Recent Developments in Compensation Analysis

Stephanie R. Thomas, Ph.D.Thomas Econometrics

sthomas@thomasecon.com

January 29, 2009

January 27, 2010

August 17, 2010

OFCCP announces Compensation Standards and

Guidelines will be rescinded

Renewed support for the Paycheck

Fairness Act

Creation of National Equal

Pay Enforcement Task Force

President Obama signs Ledbetter Fair Pay Act

Ledbetter Fair Pay Act• Ledbetter Fair Pay Act, signed into law on January 29, 2009,

reversed the Supreme Court’s decision, stating that the 180-day statute of limitations for filing an equal pay lawsuit regarding pay discrimination resets with each new discriminatory paycheck

• “application of a discriminatory compensation decision or other practice, including each time wages, benefits or other compensation is paid”

Ledbetter Fair Pay Act• What does this mean for employers?– Increased need for documentation• How were the compensation decisions made?• How did the employer arrive at the specific

compensation figures?• What metrics and criteria were used to evaluate

employees’ performance?• What compensation surveys or industry statistics were

used to determine compensation?

Ledbetter Fair Pay Act• What does this mean for employers?– Increased complexity of analysis• What do “other factors” mean?

– Pay grade– Department– Location– Shift

• “Other factors” can be any factor that creates seemingly legitimate, non-discriminatory differentials in pay

Employees in Grade 9Gender Race Pay RateMale White $45,000Male Asian $43,500Female African American $43,500Male African American $43,500Female White $43,500Male Hispanic $43,500Male Native American $43,500Male White $43,500Female Asian $43,500Male White $40,000

No statistical evidence of discrimination. We’re safe, right?

Employees in Grade 9Gender Race Pay RateMale White $45,000Male Asian $43,500Female African American $43,500Male African American $43,500Female White $43,500Male Hispanic $43,500Male Native American $43,500Male White $43,500Female Asian $43,500Male White $40,000

No statistical evidence of discrimination. We’re safe, right?

WRONG!

What if someone claims that

she was hired into the wrong

pay grade (9 instead of 10)

because of discrimination?

Ledbetter Fair Pay Act• What does this mean for employers?– “Other Factors” is still relatively new area :• Not clear what kinds of “other factors” claims will be

made• Not clear how successful these claims will be• Easy to claim, difficult to prove

What all of this means, from a compensation analysis perspective, is that you can't look at compensation in isolation.

All of these "other factors" are in play and are fair game.

National Equal Pay Enforcement Task Force

• Created as a result of Obama’s pledge in State of Union Address to crack down on violations of equal pay laws

• “Cross-Agency:– U.S. Office of Personnel Management– U.S. Department of Justice– U.S Department of Labor– U.S. Equal Employment Opportunity Commission

National Equal Pay Enforcement Task Force

• Identified persistent challenges to enforcing equal pay laws• Government’s ability to understand full scope of

wage gap and to identify and combat wage discrimination can be improved by access to more data than are currently available

Solution: Collect data on the private workforce to better understand the scope of the pay gap and target enforcement efforts

National Equal Pay Enforcement Task Force

• NEPET recommendations:– Reinstatement of the OFCCP Equal Opportunity

(EO) Survey (or similar survey)• better identification of those employers likely to be out of

compliance with respect to compensation discrimination;• narrowing of the issues on which the resulting review will focus;• identification of employers for corporation-wide and industry-

focused reviews.

Solution: Collect data on the private workforce to better understand the scope of the pay gap and target enforcement efforts

National Equal Pay Enforcement Task Force

• NEPET recommendations:– Revamping EEO Reports

• Only one of four versions collects wage data;• EEOC has concluded “no federal data source that contains private

sector employer-specific wage data broken down by demographic category”;

Solution: Collect data on the private workforce to better understand the scope of the pay gap and target enforcement efforts

National Equal Pay Enforcement Task Force

• Identified persistent challenges to enforcing equal pay laws• Existing laws do not always provide federal

officials with adequate tools to fight wage discrimination

Solution: The Administration will work with Congress to pass the Paycheck Fairness Act

Paycheck Fairness Act• Equal Pay Act prohibits employers from paying a

female employee less than a male employee for “substantially equal” work– Employers liable for pay differential unless discrepancy is

attributable to:• Seniority system;• Merit system;• System which measures earnings by quantity or quality of

production;• Any factor other than sex.

Paycheck Fairness Act• Equal Pay Act prohibits employers from paying a

female employee less than a male employee for “substantially equal” work– Employers liable for pay differential unless discrepancy is

attributable to:• Seniority system;• Merit system;• System which measures earnings by quantity or quality of

production;• Any factor other than sex.

Under the Paycheck Fairness Act, employer must show that the pay differential is not only caused by something other than sex, but also is related to job performance and is consistent with business necessity.

Paycheck Fairness Act• Under the Paycheck Fairness Act, employer would

have to show that the difference in pay was based on:– “Bona fide” factor other than sex– Job related– Consistent with business necessity

Paycheck Fairness Act• Under the Paycheck Fairness Act, employer would

have to show that the difference in pay was based on:– “Bona fide” factor other than sex– Job related– Consistent with business necessityIf passed in its current form, each element factoring in to a

compensation analysis will need to be not only bona fide and job

related, the employer will also have to demonstrate that each

element is consistent with business necessity.

Rescinding of OFCCP’s Compensation Standards and Guidelines

• In 2006, OFCCP issued Interpretive Standards for Systemic Compensation Discrimination and Voluntary Guidelines for Self-Evaluation of Compensation Practices

Rescinding of OFCCP’s Compensation Standards and Guidelines

• Standards:– OFCCP focus on

systemic pay discrimination

– Described the methodology used by OFCCP in deciding to file an agency lawsuit for pay discrimination

• Guidelines:– Outlined a voluntary self-

evaluation process to enable contactors to avoid OFCCP investigation of compensation practices• Similarly situated employee

groupings• Multiple regression analysis• Investigation of statistically

significant disparities• Contemporaneous creation

of data and documentation

Rescinding of OFCCP’s Compensation Standards and Guidelines

• Guidelines:– Outlined a voluntary self-evaluation process to

enable contactors to avoid OFCCP investigation of compensation practices

– Suggested methodology:• Similarly situated employee groupings• Multiple regression analysis• Investigation of statistically significant disparities• Contemporaneous creation of data and documentation

ON AUGUST 17, PATRICIA SHIU

ANNOUNCED THAT STANDARDS

AND GUIDELINES WILL BE

RESCINDED

Rescinding of OFCCP’s Compensation Standards and Guidelines

• The recommendation for rescission came from the National Equal Pay Enforcement Task Force

New Wage Data Collection Tool

Wage Data Collection Tool

• Some think the “new wage data collection instrument” will be the old EO Survey morphed into a different format– From 2000-2005, OFCCP utilized EO Survey to collect

information on personnel data and compensation by EEO-1 category

– The hope was that the EO Survey would identify non-compliant federal contractors and assist OFCCP in identifying contractors for further evaluation

– EO Survey was discontinued in 2006

Wage Data Collection Tool

• Part of The Paycheck Fairness Act is the reinstatement of EO Survey

• If passed in its current form, one half of all federal contractor establishments (or about 100,000 employers) would have to complete the EO Survey every year.

Wage Data Collection Tool

• The reinstatement of the EO Survey is part of the Paycheck Fairness Act, which is stalled in the Senate. If that Act passes in its current form, one half of all federal contractor establishments (or about 100,000 employers) would receive and have to complete the EO Survey every year.

• Even if the Paycheck Fairness Act is never passed, I predict we will see the EO Survey revived in some form.

What does all of this mean for compensation analysis?

What It All Means

1. Compensation cannot be analyzed in isolation

What It All Means

2. Documentation and retention of compensation decision information is critical

What It All Means

3. If you’re not statistically examining your compensation practices, you should be (because someone else will be!)

What It All Means

4. Federal contractors and subcontractors may be on their own for a while

What It All Means

5. The Paycheck Fairness Act is a HUGE wild card

Recent Developments in Compensation Analysis

Stephanie R. Thomas, Ph.D.Thomas Econometrics

sthomas@thomasecon.com