was found and I am told that OFCCP has every right to use this vague strategy because they are an enforcement agency. Many of our clients have undergone this process which causes panic to set in and is only to be followed by silence once all the information has been submitted. Many audits do eventually close but there is no specific response in regards to the compensation reviews. This is another part of the process where contractors want answers and they are difficult to provide.
So, how does a contractor begin to prepare answers to share with company executives?

Here are some ideas coming from a variety of discussions including ideas that were discussed by the legal panel at NILG.
  • You need the resources to conduct detailed analyses because it is a requirement of Executive Order 11246.

  • You need the resources because OFCCP is focusing on this area and you don’t want to be the poster child for a significant finding.

  • You need the resources because OFCCP issued a new directive last year that opens the door to broader investigations based on Title VII guidelines and they are having some success looking beyond base salary at the job level.

  • If the annual Pay Equity Report becomes a reality (opinions are mixed) then that is a “game-changer” according to many simply because it means instead of auditing a small percentage of contractors annually, OFCCP will now have access to summarized data from every single contractor. I presume this means they can “cherry-pick” who they wish to audit.
While I would agree the statements above are all true, will they result in an approved budget from company leadership?

I would also consider adding some more specific arguments in support of conducting proactive analyses.
  1. Make use of current affirmative action plans. Are there any initial indicators/red flags as a result of broader analyses conducted during plan development? Could the compliance team develop some rudimentary analyses to support a proactive position?

  2. Consider proactive analyses as an opportunity to audit the hiring and compensation assignment process. After years of plan support and the long learning curve we have seen with managing applicant data, doesn’t it tell us that collecting and analyzing compensation data is still an area of growth and understanding?

  3. Use analyses as a way of measuring risk for complaints or other internal issues. Managers typically understand the concept of risk avoidance.
With an interest in developing the area of selling proactive compensation to leadership, what tips do readers have for their peers? I hope that they can be shared and we can all help each other.

While it may seem that everything written to this point suggests a negative outlook on compensation evaluations and the sheer impossibility of accomplishing this task, this is not my intention at all. I am expressing my concern on behalf of contractors, who reasonably put, want clear and logical direction which I think is sorely lacking in the area of compensation. My recommendation is that companies could and should make efforts to evaluate fair pay practices. I tell clients all the time that analyzing proactively is a wise course of action because it allows them to maintain control of the process. If a contractor conducts analyses then they control the process and how to manage the results. Control allows for:
  • Budgeting for the changes.

  • Determining if they want to focus on eliminating statistical significance or bring staff up to full parity. Since there is a two-standard deviation threshold for identifying an issue contractors could technically bring people within the two standard deviations as a conservative approach.

  • Time is on their side. Contractors could factor in changes over time in place of a one-time correction.
Conversely, there is the result when an issue is discovered in an audit:
  • Loss of control of the process and instead working in reactive mode to accusations.

  • A term called Make-Whole-Relief comes into play where interest and back pay is added to the equation making the proposition much more expensive.

  • There is no calendar of time to phase in issues. The time becomes now.

  • There is the public relations aspect of being identified as a discriminator. OFCCP is not shy about very public press releases when a large settlement is completed.
As we conclude this discussion I did want to add a few ideas for contractors to consider as they undertake the process of developing compensation analyses.
  1. Consider areas of vulnerability. What do we see in the press releases all the time? We see large pools of victims. So, where is the company vulnerable? Some obvious starting points would be high volume jobs where statistics can be applied, often in the entry level positions.

  2. Look for clustering of race or gender within a department. If a department has women or minorities clustered into the lower paying positions can the company explain why? Even start thinking ahead to veterans and individuals with a disability. We are so used to analyzing for shortfalls by race or gender we need to broaden the spectrum.

  3. Think about gender groupings. Are women being directed to certain jobs and men to others? Same concern for race? Typical hiring patterns of the past are being questioned. A common example is any job that has pay incentives such as bonuses and commissions. Is one group getting better opportunities for additional pay?

  4. Having counsel oversee the process and keeping decisions and analyses privileged is a good idea. While AAP results may be part of the required audit submission, elements of pay strategy and analyses conducted out of a potential litigation strategy are different.

  5. Communicate with leadership. Tell them what this is all about. Use help to provide a clear message on the law and compliance expectations. There is lots of help available.
Conclusion

While there is no perfect method, contractors should continue to work towards a plan even if it takes time to gain an understanding of the entire process. There are a lot of great resources out there both in known experts and documentation that can be found online and at conferences. Developing an internal champion and educating staff as much as possible is a start.

I hope that this has not only been useful, but that it also generates more dialogue to help contractors deliver the message to leadership and find their way to a compliant and equitable compensation program.

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This communication has been prepared by OutSolve for informational purposes only and does not constitute legal advice.