Last week, I had the privilege of addressing the Central and Western New York Industry Liaison Group. I spoke about recent developments in compensation analysis. There were some great questions from the group, but there's one in particular that sparked a lot of discussion. We were discussing how a piece of proposed gender pay equity legislation has the potential to limit employers' flexibility in how they compensate their employees. This prompted the following question from someone in the audience:
Isn't the best way to avoid compliance and equity problems is to have NO flexibility in your compensation system?
I'm still thinking about that question. It seems to me that in this case, what's best from a compliance perspective is not what's best from a business perspective. Like most things in life, there's a trade-off; this trade-off can be summarized by borrowing some terms from poker:
Tight/Passive
Characteristics: compliance is primary concern, no flexibility in compensation strategy, refuses to negotiate on starting salaries, does not allow for "on-demand" raises, has very narrow salary ranges or even single-point salaries with no range, uses "conventional" compensation components, zero discretion when making compensation decisions, no variation in compensation among "similarly situated employees".
Advantages: reduced risk of compliance issues, reduced exposure to compensation discrimination claims, compensation plan is easy to administer, smaller volume of required compensation decision documentation, less attention can be paid to justification of individual compensation decisions, simplified decision-making
Disadvantages: potentially compromised ability to attract top talent, possible retention issues and increased training costs due to higher turnover, mix of salary and incentives may fail to sufficiently motivate employees, compensation system may reward the wrong things (e.g., seniority rather than performance).
Loose/Aggressive
Characteristics: attracting and retaining top talent is primary concern, great flexibility in compensation strategy, willing to negotiate on starting salaries, willing to entertain "on-demand" raise requests, has wider salary ranges, uses "non-conventional" compensation components such as flexible work hours, telecommuting, incentive pay, etc., allows for discretion in making compensation decisions, some variation in compensation among "similarly situated employees".
Advantages: flexibility and willingness to negotiate on compensation increases ability to attract and retain top talent, reduced training costs due to lower turnover, mix of salary and incentives can be adjusted as needed to motivate employees, compensation system can reward the "right" things (e.g., performance rather than seniority)
Disadvantages: some risk of compliance issues, some exposure to compensation discrimination claims, compensation plan is more difficult to administer, greater volume of required compensation decision documentation due to exceptions and "outliers", more attention must be paid to justification of individual compensation decisions, more complex decision-making process.
Each approach has its own benefits and drawbacks. Like most things, taking an extreme position is rarely the optimal strategy. Playing too tight and passive severely limits your compensation flexibility. Having no flexibility and discretion can tie your hands, which will rarely be best for the organization. But playing too loosely and aggressively, and having too much discretion introduces the potential for discrimination (both intentional and unintentional). This won't be best for the organization either.
The best approach is somewhere in between. You want to have flexibility in your compensation structure, not unfettered discretion. Compliance and gender and race equity is always important, but being too tight and passive out of fear can lead to other organizational problems. When you make a compensation decision, have a valid reason for that decision and document it. If your decisions are based on valid reasoning and you have supporting documentation, you shouldn't have anything to worry about.
As Kenny Rogers said, "you gotta know when to hold 'em, know when to fold 'em, know when to walk away, know when to run." The same is true when thinking about your compensation strategy. Like poker, there's always a risk. The only way to completely eliminate the risk of a compensation discrimination claim is to not play the game.
Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. For more than a decade, she's been working with businesses and government agencies providing expert EEO analysis. Stephanie has published several articles on examining compensation systems with respect to equity. She is the host of The Proactive Employer, and is the Director of the Statistical and Economic Expert Testimony Division of MCG. Follow her on Twitter at @ProactiveStats.
(image courtesy of Sergio Bertolini via Flickr)
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