Compensation Philosophy and OFCCP Compliance Review Audits

Since the updates of OFCCP’s Supply and Service Scheduling Letter and Itemized Listing, it is important now more than ever for employers to determine their compensation philosophy. As a quick recap of the new Scheduling Letter updates, the OFCCP is now requiring federal contractors to provide: 2 years of snapshot data, additional compensation data (e.g., bonuses, incentives, commissions, merit increases, locality pay or overtime), relevant data on the factors that are used to determine compensation (e.g., education, experience, time in current position, duty location, geographic differentials, performance ratings, department or function, job families and/or subfamilies, and salary level/band/range/grade), and provide documentation and policies related to the contractors compensation practices.

Now that we have some background on the new updates to the scheduling letter, what is a compensation philosophy?

A compensation philosophy is a set of guiding principles or strategies that an organization uses to make objective pay decisions. There are many factors that may influence how an organization determines pay such as but not limited to: Internal experience (e.g., time in job and time in company), external experience, job related education or certifications, and level of responsibility (e.g., management responsibility). One of the most useful factors that can drive your compensation philosophy is having a compensation structure. A compensation structure, which is typically referred to as a pay grade structure, is a systematic approach to compensation in which each job is grouped into different grades. Pay grade placement is determined by identifying the level of responsibility, skill, and experience required to be successful and completing a Market Analysis to determine what the market is paying for each job based on those characteristics. When an organization uses a pay grade structure, it reduces the level of subjectivity in determining pay, and leads to more consistency in pay decisions across an organization. Not only will this help with pay equity, but it will also help a company comply with new pay transparency laws that many states have been enacting.

So why does this all matter for an OFCCP audit?

Having an established pay grade structure and overall compensation philosophy should make it easier to prepare for an OFCCP audit. Since the OFCCP asks for pay factors in a contractor’s initial submission with the intention to conduct more advance statistical analyses to identify pay disparity, knowing the factors that impact your organization’s pay and having access to that data in your HRIS will make it easier to collect and analyze your compensation data ahead of submitting it for an audit. If you have a consistent and objective compensation philosophy that has been applied throughout your organization, there will be more confidence in the results of the compensation analyses and over time it will also help reduce the likelihood of unexplained pay disparities when you examine pay equity across your organization.