If your organization is a federal contractor or is otherwise seeking to excel on standards of corporate governance and due diligence in managing risk, you need to act now to implement a regular pay review process that is consistent with new federal regulations.
That´s because the Office of Federal Contract Compliance Programs (OFCCP)--the agency that monitors federal contractors for discrimination on the basis of gender and race--recently issued and put into immediate effect new standards for investigating "systemic compensation discrimination" along with guidelines for employer self-evaluation of pay programs. The rules are very similar to those proposed in November 2004 and closely track standards long held by the courts.
In fact, the OFCCP has already moved to use the new investigative protocols in its employer reviews. To that end, many organizations have already acted to put into place processes to effectively respond. But for those that have not, one change is particularly notable: When audited, organizations must share information gathered from a compliant self-evaluation or else attest--under penalty of perjury for the signing official--to having in place a process of annual, internal pay equity review (as distinct from purely market-referenced pay adjustments).
While the new standards raise the bar in terms of the complexity of required compliance activity, they will better ensure that such pay evaluations focus on true disparities requiring redress. But they also provide another significant opportunity often overlooked: using these same data and methodological underpinnings, organizations can identify the drivers of workforce outcomes (such as retention and diversity) as well as the impact of such outcomes (and the human-capital practices that support them) on business success.
A Summary of the New Standards
Until recently, compliance work has focused on pay differences, comparing the average pay levels of women or minorities, for example, with those of men or whites, within a pay grade or job title. But job titles alone are often associated with too few incumbents to provide for any statistical power, even in examining simple statistics like differences in average pay levels. And pay grades are often too broad, bringing together employees who are not otherwise comparable.
The new standards recognize that artificially narrow comparisons are unlikely to find disparities. The standards also recognize that many legitimate factors come together to drive pay differences within pay grade, including individual employee attributes (for example, employment experience, qualifications and performance), business and job specifics (such as supervisory structures, exposure to hazards and nature of work), and local labor market conditions.
Under the new standards--which are intended to consider these various factors--organizations will now need to pull together data captured in their HRIS, payroll and supplementary systems to:
1) separate employees into comparable groups for assessment;
2) use statistical regression techniques to understand which legitimate factors drive pay for each group;
3) isolate the additional effects, if any, of gender and ethnicity; and
4) make appropriate pay adjustments.
This process requires data-management and statistical expertise that has not been traditionally required for compliance-oriented work.
Effectively Managing Pay Equity
Statistical analysis of compiled data provides a starting point: identifying employees facing potential pay disparities for further investigation. But no statistical model can account for all the legitimate factors that drive pay in every case--and no database is so complete that all such factors are even available. Company compliance and compensation personnel have important institutional knowledge that can fill in gaps. They know the details that must be considered in making pay adjustments for specific employees culled out by statistical analyses. In cases where their research can justify pay differences, thorough documentation will best provide for an effective defense, should it be required later.
Challenging as it will be, coupling statistical analysis with organizational knowledge and hands-on research can make for effective and efficient enterprisewide assessment. This includes using statistical methods to validate which employees should be considered together for modeling--a technique known as workforce segmentation. In addition, statistical models of pay determination can help HR drill down to those organizational units facing disparities as well as to employees for whom specific pay changes should be considered. The following benefits will result:
■ Cases requiring research can be triaged, prioritized and addressed.
■ Pay changes ultimately made need not threaten the integrity of the organization´s rewards system, since adjustments can take into account differences in employee contributions.
■ Decentralized compensation decisions can be made to face structured, centralized review.
Systematic steps to eliminate disparities will generate other benefits too, as organizations seek every advantage to secure scarce and diverse talent.
The Opportunity: Leveraging the Data to Manage Human Capital
The same data and statistical methods required to assess pay differences can provide considerably broader workforce intelligence. They can be utilized to understand what the organization truly rewards through pay growth and promotion, and the relative efficacy of such reward patterns as compared to the organization´s intent. They can also add a fact-based counterpoint to exit interviews by providing a less subjective explanation for why employees leave the organization. Such analyses can serve to identify levers that would best achieve specific workforce outcomes, allowing the organization to build the workforce needed to deliver on its ultimate objectives.
Further, these workforce data can be directly linked to information on company performance, including financial results, operational success and customer satisfaction metrics, to establish the value of specific human capital decisions, prioritize actions and advise business partners from hard evidence. In short, such discipline brings finance and marketing-like rigor to HR and, with it, potential for greater credibility and enhanced organizational standing.
The new standards are bitter medicine, intensive in the short term as new skills and resources are sought out. In the longer term, they offer a considerable opportunity for HR professionals to meaningfully contribute beyond compliance and earn a coveted "seat at the table." Those who capitalize on the opportunity will inoculate their organizations against legal risk, improve their ability to attract and retain required (and diverse)
talent, and generally enhance the HR function´s ability to drive organizational value.
Brian Levine, Ph.D., is a principal in the Human Capital business of Mercer Human Resource Consulting. Based in New York, he is a labor economist who helps companies assess their internal labor markets and bring these markets into alignment with company business strategies. He led the development of Mercer´s proprietary pay equity assessment software. He can be reached at brian.levine@mercer.com or +1 212 345 4194.
Wendy Hirsch, Ph.D., is a principal in the Human Capital business of Mercer Human Resource Consulting. Based in Milwaukee, she helps clients leverage their human resource function to improve bottom-line results and achieve diversity goals. She can be reached at wendy.hirsch@mercer.com or +1 414 223 7970.
Luis F. Parra, Ph.D., is a principal in the Human Capital business of Mercer Human Resource Consulting, Based in Washington, D.C., he advises HR and business leaders on measuring the ROI of workforce practices, on connecting workforce strategy to the strategy of the business, and on workforce planning and design issues. He can be reached at luis.f.parra@mercer.com or +1 202 331 5202.
For Additional Information:
You can learn more about measuring and managing your workforce in Mercer´s book Play to your strengths: Managing your internal labor markets for lasting competitive advantage, by visiting www.mercerHR.com/playtoyourstrengths.
