Five Standards for an OFCCP-Compliant Compensation Self Evaluation: Standard #4

The fourth standard is the investigation of statistically significant disparities and the remedies of such disparities. According to the guidelines, any statistically significant disparity (i.e., disparities of two or more standard deviations) must be investigated and appropriate remedies must be provided. This guideline has both a concrete component (two or more units of standard deviation) and components that are more subjective (investigation and remediation).

As noted in an earlier post, an observed compensation disparity is said to be "statistically significant" if it is unlikely that this difference occurred under a gender- or race-neutral process. The general rule of thumb used to define "unlikely" is two or more units of standard deviation. A disparity of two standard deviations means that over repeated sampling, a disparity of the size observed will occur approximately 5% of the time.

It should be noted that from a statistical perspective, any disparity that is not statistically significant is not different from a disparity of zero. That is, we cannot say that the disparity is not occurring by chance, and no inference of discrimination can be drawn.

Assuming that statistically significant disparities are observed, the guidelines provide the employer with flexibility in structuring their investigation methods and appropriate remedies. Regardless of how the employer chooses to investigate and remediate the statistically significant disparities, it is imperative that investigation precedes remediation. It may be the case that the investigation reveals an "edge factor" or other legitimate factor that was not considered in the original statistical model but nonetheless explains variation in compensation. These factors - if they exist - should be identified and considered before any changes in compensation are instituted.

The manner of investigation differs among employers, and depends to some extent upon the types of employee data available to the employer. A common starting point for investigation is interviews and discussions with managers. In some cases, these conversations will bring to light additional legitimate factors that were not originally included in the analysis. If the employer has information readily available regarding these factors, the model can be re-estimated incorporating these factors, and the results from the two models can be compared. If the employer does not have information regaring these factors, these conversations may serve as the impetus to begin collection of this necessary data.

While it is generally considered "best-practice" to involve legal counsel in the follow-up process, any remediation should only be done under the auspices of legal counsel. The implications of making remedies are significant, and legal counsel is best positioned to understand these implications and to advise the organization on appropriate remedies and implementation.

A discussion of the fifth standard will be posted on October 28th.