Will Market Based Only Salary Structures Survive Regulatory Reviews and Scrutiny?

Will Market Based Only Salary Structures Survive Regulatory Reviews and Scrutiny?

Back in October, 2012, WorldatWork and Deloitte Consulting LLP released and publicized a study on “Salary Structures Policies and Practices” based on 910 respondents out of 5,398 WorldatWork members who were invited to participate in this focused study. The survey was open for data submission for approximately three weeks during the latter part of July and first week in August.

Some of the key findings from this study follow:

  • Market-based salary structures are more popular than traditional and broadband structures.

  • Traditional salary structure range spreads are increasing.

  • Larger organizations utilize wider ranges as opposed to narrower ranges for smaller organizations.

  • Market-based ranges are used more by Consulting, Professional, Scientific and Technical business sector organizations

  • Traditional ranges are widely utilized by Health Care, Social Assistance, Utilities and Oil & Gas organizations.

  • A majority of the survey respondents consistently benchmark with the 50th percentile (median) of the market.

  • A large percentage of the surveyed organizations adjust salary ranges on an annual basis.

  • Spreadsheet software applications (e.g., Microsoft Excel) are the most popular tool for salary structure design, administration, record and communication followed by Point Solutions (e.g., tools specifically focused on salary structure management) and then followed by enterprise systems.

  • Traditional salary structures have a percentage range spread from the mid 30’s to the low 50’s.

  • Market based salary structures have a percentage range spread from the upper 40’s to the upper 60’s.

Since the Easter season has just past, I would be remiss if I didn’t state that based on the WorldatWork and Deloitte Consulting LLP study, “Most of the survey respondents are putting a majority of their eggs in one basket.” Market based only salary structures tend to be mono-factor focused and heavily dependent on external market pay medians and means. Historically, aggregated market pay study data points tend to fluctuate annually due to variations in participating organizations and their respective employee pay data points. A significant amount of market pay data is required to validate and neutralize the high and low outliers and market pay fluctuations. Market based only salary structures range spreads have a wider range spread to compensate for putting all the organization’s eggs in a mono-factor and heavily dependent market pay analysis basket.

This popular approach based on the WorldatWork and Deloitte Consulting, LLP study runs counter to outside regulatory systemic compensation discrimination multi-factor regression analysis. The OFCCP uses statistical techniques inclusive of multiple regressions based on job content, skills, qualifications and responsibility levels. In addition, the OFCCP will evaluate legitimate factors that influence compensation inclusive of education, prior work experience, performance, productivity and time in job.

The OFFCP recently announced its plans to rescind restrictions on investigating pay discrimination with the following statements as noted on the U.S. Department of Labor, OFFCP web site.

OFCCP Rescinds Restrictions on Investigating Pay Discrimination

  • The Office of Federal Contract Compliance Program has rescinded two enforcement guidance documents on pay discrimination originally issued in 2006, commonly known as the "Compensation Standards" and "Voluntary Guidelines." This action, to be effective Feb. 28, is intended to protect workers and strengthen OFCCP's ability to identify and remedy different forms of pay discrimination. It will enable OFCCP to conduct investigations of contractor pay practices consistent with Title VII of the Civil Rights Act of 1964.

  • In addition, OFCCP has introduced new guidance setting forth the procedures, analysis and protocols OFCCP will utilize going forward when conducting compensation discrimination investigations. The new approach enables OFCCP investigators to better examine practices and available evidence to uncover discrimination and evaluate contractor compliance with Executive Order 11246.

  • "A strong American middle class hinges on ensuring equal pay," said Acting Secretary of Labor Seth D. Harris. "As President Obama has made clear, everyone – including the wives, mothers, sisters and daughters among us – must be paid fairly and without discrimination. These new standards will strengthen our ability to ensure that women and men are fully protected under our nation's laws."

  • "Today, we are lifting arbitrary barriers that have prevented our investigators from finding and combating illegal pay discrimination," said OFCCP Director Patricia A. Shiu, a member of the President's National Equal Pay Task Force. "At the same time, we are providing clear guidance for contractors to facilitate their success when it comes to providing equal opportunity to all of their workers."

OFCCP Definition and Discussion on Multiple Regression Analysis as stated on the DOL – OFCCP web site.

Multiple regression analysis is a statistical tool for understanding the relationship between two or more variables…. The multiple regression model must include those factors that are important to how the contractor in practice makes pay decisions. Such factors could include the employees' education, work experience with previous employers, seniority in the job, time in a particular salary grade, performance ratings, and other factors. OFCCP generally will attempt to build the regression model in such a way that controls for the factors that the investigation reveals are important to the employer's pay decisions, but also allows the agency to assess how the employers' pay decisions affect most employees. One factor that must be controlled in the regression model is categories or groupings of jobs that are similarly situated based on the analysis of job similarity noted above (i.e., similarity in the content of the work employees perform, and similarity in the skills, qualifications, and responsibility levels of the positions the employees occupy, and additional factors as discussed above). This will ensure that the analysis compares the treatment of employees who are in fact similarly situated.

Given the regulatory trends toward identification and restitution of systemic pay practices, it would be prudent for organizations that utilize market based only salary structures to place a few eggs over in the internal job evaluation (point-factor solution) salary structure management process. The combination of an internal traditional multi-compensable factor and a market based salary validate structure should stand the scrutiny of outside regulatory multiple regression analysis, depending on if the management rabbits are progressively addressing systemic pay discrimination as opposed to blissfully hopping-down the bunny trail.