4 Keys To A Strong Pay Equity Audit

Transparency laws and employee concerns are adding pressure on organizations to make sure their compensation is done equitably. Here’s how to avoid problems.

It’s more important than ever to make sure you are providing equitable compensation to all your employees. As companies review their practices, Lynne Anne Anderson, a partner with Faegre Drinker in Florham Park, New Jersey, shares the key questions HR leaders should consider.

Have you established a privileged pay equity audit team so your audit work, including the statistical analysis, can be protected by the attorney client/work product privileges and not be subject to disclosure to agencies or plaintiffs’ attorneys?

It is critical to take the steps necessary to establish that these privileged audits are distinguishable from routine compensation or other HR reviews. Otherwise, you risk having the pay equity analysis be the subject of discovery in a lawsuit or government audit.

You should clearly identify the members of the audit team and have legal counsel provide clear written guidelines establishing that the audit is being done at the direction of counsel for the purposes of providing legal advice before data collection starts. These guidelines will provide instructions regarding communications about the audit, collection of data and creation of documents for the audit.

The expert retained to perform the statistical analysis should also be retained by the law firm, not the company, to preserve the privilege. Measures should also be taken to ensure that the expert has robust data security protocols in place to protect your HRIS data.

As you build your database for the statistical analysis, have you included all of the relevant employee information, grouped employees appropriately, accounted for all compensation variables and not just salary, and built in the applicable control factors before running the initial analysis?

Once the audit team is in place, employees included within the scope of the audit will need to be appropriately grouped with similarly situated employees for analysis. When collecting compensation data, because the pay equity laws consider comparable pay based on total compensation, not just base salary, it is also important to account for all compensation variables including bonus or incentive pay, commissions, among other variables.

Data on applicable control factors and criteria that are relevant in explaining the relative pay of the various occupations at the company—such as grade, division, tenure and geographic location—need to be incorporated into the statistical model.  Data regarding factors that are typically used by decision-makers for compensation decisions and can legitimately justify a differential in salary for similarly situated employees, such as experience, tenure, performance and productivity, should also be incorporated.

Generally, the experts use a statistical technique called “multiple regression analysis” that allows the expert to estimate the impact of protected group status, such as gender or race, on the variable of interest, such as pay, after filtering out the impact of other control factors. It is important to understand that one size does not fit all in this process. Without a proper understanding of specifics such as the employer’s current pay practices, similarly situated employee groups and organizational structure, the statistical models may produce unreliable results.

For example, if a factor associated with lower pay is not included in the model, and this factor is highly relevant to a certain demographic group of employees, then the unexplained difference in pay of the protected group may be overstated or understated due to the omitted variable.

Once you have the initial results, what do you need for the cohort review of areas that have statistically significant differences in pay requiring further research to explain the differentials?

Performing the statistical analysis and identifying potential disparities or pay gaps is only the preliminary stage. Simply adjusting compensation based on the “predicted” values from the initial statistical results is not serving the goals of the pay equity audit.

There may be legitimate reasons justifying the pay disparity, and adjustments in compensation may not be appropriate and create further problems. A targeted “deeper dive” cohort review by attorneys with pay equity experience can determine what is driving the differentials identified by the statistical review for purposes of providing recommendations for remedial action.

For example, are there additional control factors driving compensation decisions that need to be factored into the model? Are those factors permissible under the law? For the “outliers” whose compensation is way above or way below what the model predicted, do their current functions match their job descriptions or job grades in which they are currently placed?

The cohort review will typically include analysis of job descriptions to, among other purposes, confirm that the groupings are accurate; review of underlying performance management documents; and targeting interviews of compensation decision-makers. If necessary, additional data points, or refinements in the groupings, will be provided to the statistical expert so the analysis can be re-run and the results updated as appropriate.

This is a critical phase of the pay equity audit.

Once the audit is completed, what types of remedial action should be considered?

To the extent that the audit reveals disparities, it is appropriate to provide recommendations on documenting applicable defenses to any disparities and/or implementation of appropriate remedial measures. Remedial measures may include compensation adjustments, guided by information from the statistical models and the cohort review. Other remedial actions would include policy and practice modifications, training, guidelines, documentation recommendations and other best practices relating to compensation decisions at all stages of employment. 

As we see continued expansion in state and local pay transparency laws, it is also appropriate to provide guidance regarding compliance with pay data reporting requirements and pay range disclosure obligations based on the audit findings.  As one example, the audit should reveal the key factors influencing compensation decisions and enable companies to have a defined process to promptly and accurately respond to inquiries from current employees about where they fall on the applicable pay range.

Finally, companies should not consider privileged pay audits as a “one and done” effort, so they can proactively manage compliance.

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