Red Circling = Regulatory Red Flag?

Have you ever tried to do the right thing, only to have it end in disaster? That's exactly what can happen if your red circling policy goes wrong.

(By way of background, red circled employees are those that are paid more than the maximum of the salary range for their job)

I came across an interesting chart at Payscale.com that proposes three options for correcting red circle issues, along with eight questions to help you choose which option is right for your situation:

Dealing with red circled employees is, I think, more difficult than simply following a flow chart approach. It's important to understand why the employee was red circled in the first place: is the red circling the result of an internal reorganization or from market forces? Is the red circled employee a long-time incumbent or a new hire? Different situations may require different solutions.

Regardless of the cause(s) and solution(s) you choose, red circling can result in regulatory red flags. As I've mentioned before, internal pay equity is a top priority for regulators right now. There are a variety of initiatives from the DOL (and OFCCP in particular) and the EEOC to collect more compensation data at the employee level. The agencies are starting the data review process with a very cursory review, looking at averages, medians, minimums and maximums by protected group status. Red circled employees - especially if they are disproportionately male, white, younger, etc. - can send up a huge red flag. On the surface, pay rates for red circled employees appear to be out of line with those of similarly situated employees. These kinds of "out of line" situations are exactly the thing that can trigger discrimination investigations.

Your chosen solution for dealing with red circled issues can also send up a reg flag. Freezing pay or providing smaller lump some increases for some employees but not others can also trigger internal pay equity questions. Remember that while we typically think of pay discrimination in terms of "men earn more than women" it is just as illegal to grant men smaller increases than women if that decision is based on gender.  

The bottom line is that regardless of the underlying reasons for and solutions to red circling, they can create the illusion of surface disparities in internal equity. They key is to thoroughly document the reasons and solutions at both the organizational level and at the employee level. You should have a formal red circle policy in place that outlines the kinds of situations that can create red circle situations, and how red circle situations will be addressed. Once that policy is in place, it should be consistently applied to each and every situation. In the event that an employee is red circled, it's critical to document the reason(s) and proposed solutions in the employee's file and maintain that documentation so that you can support your decisions down the line. 

There's not much you can do about red circling creating the illusion of surface disparities in internal equity. But if you have the documentation to back up your decisions, you can stave off further regulatory investigation and avoid compensation discrimination litigation.

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert quantitative analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics Inc., the host of The Proactive Employer radio show, and author of the upcoming book Compensating Your Employees Fairly: A Guide to Internal Pay Equity. Follow her on Twitter at @proactivemployr. 

Comments

[Laleh Hassibi]

This is a helpful article Stephanie. The chart above is intended to be used along with PayScale's guide to creating compensation plans. That eBook describes the considerations to get employees within the appropriate pay ranges. I'd recommend using this chart and other worksheets in that same toolkit in conjunction with the eBook that is available here: http://resources.payscale.com/Bring-Back-the-Sizzle-Ebook-thank-you.html

Concerns about gender-based pay inequities are rising and it's important for companies to understand not only how to pay fairly, but also how to justify pay differences based on differing compensable factors such as experience, education, certifications, skills, etc. Just yesterday, we released a revised version of a much more detailed guide to addressing pay inequities that you can find here: http://resources.payscale.com/hr-internal-pay-inequities-guide.html. Also, on May 30th, PayScale is releasing new research on gender inequities you may want to watch for.
-Laleh Hassibi, PayScale