Fair pay is a critical issue for workers and their families, and a cornerstone of OFCCP’s equal employment protections. As such, identifying and remedying compensation discrimination has long been an important goal of OFCCP compliance efforts. The Executive Order and the implementing regulations specifically require contractors to ensure pay equity. They place federal contractors under affirmative duties to maintain data, conduct internal review and monitor pay practices for potential discrimination, and prohibit discrimination in the paying of wages, salaries and other forms of compensation.290 Nevertheless, BLS data and numerous research studies indicate that unexplained disparities in compensation on the basis of sex and race continue to exist. COs should also be mindful that the implementing regulations of both Section 503 and VEVRAA similarly prohibit compensation discrimination on the bases of disability or protected veteran status, and require contractors to ensure pay equity.
OFCCP follows Title VII principles in investigating and analyzing compensation discrimination. While the approach set forth in Chapters 1 and 2 for analyzing compensation applies, there are additional complexities in typical corporate compensation programs for high level jobs. As in any other compensation analysis, the objective is to determine whether employees receive compensation and benefits to the same extent, and under the same standards, as their similarly situated peers, without regard to sex, race or ethnicity. If not already provided, the first step should be to request any formal policies the corporation has regarding each type of compensation. In addition to reviewing the policies, the CO will probably need to use interviews to determine at what level employees become eligible to receive each type and what, if any, exceptions the corporation has made for people below the specified level.
When investigating compensation cases at the corporate management level, COs must have an understanding of the compensation structure. As management level increases, it is likely that total compensation goes well beyond the base salary typically reflected in a workforce analysis.
Similarly, COs will find that benefits go well beyond what is standard for other employees. At higher management levels, base salary is often supplemented or, for top managers, exceeded by other forms of compensation such as cash bonuses, stock awards and stock options. Standard benefits are usually supplemented by what are often referred to as perquisites or “perks.” Perks are numerous and varied. Examples include the use of corporate cars, concierge service that offers discounted services, free trips, access to the corporate plane, and housing subsidies or allowances.
Upper level management compensation, benefits and perks can be specialized and can be closely held within some corporations. Therefore, it is usually necessary to interview the person in charge of compensation and benefits at the corporate level, identify who maintains the data and, if necessary, interview an official who has recordkeeping responsibility for the corporation.
a. Bonuses. As used here, bonuses refer to those that are predominantly exclusive to the management level. An addition to base salary, bonuses may be granted in cash, stock or in some combination thereof. Corporations most often distribute bonuses annually, usually soon after the end of a corporation’s fiscal year or performance appraisal cycle. Corporations may distribute bonuses as a lump sum or over a specified period of time, in which case, COs should consider the totality of the award in the analysis. In a multi-establishment corporation, it is fairly typical for the bonus “pot” to be allocated to component business groups in some proportion to their contribution to corporate profitability over the bonus period. Those business groups, in turn, may similarly allocate their bonus “pot” to their component establishments. Bonuses thus provide an incentive for managers to improve profitability. This incentive tends to increase as a larger proportion of a manager’s compensation comes from bonuses rather than from base salary or other forms of compensation.
Cash bonuses are most often a percentage of base salary. When reviewing potential compensation issues where cash bonuses are involved, some areas COs should consider include:
- The level or salary grade at which employees become eligible for cash bonuses;
- The history of bonuses being granted to employees below this level;
- The role of corporate headquarters in allocating cash bonuses;
- The role of intermediate headquarters and subordinate establishments in allocating bonuses;
- The standard the corporation uses to determine whether an employee receives a cash bonus;
- The individuals, including their specific roles, determining who is eligible, what standards to apply and the amount of the bonus;
- The levels of review and approval in the process; and
- The existence of safeguards that ensure that all eligible employees are given equal consideration in the allocation of cash bonuses.
In addition to exploring these areas, COs should ask questions to gather information on the consideration and representation of members of nonfavored groups during the bonus process. Below are a few sample questions.
- What proportion of those eligible, separated by nonfavored and favored group status, received a cash bonus?
- If there is a nonfavored group with respect to bonus allocation, did the contractor review bonus allocation to ensure nondiscrimination? What were the findings or results?
- What is the average cash bonus separated by nonfavored and favored group status?291
- If there is a nonfavored group with respect to average bonus amount allocated, did the contractor review allocation to ensure nondiscrimination? What were the findings or results?
b. Stock. Corporate stock plans can be a particularly strong incentive to improve corporate performance, since such improved performance usually increases the stock’s share price and thus increases the value of any given number of shares of corporate stock an employee holds.
Employers may sometimes use company stock as a bonus but may also use it as a way to retain key employees or to provide an incentive for a given action. The corporation also may offer employees the option to purchase corporate stock on favorable terms. If the corporation has not already provided it, COs should request any written policies and procedures regarding use of stock as a management incentive.
- Stock Awards – One-time Bonuses: Corporations occasionally pay bonuses, in whole or in part, in corporate stock. This may be an outright grant, usually annual, of a certain number of shares of stock at the market value at the time of the grant. More often, however, a stock award is vested over a number of years.
- Stock Awards – Vested. The term “vested” is more commonly associated with time-in-company required to begin accruing retirement and/or health benefits; it can also be applicable in this context.
A stock award is vested when an employee, instead of immediately receiving a given number of shares, receives those shares after a given number of years (the “vesting period”). For example, the corporation may award a person 300 shares of stock, with 100 shares allocated immediately, and the remaining 200 to be allocated at the end of three years. Such vested stock awards provide an incentive for the recipient to remain with the corporation since he or she will not receive the remaining stock if he or she leaves.
Vesting also may be for a specific limited purpose. For example, a stock award may be conditional on an employee action, such as completing a particular project by a given date. In this case, the stock is “awarded” but it is not allocated unless the employee completes the project by the due date.
- Stock Options. This noncash form of compensation offers the employee the ability to choose to buy or not to buy a given number of shares of stock at a specified price within a specified period of time. Stock options are issued as a private contract between the employer and employee. Because the stock options cannot be exercised immediately, employers use them as a way to retain employees. The option to purchase stock may have conditions or limitations, such as limited transferability and vesting requirements. Unless the company performs poorly, employees generally expect to sell the stock at a higher market price and make a profit.
For example, an employee is offered an option to buy 100 shares of corporate stock at $30 a share (its current market price) at any time within the next five years. If the stock goes down, the employee simply does not exercise the option to buy. If it goes up, however, say to $50 a share, and the employee exercises his or her option, the employee has an immediate profit of $20 a share or $2,000.
When evaluating stock as a part of compensation, there are several things to consider. For any area of potential compensation concern where stock appears to be a factor, COs must determine, for each year:
- The form in which the corporation gave the stock;
- The eligibility criteria;
- The extent the same form of stock was given to all eligible employees in the same manner, at the same time and with the same value;
- The change in stock type between years; and
- The consistency, or lack thereof, in the change in stock type for all eligible employees.
In addition to the above considerations, COs must ask specific questions when reviewing stock given during the last award cycle:
- What proportion of those eligible, by race, ethnicity and sex, received stock?
- If there is a nonfavored group with respect to receipt of stock awards, the CO should ask: Did the contractor review the stock awards to ensure nondiscrimination? What were the findings or results?
- What is the average stock award by nonfavored and favored group status?
- If there is a nonfavored group with respect to average amount of stock awarded, did the contractor review stock awards to ensure nondiscrimination? What were the findings or results?
Finally, if there is a favored group, and the corporation awarded vested stock to keep favored group members with the corporation, COs should review data on terminations to determine if there were any nonfavored group members in similar positions who left the corporation around the same time. If so, COs should determine whether the nonfavored group received vested stock. If not, COs should then determine whether they should have under the corporation’s criteria for receiving such stock. When there is a finding of discrimination in the awarding of stock, there are some special considerations to be applied to the remedy. These are identified in Appendix A-7, Special Remedial Considerations Applicable to Stock.
c. Perquisites. Called “perks,” these are privileges that corporations may provide employees as they reach a certain management level. “Perks” generally are benefits that have cash value, like a corporate car; that save time, like accounting or tax services; that offer a convenience, like the use of corporate plane; and that protect key personnel, like paid medical exams.
As with other compensation elements, COs must determine whether the corporation offers perks, what they offer, how it decides who is eligible for a given perk, and if the proportion of eligible employees receiving each perk differ based on sex, race or ethnicity. COs must also ask if the corporation reviews its allocations of perks to ensure nondiscrimination, and obtain the findings or results of the reviews.
290. 41 CFR. 60-1.4; 60-1.12; 60-2.17(b)-(d).
291. This may be expressed as the average percentage of base salary.