By Don Lustenberger
BLOG OVERVIEW:
Conducting a pay equity analysis on total compensation alone is often legally and practically risky. To avoid blind spots in pay analyses, employers should consider conducting pay equity analyses on each form of compensation including base pay, bonuses, and commissions.
When organizations conduct anti-discrimination pay studies, they often focus on total compensation, which includes the sum of base pay, bonuses, commissions, long-term incentives, and other forms of pay. This analysis can be intuitively appealing. If no race, ethnicity, or gender differences appear in the bottom-line numbers, it is natural to conclude that pay practices must be sound.
Although there is nothing inherently wrong with examining total compensation, relying on it alone can create blind spots, both legally and practically. There are three important points are worth considering:
- Legal risk still exists if individual pay components are unequal.
Federal laws such as the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964, as well as many state statutes, prohibit pay discrimination in all forms of compensation. So even if total compensation appears equitable, differences in specific elements (e.g., base pay, bonuses, commissions) by race, ethnicity, or gender could still violate these laws. Regulators and courts can and do look at individual pay components. - Total compensation disparities aren’t actionable without component analysis.
If a disparity in total compensation is identified, the driver(s) of the disparity are rarely clear. Is it base salary? Bonuses? Market-driven shifts in hiring? Without analyzing individual components of pay, employers cannot take targeted steps to address disparities, such as pay adjustments, incentive plan changes, or revised promotion policies. In practice, digging into disparities in total compensation requires running analyses of each component anyway. - Methodological challenges can distort the results.
Calculating total compensation is rarely straightforward. Differences in start dates, promotion dates, incentive cycles, and one-time awards can all skew the numbers. In some cases, employees may have to be excluded from the analysis entirely, decreasing the coverage and utility of the analysis. Although experienced consultants can address a number of these shortcomings, they can also clearly articulate potential limitations of these analyses and guide employers on decision-making leveraging the analyses of individual pay components.
So how should employers approach pay equity studies? For a proactive and legally defensible pay equity study, each component of compensation should be analyzed separately to identify and address disparities where they occur. A total compensation analysis can still be useful, but as a supplement, not as sole analysis.
For more resources on achieving pay equity at your organization, download our complimentary Pay Equity Toolkit.
