There is a process for setting pay for the newly hired. The merit pay matrix is in place, payment and performance are aligned, and there is an understanding of how and what employees are paid throughout the organization, right? But when 99% of an organization’s employees still receive pay increases every year despite an individual’s performance level or position within pay ranges, a business can find it challenging to explain pay inequities that arise.

In addition to outdated payment policies, organizations have the added stressors of complying with the Federal Statutes of the Equal Pay Act, Title VII of the Civil Rights Act, Age Discrimination in Employment Act, and the Americans with Disabilities Act. Despite appearing to follow these rules, hidden non-compliance can be below the surface of their systems.

Hiring, merit-based performance, and promotional pay decisions made by managers can put your organization at risk for non-compliance with these regulations. Self-auditing and evaluation are crucial steps in any pay administration and performance management process and is necessary to ensure an organization complies with Federal and State pay regulations. After an initial hire, merit increases throughout an employee’s tenure can continue to perpetuate any initial pay inequalities. While a merit matrix provides a guideline, organizations can lose sight of where the actual merit budget dollars end up unless an auditing program is in place.

It is illegal for an employer to discriminate against an employee in the payment of wages or employee benefits on the bases of race, color, religion, sex (including gender identity, sexual orientation, and pregnancy), national origin, age (40 or older), disability or genetic information. Employee benefits include sick and vacation leave, insurance, access to overtime as well as overtime pay, and retirement programs.

Data collection and analysis are critical steps for an organization to understand the allocation of pay throughout the group. If reasons for pay differences are other than tenure, it is up to the employer to defend the gaps with clear explanations.  Some factors contributing to a gap might include: years in the job (including prior employment), job performance, responsibility, reporting structure (staff size), job title, grade, location, and education, certifications, or other skills. A review of employee pay by categories such as ethnicity, performance, gender, grade and occupational type are among the processes for conducting a pay audit.

In addition to a pay audit, a review of policies and processes for biases is an important step. Conduct an evaluation of the performance management systems for prejudices in the rating documents or process. Pay policies for hiring, performance, and promotional pay decisions should be clear and understood by managers. In addition, it is important to document future pay decisions and the reasons behind them and retain employment and payroll records as required by law. Understanding the formation of an employee’s current pay will help prepare a defense of historical and future pay decisions made by the organization if a discrimination charge or complaint is filed.

Note: When conducting internal self-audits, consider performing the process under the guidance of legal advice.

How can we help?

Compensation Works can perform a pay equity study and gap analysis using our proprietary software to identify issues, ensure pay equity compliance and assist with the development of  a remediation plan.

Appendix A. From the website of the Office of Federal Contract Compliance. Census Bureau’s American Community Survey (2009-2013).