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Is there a legal issue with basing comp off of standardized salary data?

Is there a legal issue with basing comp off of standardized salary data? We are about to initiate a company-wide compensation review and I would like to know whether there are any legal issues with basing comp on third party data - assuming it results in some unfavorable (downward) adjustments for some employees.


Kent Mannis
Title: Managing Editor
Company: LawRoom
(Managing Editor, LawRoom) |

Establishing compensation levels for different positions is usually not a legal compliance issue. Instead, managing that problem is a creative challenge that employers must address using psychology, politics, and business judgment.

Employers are not required to provide the same benefits (or the same pay) to everyone. In fact, most employers provide different benefits (and different pay) for different classes of employees (e.g., full-time vs. part-time, or office employees vs. production workers).

Additionally, the law isn't usually concerned with whether these differences are based on third party data or simply the value judgment of the employer. So, employers use a variety of methods to determine what they want to (or must) pay to get the type of employee they want.

The major legal exposures for adjusting pay based on third party data would likely be:

(1) you can't end up with discriminatory results (e.g., if one category of worker is largely one racial/ethic group, or one gender), then the use of third party data that resulted in that group being paid less may qualify as an illegal "employment practice" due to the adverse impact it has on that workers who have that protected characteristic;

(2) you must keep your promises (e.g., if a policy, contract, or collective bargaining agreement established rules for the levels of or for adjusting compensation, you must comply with those rules); and

(3) certain workers (e.g., "exempt employees") have minimum salary levels set by law, and you can't pay less.

Basically, setting pay rates for employees is part science and part art. You've got to pay enough to attract and retain the skilled talent you need, but you can't pay more than the job is worth. To determine how much to pay for a position, companies typically consider a variety of factors -- salary surveys, local competition, available labor pools, costs of living, and so on.

For example, one of the best sources for what employees expect to earn is based on what they have earned -- that is, their salary history. Generally, there is no law that prevents employers from asking applicants about their pay rates at previous jobs. One way to verify a salary history is to have applicants bring in a paystub or a W2 form from their previous employers. Although a sensitive individual may claim a question is an "invasion of privacy," finding out what a potential employee has earned (or may expect to earn) is a legitimate area of inquiry for employers.

Another source for setting pay is finding out what others employers pay. Thus, standardized salary data is often (and can be) used to adjust pay, no matter whether the results may be favorable or unfavorable.

Michael Jameson
Title: VP Finance
Company: Undisclosed
(VP Finance, Undisclosed) |

Thanks Kent.


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