Compensating Your Employees Fairly: A Guide to Internal Pay Equity

295 Pages·2013·5.375 MB·English

by  Stephanie R. Thomas

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Contents
About the Author. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ix
Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xi
Chapter 1: Why equity in Compensation Matters � � � � � � � � � � � � � � � � �1
Chapter 2: types of discrimination in Compensation � � � � � � � � � � � � � � 19
Chapter 3: Multiple regression Analysis� � � � � � � � � � � � � � � � � � � � � � � � � 39
Chapter 4: the data� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 89
Chapter 5: regression Models of equal Pay� � � � � � � � � � � � � � � � � � � � � 119
Chapter 6: other tests of equal Pay � � � � � � � � � � � � � � � � � � � � � � � � � � 141
Chapter 7: Analysis Follow-up� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 177
Chapter 8: the Changing landscape of Pay equity enforcement� � � 209
Chapter 9: Causes of the Gender Pay Gap� � � � � � � � � � � � � � � � � � � � � � 237
Chapter 10: litigation Avoidance and Proactive Self-Analysis� � � � � � � 259
Appendix: the Basics of Statistical inference� � � � � � � � � � � � � � � � � � � 275
index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
C H A P T E R
1
Why Equity in
Compensation
Matters
Do you compensate your employees fairly?
Answering that question is not as simple as you might think. There are a
variety of ways it could be interpreted. The question could pertain to the
policies and procedures used to make compensation decisions. It could be
asking about the actual compensation outcomes. Or it could relate to how
each employee feels about the compensation decision-making process, his
or her actual compensation outcome, what information was communicated
about the decision-making process and compensation outcome, and how that
information was communicated.
One way to approach the concept of fairness is from an organizational justice
perspective. Organizational justice theorists argue that fairness, at its core, has
four dimensions:
1. Distributive justice.
2. Procedural justice.
3. Interactional justice.
4. Informational justice.
2 Chapter 1 | Why Equity in Compensation Matters
Distributive justice is the perceived fairness of the actual outcome. When we
talk about equity and fairness of bonus payments, merit increases in base salary,
or the size of promotional increases, we are talking about distributive justice.
Distributive justice answers the question, “Did I receive what I should have
received?” When we talk about intentional discrimination in pay, we are typically
discussing distributive justice: whether the money was distributed among the
employees equitably, given the compensation policies and practices.1
Procedural justice is the perceived fairness of the policies and procedures
used to arrive at the actual outcomes. Procedural justice includes the criteria
used to determine bonus payments, how merit increases in base salary are
determined, and the guidelines governing the size of promotional increases.
Procedural justice answers the question, “Was what I received determined
fairly?” When we talk about unintentional discrimination in pay, we’re typically
discussing procedural justice: whether the rules we use to distribute money
affect different groups of employees differently.2
Interactional justice is the perceived fairness of the treatment received in the
application of the actual outcome. It refers to the “warm fuzzy” or “cold
prickly” feeling we get based on the way the outcome is presented to us.
Interactional justice answers the question, “Was I treated with politeness,
dignity, and respect?”
Informational justice is the perceived fairness or adequacy of the information
provided regarding the actual outcome. In the realm of compensation, this
idea is frequently referred to as transparency. Without informational justice,
there can be no overall fairness. An organization’s compensation decisions
could be internally equitable, based on objective and well-defined factors, and
communicated with the utmost courtesy and respect. However, if the only
communication is “your bonus is $X” or “your merit increase is Y%” and no
supporting information is provided, the decision may be interpreted as unfair.
Even if employees disagree with the actual outcome and/or the policies and
procedures used to arrive at it, they are more likely to perceive decisions as
fair if they understand how those decisions were made.
1I ntentional discrimination is referred to in the legal lexicon as disparate treatment, which
is discussed in Chapter 2.
2U nintentional discrimination is referred to in the legal lexicon as disparate impact, which
is discussed in Chapter 2.
Compensating Your Employees Fairly 3
Fairness is both science and art. Within the context of this book, we focus
on the scientific aspects of fairness. Specifically, we address statistical testing
of compensation outcomes for disparate treatment and statistical testing of
compensation policies and practices for disparate impact. Broadly speaking, we
focus on distributional justice and procedural justice. Issues of interactional
justice and informational justice are outside of the scope of this book.
Before discussing the statistical examination of compensation for discrimina-
tion, it is important to put the issue of internal pay equity into context. This
can best be accomplished by reviewing federal equal pay laws and regulations
in recent history.
Federal Equal Pay Laws and Regulatory
Climate of the Twentieth Century
Figure 1-1 provides an overview of the equal pay laws of the twentieth cen-
tury. As can be seen, the first equal pay policy was implemented in 1918 by
the War Labor Board. World War I saw the entrance of women into the
manufacturing workforce to take the place of male employees serving in the
military. Under an equal pay policy implemented by the War Labor Board,
manufacturers were obligated to pay female employees the same wages paid
to their male counterparts.3
3 “ National War Labor Board: Its Establishment and Historical Setting,” in War Labor Reports,
vol. 1, Bureau of National Affairs, 1942.
4 Chapter 1 | Why Equity in Compensation Matters
Figure 1-1. The history of U.S. equal pay laws
Compensating Your Employees Fairly 5
With the arrival of World War II in the 1940s, an even greater number of
women entered the workforce. The majority of these women were hired into
positions within war industries, and for many it was the first time they were
employed outside of the home.
Nearly a quarter of a century after the War Labor Board enacted the first
equal pay policy, it encouraged employers to make “adjustments which [would]
equalize wage or salary rates paid to females with the rates paid to males for
comparable quality and quantity of work on the same or similar operations.”4
Around this same time, the “Women’s Equal Pay Act of 1945” was introduced to
the U.S. Senate. Neither this bill nor similar bills introduced in the 1950s were
passed. The 1960s ushered in major reforms to civil rights in the United States,
and pay equity was part of this sea of change. The Equal Pay Act was signed into
law by John F. Kennedy on June 10, 1963. Under this act, it became illegal to pay
employees lower wages than their counterparts on the basis of sex:
No employer having employees subject to any provisions of this section
shall discriminate, within any establishment in which such employees are
employed, between employees on the basis of sex by paying wages to
employees in such establishments at a rate less than the rate at which
he pays wages to employees of the opposite sex in such establishments
for equal work on jobs the performance of which requires equal skill,
effort, and responsibility, and which are performed under similar working
conditions, except where such payment is made pursuant to (i) a seniority
system, (ii) a merit system, (iii) a system which measures earnings by
quantity or quality of production, or (iv) a differential based on any other
factor other than sex: provided, that an employer who is paying a wage rate
differential in violation of this subsection shall not, in order to comply with
the provisions of this subsection, reduce the wage rate of any employee.
The following year, the Civil Rights Act of 1964 was signed into law. Title VII
spoke specifically to employment practices. Under Title VII, the following are
unlawful employment practices:
1. To fail or refuse to hire or to discharge any individual, or
otherwise discriminate against any individual with respect
to his compensation, terms, conditions, or privileges of
employment, because of such individual’s race, color, reli­
gion, sex or national origin.
2. To limit, segregate, or classify employees or applicants for
employment in any way which would deprive or tend to
deprive any individual of employment opportunities or other­
wise adversely affect his status as an employee, because of
such individual’s race, color, religion, sex, or national origin.
4War Labor Reports, National War Labor Board, 1945.
6 Chapter 1 | Why Equity in Compensation Matters
With the passage of the Age Discrimination in Employment Act of 1967, age
became a protected characteristic as well. The act made it unlawful for an
employer:
1. To fail or refuse to hire or to discharge any individual or
otherwise discriminate against any individual with respect
to his compensation, terms, conditions, or privileges of
employment because of such individual’s age.
2. To limit, segregate, or classify employees in any way which
would deprive or tend to deprive any individual of
employment opportunities or otherwise adversely affect his
status as an employee because of such individual’s age.
3. To reduce the wage rate of any employee in order to comply
with this chapter.
The issue of discrimination against individuals on the basis of disability status
came to the forefront in the early 1970s. It wasn’t until 1988, however, that the
first Americans with Disabilities Act was introduced in Congress. On July 26,
1990, President George H. W. Bush signed the bill in to law. The Americans
with Disabilities Act made it unlawful for an employer to discriminate on the
basis of disability status. Specifically, the Americans with Disabilities Act states
that no covered entity shall discriminate against a qualified individual on the
basis of disability in regard to job application procedures; the hiring, advance-
ment, or discharge of employees; employee compensation; job training; and
other terms, conditions, and privileges of employment.
Equal Pay Laws and Regulations in the
Twenty-first Century
Among the equal pay laws and regulations of the twenty-first century, the Lilly
Ledbetter Fair Pay Act of 2009 is probably the most recognized. Other regula-
tory changes have been championed by the National Equal Pay Enforcement
Task Force, a little-known federal body that is dramatically altering the
regulatory climate with respect to equal pay and pay discrimination.
The Ledbetter Fair Pay Act
The issue of pay discrimination again rose to a position of prominence in 2007
when the U.S. Supreme Court issued its decision in Ledbetter v. Goodyear Tire
and Rubber Co. The case began in 1998 when Lilly Ledbetter, a production
supervisor at a Goodyear tire plant in Alabama, filed an equal pay claim under
Title VII of the Civil Rights Act of 1964 alleging pay discrimination. After years
in the lower courts, the case finally appeared before the Supreme Court.
Compensating Your Employees Fairly 7
Interestingly, the question addressed by the Supreme Court was not whether
Goodyear had discriminated against Ledbetter; instead, the court addressed
a technical issue in the case. Specifically, the court considered whether
Ledbetter’s complaint was time-barred because the discriminatory compen-
sation decisions had been made more than 180 days prior to the filing of her
charge of discrimination.
On May 29, 2007, the Supreme Court ruled by a 5–4 vote that Ledbetter’s claim
was in fact time-barred. Justice Samuel Alito delivered the opinion of the court:
Ledbetter’s arguments here—that the paychecks that she received during
the charging period and the 1998 raise denial each violated Title VII and
triggered a new EEOC charging period—cannot be reconciled with Evans,
Ricks, Lorance, and Morgan. Ledbetter, as noted, makes no claim that
intentionally discriminatory conduct occurred during the charging period or
that discriminatory decisions that occurred prior to that period were not
communicated to her. Instead, she argues simply that Goodyear’s conduct
during the charging period gave present effect to discriminatory conduct
outside of that period. . . . But current effects alone cannot breathe life into
prior, uncharged discrimination; as we held in Evans, such effects in themselves
have “no present legal consequences.” 431 U.S., at 558. Ledbetter should have
filed an EEOC charge within 180 days after each allegedly discriminatory pay
decision was made and communicated to her. She did not do so, and the
paychecks that were issued to her during the 180 days prior to the filing of
her EEOC charge do not provide a basis for overcoming that prior failure.5
In the dissenting opinion, Justice Ruth Bader Ginsburg stated:
The Court’s insistence on immediate contest overlooks common
characteristics of any discrimination. Pay disparities often occur, as they did
in Ledbetter’s case, in small increments; cause to suspect that discrimination
is at work develops only over time. . . . Small initial discrepancies may not
be seen as meet for a federal case, particularly when the employee, trying
to succeed in a nontraditional environment, is averse to making waves.
Pay disparities are thus significantly different from adverse actions “such
as termination, failure to promote, . . . or refusal to hire,” all involving fully
communicated discrete acts, “easy to identify” as discriminatory. . . . It is only
when the disparity becomes apparent and sizable, e.g., through future
raises calculated as a percentage of current salaries, than an employee
in Ledbetter’s situation is likely to comprehend her plight and, therefore,
to complain. Her initial readiness to give her employer the benefit of the
doubt should not preclude her from later challenging the then current and
continuing payment of a wage depressed on account of her sex.6
5Ledbetter v. Goodyear Tire & Rubber Co. (No. 05-1074), 421 F.3d 1169.
6Ibid.