2012 ILG National ConferenceWaikoloa, HawaiiAugust 28, 2012Equal Employment Advisory Council1501 M Street, N.W. | Suite 400Washington, D.C. 20005Presented by:Chris GokturkJeff Norris

Constructing and Conducting a Compensation Analysis

2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * 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.

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Seminar OverviewEstablishing a Compensation Analysis ProcessPreliminary ConsiderationsUnderstanding Your Current Compensation StructureData Preparation and ReviewConducting the Statistical AnalysesUnderstanding Statistical ProceduresAnalyzing Compensation PracticesWhat Compensation Should Be Analyzed?Analyzing Compensation Beyond Base Pay and Performance Considerations in Making Pay Adjustments

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Establishing a Compensation Analysis Process

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Preliminary Considerations

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Purpose of Analysis

Narrow ScopeExpanded ScopeReactiveOFCCP ReviewLitigation/EEOC Charge

ProactiveCSAL ListProactive Analysis in anticipation of litigation

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * OFCCP ReviewEvolving landscape Focus on current compensationInitial scope still USUALLY limited to base payFollow up request includes beyond base pay dollars

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Contractor Selection Advance Notice Letter (CSAL)Still responding to a potential reviewMay have additional time to analyze data or expand scope as warrantedAbility to address issues PRIOR TO receipt of scheduling letter

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Litigation or EEOC ChargeMust stem from or be reasonably related to chargeFocus on defending the data and practices in effect during the alleged time periodQuestions:What is the alleged time period?What practices are being challenged?These may alter the scope of your analysis

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Proactive AnalysisMore options available, so determining scope becomes trickierScope of analysis can be defined more broadlyLimitations usually data-relatedCounsels involvement is critical

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Purpose of AnalysisThe companys motivation to conduct the analysis impactsWhich types of pay practices to includeTime period of analysisWhom to include in the analysisRoles and responsibilities

more on these later

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Getting StartedWhere to startYour Compensation DepartmentWhat analyses are currently being performedEvaluate appropriateness for THIS purposeBase or total compensationEmployee groupingsDo you have a compensation structure in place? What is it?How is pay determined?What influences what each employee gets paid?

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Understanding Your Current Compensation Structure

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Understanding Your Current Compensation StructureWhat do you say that you doCompensation philosophyCompensation structureGrades, bands, otherCompany policies and proceduresBoth formal and informalHow does it work in practice

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Understanding Your Current Compensation StructureFour keys to minimizing riskAlignment of policy and practiceData integrityTransparencyMonitoring and analysis

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Data Preparation and Review

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * The KeyEmployment Data Preparing data for analysisAnnualizing compensation for your part-timersDoes everyone have a race/gender codeDoes everyone have data in the fields that matterReview for any garbage in data fieldsAny field important enough to determine or influence pay is important enough to check for accuracy

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * The KeyEmployment DataWhat data do you needGroupings and factors that influence payFields that define THE JOBFields that define where the person sits organizationally Fields that differentiate an individual from others in the same type of job

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * The KeyEmployment DataWhat do you have in your systemHow reliable are the data in the fieldsCommon data integrity issues:System conversion issues Example: Everyone has same time in grade dateFields that are not kept up to dateExample: Education dataFields that are important but not trackedExample: Prior experience

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * DatesCheck for accuracy and incomplete valuesLegacy System Problems:Senior employees: hire date is not actual mark or change dateErrors in updating Decision date vs. Effective datesRehires how handledMissing parts of dates (e.g., no day)

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Unexpected Data ValuesInconsistent or misspelled text entriesMissing values:Identify the causeHave you merged the data correctlyDont mix with zero values or No entriesBeware of conducting analysis only on the employees with available dataOutliers or misclassified employees:Unidentified demotionsErroneous entries Wide ranges in pay or grade values for given job title

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Using the Right DataGeneral pay factor coding schemes:Yes/No Convert to Dummy/Indicator Factor (0=No, 1=Yes)Multiple Category Factors: Use as scale or separate factorsEx: Education level ( 3 factorsDetermine reference group and code dummies for othersContinuous Factors (e.g., experience) plot it by salary and structure factor appropriatelyCorrelated Factors try to identify distinct componentsE.g., time in company and time in job => time in job and time in company beyond the current job

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Conducting the Statistical Analyses

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Understanding Statistical Procedures

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * TopicsStatistical testMean/Median Analysist-TestRegressionsExamples of regression plots and resultsUsing the right statistical toolUsing the right data

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Mean & Median Mean AnalysisWhat 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 AnalysisWhat 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

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * t-TestWhat is it?The t-test assesses whether the means of two groups are statistically different from each otherDoes not consider other factorsWhen 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.

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * RegressionsRegression 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 systemLike prior comparisons, measures disparities in light of (controlling for) other factorsSimple Regression one explanatory variableMultiple Regression multiple explanatory variables

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Regression AnalysisIn order to develop a regression model, we need to determine three things:Dependent variableGroupingFactors that influence the dependent variable within the groupingArmed with the right tools and the right data now we can develop the regression model

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Regression AnalysisDependent variableThis refers to the data we are trying to explain Base payTotal cashStarting payWhether or not someone received a bonus

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Regression AnalysisGroupingBalance similarly situated with group sizeTypical groupings include:Job titleGradeAAP job group

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Regression AnalysisPay factorsVirtually anything can be coded as a factorSome best practice companies check each factor independently to determine its influence in the absence of other factorsTypical factors include:Time factors (seniority, time in job, experience, etc.)Market factorsEducation factors to the extent they are different within the selected grouping

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * 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 dont contribute to the model

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Analyzing Compensation Practices

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What Compensation Should Be Analyzed?

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * What Compensation Should Be Analyzed?Base salaryHistorically what companies have focused on, both proactively and for OFCCP auditsTotal compensation

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * What Compensation Should Be Analyzed?Base salary is only one of the many elements of total compensationBase salaryShort-term incentivesCash bonusesAnnual bonusSign-on bonusReferral bonusRetention bonusHoliday bonusOther cash

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * What Compensation Should Be Analyzed?Long-term incentivesStock optionsEmployee benefitsPerquisites (perks)Varies from company to companyIndividual packages product of negotiationsInternal perksLuxury officesExecutive dining roomsSpecial parking and cars

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * What Compensation Should Be Analyzed?Merit IncreasesOFCCP is routinely requesting Do you give $$s or percents?How does this tie into performance evaluations?

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Analyzing Compensation Beyond Base Pay and Performance

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Why Monitor Beyond Base Pay?The OFCCP is going to ask for itIts where the real money liesIts discretionaryIts an in-house function generally not outsourcedIts better to do so proactively today rather than defensively tomorrow

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Evaluating Compensation Beyond Base PayAnalyzing 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?

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Evaluating Compensation Beyond Base PayTwo phase processParticipationImpact ratio analysisDistribution and patternsExtent of ParticipationRegressionsMean analysisDistribution and patterns

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Considerations in Making Pay Adjustments

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Key QuestionsThree key questionsWho 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

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Who Should Receive Pay AdjustmentsIndividuals whose compensation is so low that they skew the data and no legitimate explanations are identified should be considered for adjustmentConsult with (as appropriate):Human resources and compensation staffIndividuals line managementGeneral counsel (risk/benefit analysis)Senior managementFull story rarely resides in the database or employee filesShould disadvantaged males and non-minorities be afforded adjustments

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * How Much of an Adjustment Should Be MadeImmediate elimination of entire disparityAmount sufficient to reach bottom of rangeAmount sufficient to eliminate statistical significanceAdditional considerations:Budget limitationsWill adjustments create new disparities for men/non-minorities

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * When Should Adjustments Be MadeDuring next scheduled compensation review cycleLeast likely to generate questionsImmediately, mid-cycleWhat explanation do you provide employeePrior to submitting compensation data to OFCCP or EEOC for analysisConduct risk/benefit analysisWhat if OFCCP asks

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * ConclusionPrudent 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

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2012 Equal Employment Advisory Council 2012 ILG National Conference | August 28, 2012 | Page * Wrap-Up and Questionsjnorris@eeac.orgcgokturk@easiconsultants.com

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