1P Compensation Analysis

Compensation is defined as any payments made to, or on behalf of, an employee or offered to an applicant as remuneration for employment, including, but not limited to, salary, wages, overtime pay, shift differentials, bonuses, commissions, vacation and holiday pay, allowances, insurance and other benefits, stock options and awards, profit sharing, and retirement.70 As stated, the definition is not exhaustive and can include other forms of compensation, such as paid family leave. OFCCP can investigate and seek remedies for discrimination in any form of compensation. In every review of potential compensation discrimination, there are three key questions to be addressed:

• Is there a measurable difference in compensation on the basis of sex, race or ethnicity?
• Are the differently compensated groups of employees comparable under the contractor’s wage or salary system?
• Is there a legitimate, nondiscriminatory explanation for the difference?
  • Measurable difference. When statistical analysis is used, a measurable difference generally means a statistically significant difference - two or more standard deviations - consistent with Title VII principles. When nonsystemic comparisons of small groups are conducted, there must be a measurable difference in compensation plus sufficient other evidence (often in the form of anecdotal evidence).
  • Comparable employees. OFCCP follows the Title VII standard of comparing similarly situated workers to establish a case of compensation discrimination. The definition of “similarly situated” is a case-specific legal standard. In the compensation discrimination context, “similarly situated” means that employees are similar in all the ways that are relevant in the contractor’s compensation system. Relevant factors in determining similarity may include tasks performed, skills, effort, level of responsibility, working conditions, job difficulty, minimum qualifications, and other objective factors. Employees may be similarly situated where they are comparable on the factors relevant to the investigation, even if they are not comparable on others.
  • Legitimate, nondiscriminatory explanation for the difference. OFCCP considers all relevant factors offered by the contractor on a case-by-case basis to determine whether the factors are implemented fairly and consistently applied, whether they should be incorporated into a statistical analysis, and whether, as a whole, they provide a legitimate explanation for any pay disparities.

During a compliance review, the CO must examine all employment practices that appear to lead to compensation disparities. For example, there may be differences in employee access to opportunities affecting compensation such as higher-paying positions, job classifications, work assignments, training, preferred or higher-paid shift work, and other opportunities. The CO should also examine policies and practices that unfairly limit a group’s opportunity to earn higher pay, such as “glass ceiling” issues, and access to overtime hours, pay increases, incentive compensation, and higher commission or desired sales territories. The CO may investigate any observed differences in pay, other earnings or benefits, job assignment/placement, training/advancement opportunities, differences in opportunities to increase compensation, or other unexplained differences.

The Itemized Listing requires a contractor to submit employee-level (i.e., individual) data on compensation. Upon receipt of a contractor’s AAP and supporting compensation data, the CO must review the submitted compensation data to ensure that it satisfies all of the requirements from the Itemized Listing, as explained above.71 If the CO determines that the submission does not satisfy the requirements of the Itemized Listing data request, the CO must contact the contractor to discuss the discrepancies. Additionally, the CO must send a written request to the contractor seeking production of the compensation data within seven business days of receipt of the letter. The CO must recommend the issuance of an SCN if the contractor fails to comply.72

The CO may begin the desk audit analysis of compensation once the contractor’s compensation data submission is complete and acceptable. What constitutes an acceptable submission is discussed in Section 1F05. Analysis should begin with an examination of the descriptive statistics related to the data. Descriptive statistics are fact-based statistics such as mean, median, modes, or other distributional measures. The CO may use preliminary tools, tests, or broad indicators of potential compensation issues at the desk audit to identify pay practices or issues needing further review. In most cases, it is insightful to use nonsystemic comparative analysis to compare the treatment of similarly situated individuals or small groups of employees. In familiarizing themselves with the data, the CO should ascertain whether groupings, ratings, rankings, labels, and other employer-assigned attributes are differentially distributed by gender, race, or national origin. As with the systemic analysis of compensation, the CO must ensure that similarly situated employees are being compared and must assess whether any explanatory factors the contractor offers are implemented fairly, consistently applied, and relevant to the contractor’s compensation system. This data exploration stage also includes an assessment of the pay analysis groups for reasonableness and statistical sufficiency. Considering these questions in consultation with supervisors, RSOL and Branch of Expert Services (BES) will allow the CO to determine whether initial indicators warrant further systemic analysis and on-site investigation.

Regression analysis is the statistical method of analysis most often used by OFCCP to analyze systemic patterns in compensation. Regression analysis builds upon descriptive statistics and anecdotal evidence by further isolating the comparability of the workers at issue. OFCCP compares similarly situated employees by forming pay analysis groups and controlling for relevant factors influencing their pay.

a. Similarly Situated Employee Group (SSEG). A similarly situated employee group (SSEG), is a group of employees who are comparable for purposes of analyzing a contractor’s pay practices. Note that OFCCP also uses the term “pay analysis group” and views the SSEG and pay analysis group, or PAG, as equivalent terms. An SSEG may be limited to a single job or title, and regression analysis may be performed separately on distinct units or categories of workers. Alternatively, an SSEG may aggregate employees from multiple job titles, units, categories and/or job groups to perform a regression analysis, with statistical controls added as necessary to ensure workers are similarly situated. For example, an SSEG could cover an entire unit or division of the organization but control for job title or pay grade to ensure that the analysis compares similarly situated workers. Statistical testing for practices that impact pay such as job assignment may require a different analytic grouping than testing for pay differences within a single job.

At the desk audit stage, the CO forms preliminary SSEGs by considering the industry, the types of jobs and compensation at issue, the contractor’s actual compensation practices and the available data. If a contractor provides its compensation hierarchy and job structure with its Itemized Listing submission, the CO must attempt to design its pay analysis based on that structure. In the absence of information about a contractor’s compensation system, the CO should conduct its desk audit analysis using AAP job groups as SSEGs, provided they are reasonable,73 meet the requirements of 41 CFR 60-2.12, and are of a sufficient size to conduct a meaningful systemic statistical analysis. If those conditions are not met, the CO should use EEO-1 job categories as SSEGs. Salary structures and levels or stacking lines of progression (e.g., Accountant 1, Accountant 2, etc.) may also be viable options for SSEGs. Working with BES, the CO must control further for sub-job groupings, functions, units, or titles, as appropriate. During the desk audit analysis, OFCCP will also control for tenure and full-time status as well as other factors, as appropriate.

b. Statistically Controlling for Factors. In a statistical analysis of compensation, using controls is a way of ensuring comparison of similarly situated workers and accounting for potential explanations of pay differences. Controlling for education, for instance, accounts for the effect of education on any differences in pay. OFCCP can control for observable employee factors such as education, tenure or performance, as well as institutional factors such as department or job title. It is only appropriate to control for factors in a statistical model if they have been implemented fairly and consistently applied and are relevant to the contractor’s compensation practices. At the desk audit stage, the CO should utilize a variety of desk audit tools and consult with the regional BES expert to decide on which factors to include in the preliminary analytical model.

For example, if a contractor awards bonuses based on performance, employees may be similarly situated if their performances are assessed according to the same process and criteria, and if they have similar performance ratings. Considering these facts, a statistical analysis of bonuses could compare similarly situated employees by grouping together all employees who are subject to the same performance evaluation process into one pay analysis group, and then statistically controlling for individual differences in performance ratings, as well as any other relevant factors. In some instances, the pay analysis group appropriate for an analysis of bonus pay may differ from the pay analysis group used to assess base pay.

At the conclusion of the desk audit, the CO must notify the contractor in writing of the general nature of any preliminary compensation disparities that warrant further information requests or on-site review. For example:

• Compensation issues for women in the Engineers and Project Architects SSEGs.
• Compensation policies and practices for the Engineers SSEG for Blacks and Hispanics, and the Technicians SSEG for females.

When conducting further review of a contractor’s compensation practices, the CO must seek additional information to understand the contractor’s compensation system, the elements that drive compensation decisions, and the job structure/hierarchy. Based on these facts, the CO may broaden or narrow the SSEGs and subsequent data requests to conform the analysis closely to the contractor’s compensation system and practices, where appropriate. Chapter 2 contains information on conducting a further review of potential compensation discrimination.74