Editor's Note: The issue of "red circled" employees is a Classic one, for sure. It can be particularly acute when organizations create and implement new pay programs and structures, or when they update programs and structures that have fallen into disrepair. Can it also create regulatory red flags? Stephanie Thomas shares a cautionary post for us all.
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 (click chart for a full-size pop-up):
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 Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches undergraduate and graduate courses on economic theory and labor economics in the College of Arts and Sciences and in Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals.
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