5 Key Questions for Pay Equity Remediation

Acting on the results of a pay equity study sounds simple. Spoiler alert: it isn’t. Pay equity studies involve the design of advanced statistical models to test whether appropriate factors like role, performance, and location can explain individual compensation levels. The goal is to test whether inappropriate factors like gender and race influence compensation, and if so, create a roadmap for corrective action.

A pay equity study can yield insight into the overall organizational pay gap (if any) and identify employees whose pay differs most from what the statistical model predicts. That said, building the model is only half the battle. Companies must make a number of tough decisions once the results are in hand. Here are five of the most common question clients ask when the time comes to make those decisions.

1. How much should we focus on the outliers?

This is the most hotly debated question. In a pay equity study, the statistical regression model aims to identify whether:

• A structural difference exists in how certain employee demographics are paid, after controlling for legitimate factors (the “pay gap”)
• Any employees are underpaid relative to what the regression model predicts at 95% certainty (the “outliers,” which are usually about 5% of the population)

It’s tempting to focus on the outliers because they’re an easier problem to solve. But that isn’t necessarily the best course of action. What you really need to do is investigate how much the outliers drive any pay equity problem.

Imagine a hypothetical company that chooses to pay minorities 4% less than their non-minority coworkers holding the same job, in the same region, at the same level of performance. We’d call this a structural and systemic pay equity problem—it couldn’t get much worse than this. Given the architecture of a pay equity study and how the math works, there would nonetheless be a 5% group of outliers. However, focusing only on them leaves the other 95% (the non-outliers) unaddressed when clearly the problem is pervasive. In this sort of fact pattern, it’s risky to focus on outliers versus the overall pay gap.

In other words, where you focus your remediation efforts should depend on the nature and context of any problem that comes up. The outliers may be the result of accidental breakdowns in the pay process. On the other hand, they may be the most visible part of a much broader problem. Figure this one out, and then the next steps will be much clearer.

2. How do we fold adjustments into compensation?

Once pay adjustments are determined, there are different ways to carry them out. You could make the adjustments immediately and even let affected employees know that it’s due to a pay equity study. Alternatively, you could quietly fold the adjustments into the next annual merit process.

The second approach is usually preferred by employers. It’s simpler, helps preserve legal privilege for the study itself, and doesn’t open the door to tough questions like, “Where’s all my back pay?”

But even the inconspicuous approach has its drawbacks. For one, leaving line managers in the dark can lead to confusion if they see a material increase in compensation to someone they manage. Managers may even try to reallocate the adjustment to someone else on their team based on perceived performance—and then be surprised when they’re told they can’t. For another, waiting until the next merit cycle to make an adjustment increases the risk that outliers will remain outliers. Suppose an outlier, Sally, needs $5,000 to be at par with her relevant cohort. If she gets a $5,000 raise during the next merit cycle, she could remain an outlier if others in her cohort get a raise too—even if their raises aren’t as high.

To manage these issues, some companies conduct an ultra-condensed pay equity study toward the front end of the annual merit cycle. That way, they can test whether the adjustments linked to the prior pay equity study will accomplish their intended purpose. We like this approach a lot because it offers a reality check before finalizing compensation decisions. It also helps to resolve problems at the source rather than allow them to linger.

3. How much should we remediate?

This is the toughest question we face in every project. To see why, let’s suppose focusing on outliers is an adequate approach and there are 50 outliers in a population of 1,000. For simplicity, let’s further suppose they all have the same target compensation levels (that is, we don’t need to normalize for high- and low-paying roles). Now let’s say one outlier, Cindy, makes $60,000 and the model’s predicted compensation level for Cindy is $80,000.

What adjustment is appropriate for Cindy? Yes, the model suggests raising her salary to $80,000, but let’s think this through.

What if there are 20 people with compensation between $62,000 and $78,000 who are not outliers? Perhaps some are even women and/or minorities. If only Cindy gets an adjustment, she’ll effectively leapfrog all 20 in compensation, which can be perceived as quite unfair.  Instead of solving the inequity, you’ll just move it around.

There are a number of alternatives. One is to adjust a targeted outlier’s pay only to the point at which their pay differential (actual pay versus model-predicted pay) is no longer statistically significant—in other words, they’re no longer an outlier. For Cindy, the model may present $63,500 as the watermark at which her actual pay is not considered statistically different from her predicted pay. Another alternative is to adjust all employees to their model-predicted pay level regardless of whether they were flagged as a statistical outlier or were merely slightly low. And, of course, there are plenty of other solutions that merit consideration.

As you can see, the remediation process is filled with judgment calls that balance cost, internal fairness, and effectiveness. By effectiveness, we specifically mean the extent to which an action addresses root causes and reduces the probability of the flagged issues reappearing in future years’ analyses. In our experience, the best approach has a lot to do with the organization’s culture, budget, and pay philosophy. The best advice we can give is to budget time to have these discussions and run multiple what-if statistical scenarios so that you can work through the strategy with data in hand.

4. How do we identify root causes of inequity?

A major goal of any pay equity initiative is answering the critical, board-level question of where an inequity came from. Did it materialize during the hiring process? Could it be linked to unconscious bias in promotion and pay decision-making? Could there be shreds of conscious bias? Or could the problem stem from other factors? These are all questions to expect from the board and senior management.

During year one of a study, it’s common to focus on getting the lay of the land and addressing any major symptoms, leaving causal questions for the second year or later. In any event, the solution is to analyze the data to see where the problem could be. For example, you can study pay equity only in the first year of every employee’s tenure to see if the problem shows up via the hiring process. Or, you can monitor the growth/decline rate of a problem to see if it changes one way or the other during the annual merit process. You can also look at other diversity and inclusion statistics such as promotion and attrition rates for women and men at various levels in the organization.

In our experience, root causes differ across organizations and the best pay equity strategies are holistic—that is, a statistical study drives operational improvements throughout the organization. For instance, if a problem originates during the hiring process itself, this suggests reevaluating how compensation is set during the job offer and negotiation stage, whether to ask about prior salary, and so on. Some of our clients use the statistical model from their pay equity study as a gateway in the hiring process to ensure the starting salary is within the expected ranges. Over the long run, the annual pay equity study serves as both a gauge of whether operational enhancements are working and a guide to where further enhancements may be necessary.

After year one, subsequent annual studies should report key punchlines to the board and senior management in the form of:

• • Our study yielded _____
  • We improved on our prior results as shown by _____
  • Drivers of any problem are _____, which differ/align with what we found last year
  • Operational enhancements implemented include _____ and yielded _____ impact
  • Goals for next year include _____

5. What if we can’t afford the adjustments we want to make?

We work with organizations in a range of situations, from highly scrutinized businesses that can make large pay adjustments to old-line industries where the compensation budgets are small.

This is a sensitive topic. Every organization wants to do the right thing, but many feel caught between a rock and a hard place given financial constraints. It’s not our place to opine on how to allocate budgets and deal with the economic realities faced in today’s competitive market. But we can suggest some strategies to consider when struggling with limited budgets for pay adjustments.

Educate your compensation committee, CEO, and CHRO. Help them see the strategic business case for getting in front of pay equity issues. In our view, the business case is more compelling than reducing legal risk and gets to the heart of your talent attraction and retention strategy. If you can garner the right support and engagement, the budget will eventually come.

Approach pay equity (and diversity and inclusion) as a marathon, not a sprint. The effort to nip any issue in the bud in the first year a study is done is very admirable, but recognize that the problem is fluid and dynamic. For every outlier remediated, a new one may appear next year. Complex social problems are solvable, but it takes structural change over many years to get there. As such, focus on the recurring analytical pay equity process and how to make it more robust—that is, predictive of problems and their root causes so you can effect positive, long-run structural change.

Track trends over time. If the actions you’ve taken aren’t getting results, it may help support the business case to try different things. Of course, in the spirit of playing the long game, don’t expect a few pay adjustments to resolve a problem that may be structural.

Think beyond pay adjustments. Try to get to the source of any problems. Operational enhancements such as tweaking hiring, promotion, and mentoring processes are not only cost efficient, but tend to address underlying structural issues more effectively over time.

Conclusion

Pay equity is a mega topic; even the statistical analysis piece of it can be overwhelming. Link it to broader diversity and inclusion initiatives, and it becomes especially unclear what to prioritize and how to allocate organizational resources. Instead, try to focus on recurring processes that you can stand up to equip cross-functional decision-makers with the information they need to make positive change.

We hope this overview of common questions and decision areas is helpful as you think through your own situation. For a more general introduction to the topic of pay equity, check out some of our more popular pieces:

• General overview on pay equity
• Deep dive into statistical pay equity models
• Q&A on pay equity studies

In the meantime, if you have any questions, please contact us.