Constructing and Conducting A Comp Analysis

Constructing and Conducting a
Compensation Analysis
2012 ILG National Conference

Waikoloa, Hawaii
August 28, 2012
Equal Employment Advisory

Council
1501 M Street, N.W. | Suite 400
Washington, D.C. 20005
Presented by:
Chris Gokturk
Jeff Norris
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.
2012 Equal Employment Advisory Council
2012 ILG National Conference | August 28, 2012 |
Seminar Overview
Establishing a Compensation Analysis Process
Preliminary Considerations
Understanding Your Current Compensation

Structure
Data Preparation and Review
Conducting the Statistical Analyses
Understanding Statistical Procedures
Analyzing Compensation Practices
What Compensation Should Be Analyzed?
Analyzing Compensation Beyond Base Pay and
Performance
Considerations in Making Pay Adjustments
Establishing a Compensation
Analysis Process
Preliminary
Considerations
Purpose of Analysis
Narrow
Scope
Reactive
OFCCP Review
CSAL List
Proactive
Expanded
Scope
Litigation/
EEOC Charge
Proactive
Analysis in
anticipation of
litigation
OFCCP Review
Evolving landscape
Focus on current compensation
Initial scope still USUALLY
limited to base pay
Follow up request includes
beyond base pay dollars
Contractor Selection
Advance Notice Letter
(CSAL)
Still responding to a potential

review
May have additional time to
analyze data or expand scope
as warranted
Ability to address issues PRIOR
TO receipt of scheduling letter
Litigation or EEOC
Charge
Must stem from or be reasonably
related to charge
Focus on defending the data and
practices in effect during the
alleged time period
Questions:
What is the alleged time period?
What practices are being challenged?
These may alter the scope of your

analysis
Proactive Analysis
More options available, so
determining scope becomes
trickier
Scope of analysis can be defined
more broadly
Limitations usually data-related
Counsels involvement is critical
Purpose of Analysis
The companys motivation to
conduct the analysis impacts
Which types of pay practices to
include
Time period of analysis
Whom to include in the analysis
Roles and responsibilities
more on these later
Getting Started
Where to start
Your Compensation Department
What analyses are currently being
performed
Evaluate appropriateness for THIS purpose
Base or total compensation

Employee groupings
Do you have a compensation structure in
place? What is it?
How is pay determined?
What influences what each employee gets
paid?
Understanding Your Current

Compensation Structure

What do you say that you do
Compensation philosophy
Compensation structure
Grades, bands, other
Company policies and procedures

Both formal and informal
How does it work in practice

Four keys to minimizing risk
Alignment of policy and practice
Data integrity
Transparency
Monitoring and analysis
Data Preparation and

Review
The KeyEmployment
Data
Preparing data for analysis
Annualizing compensation for your parttimers
Does everyone have a race/gender code
Does everyone have data in the fields that
matter
Review for any garbage in data fields
Any field important enough to

determine or influence pay is important
enough to check for accuracy
The KeyEmployment
Data
What data do you need
Groupings and factors that
influence pay
Fields that define THE JOB
Fields that define where the
person sits organizationally
Fields that differentiate an
individual from others in the
same type of job
The KeyEmployment
Data
What do you have in your system
How reliable are the data in the fields
Common data integrity issues:
System conversion issues
Example: Everyone has same time in
grade date
Fields that are not kept up to date

Example: Education data
Fields that are important but not

tracked
Example: Prior experience
Dates
Check for accuracy and incomplete
values
Legacy System Problems:
Senior employees: hire date is not
actual mark or change date
Errors in updating
Decision date vs. Effective dates

Rehires how handled
Missing parts of dates (e.g., no day)
Unexpected Data Values

Inconsistent or misspelled text entries
Missing values:
Identify the cause
Have you merged the data correctly
Dont mix with zero values or No entries

Beware of conducting analysis only on the employees with
available data
Outliers or misclassified employees:

Unidentified demotions
Erroneous entries
Wide ranges in pay or grade values for given job title
Using the Right Data

General pay factor coding schemes:
Yes/No Convert to Dummy/Indicator Factor (0=No, 1=Yes)
Multiple Category Factors: Use as scale or separate factors
Ex: Education level (<HS, HS, BA/BS, MS+Phd) = > 3
factors
Determine reference group and code dummies for
others
Continuous Factors (e.g., experience) plot it by salary
and structure factor appropriately
Correlated Factors try to identify distinct components
E.g., time in company and time in job => time in job and
time in company beyond the current job
Conducting the Statistical

Analyses
Understanding
Statistical Procedures
Topics
Statistical test
Mean/Median Analysis
t-Test
Regressions
Examples of regression plots and
results
Using the right statistical tool

Using the right data
Mean & Median

Mean Analysis
What 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 Analysis
What 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
t-Test
What is it?
The t-test assesses whether the means of

two groups are statistically different from
each other
Does not consider other factors
When 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.
Regressions
Regression 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 system
Like prior comparisons, measures
disparities in light of (controlling for)
other factors
Simple Regression one explanatory
variable
Multiple Regression multiple explanatory
variables
Regression Analysis
Armed with the right tools and the right
data
now we can develop the regression model
In order to develop a regression
model, we need to determine three
things:
Dependent variable
Grouping
Factors that influence the dependent
variable within the grouping
Regression Analysis
Dependent variable
This refers to the data we are
trying to explain
Base pay
Total cash
Starting pay
Whether or not someone received
a bonus
Regression Analysis
Grouping
Balance similarly situated
with group size
Typical groupings include:
Job title
Grade
AAP job group
Regression Analysis
Pay factors
Virtually anything can be coded as a
factor
Some best practice companies check each
factor independently to determine its
influence in the absence of other factors
Typical factors include:

Time factors (seniority, time in job,
experience, etc.)
Market factors
Education factors to the extent they are
different within the selected grouping
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
Analyzing Compensation
Practices
What Compensation
Should Be Analyzed?
What Compensation
Should Be Analyzed?
Base salary
Historically what companies have
focused on, both proactively and
for OFCCP audits
Total compensation
What Compensation
Should Be Analyzed?
Base salary is only one of the many
elements of total compensation
Base salary
Short-term incentives
Cash bonuses
Annual bonus
Sign-on bonus
Referral bonus
Retention bonus
Holiday bonus
Other cash
What Compensation
Should Be Analyzed?
Long-term incentives
Stock options
Employee benefits
Perquisites (perks)
Varies from company to company
Individual packages product of
negotiations
Internal perks
Luxury offices
Executive dining rooms
Special parking and cars
What Compensation
Should Be Analyzed?
Merit Increases
OFCCP is routinely requesting
Do you give $$s or percents?
How does this tie into
performance evaluations?
Analyzing
Compensation Beyond
Base Pay and
Performance
Why Monitor Beyond

Base Pay?
The OFCCP is going to ask for it
Its where the real money lies
Its discretionary
Its an in-house function
generally not outsourced
Its better to do so proactively
today rather than defensively
tomorrow
Evaluating Compensation
Beyond Base Pay
Analyzing 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?
Evaluating Compensation
Beyond Base Pay
Two phase process
Participation
Impact ratio analysis
Distribution and patterns
Extent of Participation
Regressions
Mean analysis
Distribution and patterns
Considerations in
Making Pay
Adjustments
Key Questions
Three key questions
Who 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
Who Should Receive Pay

Adjustments
Individuals whose compensation is so low that they
skew the data and no legitimate explanations are
identified should be considered for adjustment
Consult with (as appropriate):
Human resources and compensation staff
Individuals line management
General counsel (risk/benefit analysis)
Senior management
Full story rarely resides in the database or employee

files
Should disadvantaged males and non-minorities be
afforded adjustments
How Much of an Adjustment

Should Be Made
Immediate elimination of entire disparity
Amount sufficient to reach bottom of
range
Amount sufficient to eliminate statistical
significance
Additional considerations:
Budget limitations
Will adjustments create new disparities for
men/non-minorities
When Should Adjustments

Be Made
During next scheduled compensation
review cycle
Least likely to generate questions
Immediately, mid-cycle
What explanation do you provide employee
Prior to submitting compensation data to

OFCCP or EEOC for analysis
Conduct risk/benefit analysis
What if OFCCP asks
Conclusion
Prudent 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
Wrap-Up and Questions

jnorris@eeac.org
cgokturk@easiconsultants.com

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Constructing and Conducting a

2012 ILG National Conference

Equal Employment Advisory

The Equal Employment Advisory Council (EEAC) is a nonprofit

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Understanding Your Current Compensation

Considerations in Making Pay Adjustments

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Still responding to a potential

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

These may alter the scope of your

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Base or total compensation

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Understanding Your Current

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Understanding Your Current

Company policies and procedures

How does it work in practice

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Understanding Your Current

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Data Preparation and

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Any field important enough to

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Fields that are not kept up to date

Fields that are important but not

2012 ILG National Conference | August 28, 2012 |

Decision date vs. Effective dates

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Unexpected Data Values

Dont mix with zero values or No entries

Outliers or misclassified employees:

Wide ranges in pay or grade values for given job title

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

2012 Equal Employment Advisory Council

2012 ILG National Conference | August 28, 2012 |

Using the Right Data