Arimak, Inc.

Analysis of salary discrepancies between white and minority employees

Prepared by: Andrea Nowack

Executive Summary
Arimak, Inc. is facing a problem. Three minority employees, Tom Johnson, Al Washington, and Michael
Post, are threatening to press discrimination charges against Arimak, claiming that minority employees
are, on average, paid $250 less than white employees. Arimak is a company that prides itself on its
above par affirmative action policy, implemented just over two years ago, thus it is disconcerting that
minority employees would make such claims. This led my team to believe that Johnson, Washington
and Post were not looking at the complete picture – ie, all potential variables that might affect salary
decisions – when evaluating the salary discrepancy. Thus, my team sought to determine if Arimak, Inc.
should be held liable for Johnson’s discrimination claims.

Our research objective was two-fold:

1. Determine if Arimak does, in fact, unknowingly discriminate against minority employees,
despite the company’s genuine efforts to uphold standards outlined in their voluntary
affirmative action program, and
2. Prove that Arimak bases salary decisions primarily on performance ratings, as the company
asserts.

My team conducted a detailed analysis of Arimak’s employment and pay history data and found that,
while it is true that minority employees are, on average, paid less than white employees at Arimak, race
is not the reason behind this salary discrepancy. Further, my team found that salary decisions are, in
fact, based primarily on performance ratings, as Arimak claims, which in turn is determined by tenure at
the company. Since Arimak’s affirmative action program was only implemented just over two years ago,
minority employees tenure tends to be lower than that of white employees, which explains why they
are paid less, on average, than white employees.

The following analysis summarizes the data and supports how we arrived at the above conclusion.

Analysis
A quick glance at the salary data does, in fact, show that there is a difference between the salaries of
white and minority employees (See figure 1). On average, white employees are paid $1675.58, while
minority employees are paid $1410.32, a difference of $265.26. To determine if this difference is
statistically significance, my team performed a one-tailed hypothesis test (See figure 2). Our null
hypothesis was that the salary mean of white and minority employees is 0, and our alternative
hypothesis was that the salary mean of white employees is greater than that of minority employees.
Our hypothesis test told us to reject our null hypothesis, thus we can say with at least 95% confidence
that there is, in fact, a salary discrepancy between the two groups. However, given that Arimak claims
that salary is based on performance ratings, and not on race, we knew that we needed to dig deeper
into the data to determine additional relationships.

Next, we created a box-and-whisker plot for performance ratings based on race (See figure 3) and found
that minorities were offered consistently lower ratings during performance reviews than white
employees (5.03 average score for minorities and a median of 4, versus a 6.96 average score for white
employees and a median of 7), suggesting that either minority employees perform at below par rate, or
that adverse discrimination does, in fact, exist during performance reviews.

However, we also noticed that whites, on average, have a longer tenure at the company than minorities
(3.37 years average for whites, versus 2.43 years average for minorities; See figure 5). Since the data
suggests that performance ratings are highly dependent on company tenure, we sought to dig deeper
into this relationship. We created a pivot table of average company tenure per level broken up by race,
and actually found that, on average, minority employees are promoted quicker than their white
counterparts (See figure 6). For example, white employees spent an average of 1.98 years in pay grade
1 before they were promoted to pay grade 2, while minority employees spent an average of only 1.79
years. While there are more minority employees in lower pay grades (see figure 7) figure 6 proves that
race has little to do with how quickly employees are able to move up in rankings at the company. These
two pivot tables explain why there is a salary discrepancy between white and minority employees –
since there are more minority employees who have less tenure at the company in comparison to white
employees, the large number of minority employees with less tenure pulls the weighted average salary
down for the group as a whole. Further, my team found that, on average, minority and white
employees within each pay grade are assigned equivalent performance ratings, proving that managers
are upholding the company’s affirmative action policies and grading employees solely based on
performance and tenure when assigning ratings (See figure 8).

Based on this information, we know we can reasonably assume that employees at Arimak are not
discriminated against based on race. Next, we sought to develop a regression model to best calculate
predicted salary based on independent variables to further support our analysis.

First, to better understand the relationship between the different factors potentially affecting salary, we
ran a correlation table to determine which variables are most closely correlated to salary (See figure 10).
Judging by the table, we can see that the factors that most influence salary are tenure, performance
rating, and pay grade (however, since pay grade and performance rating are ordinal variables, we have
to be careful to not accept the number completely as is). However, there is also a strong positive
relationship between Pay Grade and Tenure, as well as Pay Grade and Rating, suggesting that there may
be some multicollinearity issues between those two sets of variables. Of the categorical variables, we
can see that race does negatively affect salary, however, we already explained the reason behind this
negative correlation above, which is further described by the fact that race and tenure are also
negatively correlated. We may want to dig deeper into gender and age as well, since there does appear
to be some sort of positive relationship to salary, though not much.

Developing a best fit regression model for this set of data was particularly challenging, given the amount
of multicollinearity that exists between the independent variables. For example, performance rating
strongly predicts salary, but tenure strongly predicts performance rating. Pay grade also strongly
predicts salary, but performance rating strongly predicts pay grade. However, after running multiple
regressions to determine the best fit relationship, my team came up with the following regression
equation (See Figure 11):

Salary = 722.32 + 282.88 (Yrs. Tenure)

This equation suggests that all employees start with a base salary of $722, and for every additional year
they are employed by Arimak, they are offered a $283 pay raise. However, the R-Square value for this
model is only .58, so we realize that this equation only explains about 58% of salary decisions. The
reason we determined this to be the most effective model is because, though performance rating is a
better indicator of salary and returns an R-Square value of .73, we weren’t comfortable with this model
due to the scatterplot of residual versus fit that it returned and the heteroskedastic characteristics it
displayed (See figure 12). While the regression model using Tenure as the dependent variable returns a
much lower R-Square value, we are more confident using this model to predict salary decisions,
especially as employees stay at the company for a greater number of years, because the residual plot
does not display any strange characteristics. For employees in pay grade 1, though, and pay grade 2, to
some extent, either regression model will work perfectly fine to predict salary, and in fact, the latter
might work best.
Regardless, we feel that, in order to gain a true, complete picture of the predicted salary for employees,
managers will need to look at both these regression models separately, but realize that they don’t tell
the full and complete picture. With this set of data, it is near impossible to create an outstanding
model, given how interrelated the independent variables are, and managers will need to carefully
consider all the categorical variables not displayed in the regression when predicting salary for
employees. In fact, we ran a regression with rating as the dependant variable tenure as the
independent variable and found that tenure explains about 73% of an employee’s performance rating.
Thus, to predict performance rating we can use the equation: Rating = .85831 + 1.77(yrs. Tenure)
Finally, we sought to use this regression equation to prove that minority employees are not
discriminated against when it comes to salary decisions, and we find that, since race isn’t even a variable
in the equation (See figure 13 – it is not even statistically significant) we can conclude that Arimak does
not discriminate against minority employees when making salary decisions.

Recommendations
Given the above analysis, we found that, though it appears that minority employees are paid less than
their white counterparts, tenure is the most accurate variable that determines employee salary.
However, in order to avoid discrimination claims in the future, Arimak might consider making ratings
more highly dependent on performance, and less dependent on tenure, given there may be some level
of discrimination against lower-level employees (and as a result, disparate impact on minority
employees) in Arimak’s performance rating model.

Appendix
Figure 1: Box-and-whisker plot describing the difference between white and minority employee salaries.

Box-Whisker Plot Comparison

Salary(Minor.)
Data Set #2

Salary(White)
Data Set #2

0 500 1000 1500 2000 2500 3000

Figure 2: Hypothesis test proving that there is a salary discrepancy between white and minority
employees.

Salary(White) Salary(Minority)
Hypothesis Test (One-Sample) Data Set #2 Data Set #2
Sample Size 77 63
Sample Mean 1675.58 1410.32
Sample Std Dev 469.57 382.61
Hypothesized Mean 0 0
Alternative Hypothesis >0 >0
Standard Error of Mean 53.51 48.20
Degrees of Freedom 76 62
t-Test Statistic 31.3122 29.2568
p-Value < 0.0001 < 0.0001
Null Hypoth. at 10% Significance Reject Reject
Null Hypoth. at 5% Significance Reject Reject
Null Hypoth. at 1% Significance Reject Reject

Figure 3: Box-and-whisker plot describing the difference between white and minority employee
performance ratings.

Box-Whisker Plot Comparison

Rating(Min)
Data Set #2

Rating(Wh.)
Data Set #2

0 2 4 6 8 10 12

Figure 4: Box-and-whisker plot describing the difference between salary and pay grade.
 Box Plot Comparison

Salary(3) /
Data Set #2

Salary(2) /
Data Set #2

Salary(1) /
Data Set #2

0 500 1000 1500 2000 2500 3000

Figure 5: Box-and-whisker plot describing the difference between white and minority employee tenure.

Box-Whisker Plot Comparison

Tenure(Min
) Data Set
#2

Tenure(Wh)
Data Set #2

0 1 2 3 4 5 6

Figure 6: Pivot table describing the average tenure of employees within each pay grade, broken out by
race.

Average of
Tenure Pay Grade
Race 1 2 3 Grand Total
White 1.978947368 3.273076923 4.28125 3.372727273
Minority 1.794871795 3.193333333 3.9 2.428571429
Grand Total 1.855172414 3.243902439 4.197560976 2.947857143

Figure 7: Pivot tables describing the number of both white and minority employees in each pay grade, as
well as the percentages of the total.

Pay Grade
Grand
Race 1 2 3 Total
 White 19 26 32 77
Minority 39 15 9 63
Grand
Total 58 41 41 140

Pay Grade
Race 1 2 3 Grand Total
White 13.57% 18.57% 22.86% 55.00%
Minority 27.86% 10.71% 6.43% 45.00%
Grand Total 41.43% 29.29% 29.29% 100.00%

Figure 8: Pivot table describing the average performance ratings of both white and minority employees
in each pay grade.

Average of
Rating Pay Grade
Race 1 2 3 Grand Total
White 3.473684211 6.615384615 9.3125 6.961038961
Minority 3.512820513 6.466666667 9.222222222 5.031746032
Grand Total 3.5 6.56097561 9.292682927 6.092857143

Figure 9: Pivot table describing the average salary of both white and minority employees within each
pay grade.

Average of
Salary Pay Grade
Race 1 2 3 Grand Total
1 1143.157895 1600.384615 2052.8125 1675.584416
2 1190.25641 1586.666667 2070 1410.31746
Grand Total 1174.827586 1595.365854 2056.585366 1556.214286

Figure 10: Correlation table displaying apparent relationships between all variables that potentially
affect employee salary.

Pay Grade Gender Race Married Age Tenure Rating

Correlation
Table Data Set #1 Data Set #1 Data Set #1 Data Set #1 Data Set #1 Data Set #1 Data Set #1
Pay Grade 1.000 0.025 -0.386 -0.011 0.067 0.811 0.961
Gender 0.025 1.000 -0.090 0.003 -0.106 -0.075 -0.007
Race -0.386 -0.090 1.000 -0.019 0.094 -0.387 -0.382
Married -0.011 0.003 -0.019 1.000 -0.046 0.018 -0.012
Age 0.067 -0.106 0.094 -0.046 1.000 0.101 0.109
Tenure 0.811 -0.075 -0.387 0.018 0.101 1.000 0.856
Rating 0.961 -0.007 -0.382 -0.012 0.109 0.856 1.000
Salary 0.814 0.012 -0.294 0.003 0.095 0.764 0.845
Figure 11: Regression analysis, with salary as the dependent variable and tenure as the independent
variable. The hypothesis test shows that the actual versus the predicted salary values are statistically
significant.

Multiple Adjusted StErr of

R-Square
Summary R R-Square Estimate
0.7636 0.5830 0.5800 292.2742665

Degrees of Sum of Mean of

F-Ratio p-Value
ANOVA Table Freedom Squares Squares
Explained 1 16483547.51 16483547.51 192.9610 < 0.0001
Unexplained 138 11788546.07 85424.24686

Standard Confidence Interval 95%

Coefficient t-Value p-Value
Regression Table Error Lower Upper
Constant 722.3230985 64.91439192 11.1273 < 0.0001 593.9676415 850.6785556
Tenure 282.8804609 20.36423913 13.8910 < 0.0001 242.6141787 323.146743

Scatterplot of Residual vs Fit

1000.0

500.0
Residual

0.0
0.0 500.0 1000.0 1500.0 2000.0 2500.0
-500.0

-1000.0
Fit

Salary - Reg. Sal

Hypothesis Test (Paired-Sample) FINAL
Sample Size 140
Sample Mean 0.004457143
Sample Std Dev 291.2210225
Hypothesized Mean 0
Alternative Hypothesis <> 0
Standard Error of Mean 24.61266862
Degrees of Freedom 139
t-Test Statistic 0.0002
p-Value 0.9999
Null Hypoth. at 10% Significance Don't Reject
Null Hypoth. at 5% Significance Don't Reject
Null Hypoth. at 1% Significance Don't Reject
Figure 12: Regression analysis, with salary as the dependent variable and performance rating as the
independent variable.

Multiple Adjusted StErr of

R-Square
Summary R R-Square Estimate
0.8553 0.7315 0.7151 240.733089

Degrees of Sum of Mean of

F-Ratio p-Value
ANOVA Table Freedom Squares Squares
Explained 8 20680326.53 2585040.816 44.6063 < 0.0001
Unexplained 131 7591767.041 57952.42016

Standard Confidence Interval 95%

Coefficient t-Value p-Value
Regression Table Error Lower Upper
Constant 883.3333333 138.9873138 6.3555 < 0.0001 608.3832728 1158.283394
Rating = 3 287.9166667 147.4183081 1.9531 0.0529 -3.711911781 579.5452451
Rating = 4 330.3333333 145.7711245 2.2661 0.0251 41.96327703 618.7033896
Rating = 5 450.6666667 175.8065909 2.5634 0.0115 102.879293 798.4540403
Rating = 6 561.6666667 153.1565603 3.6673 0.0004 258.6864565 864.6468768
Rating = 7 795.0877193 149.558018 5.3162 < 0.0001 499.2262841 1090.949154
Rating = 8 1003.333333 160.488726 6.2517 < 0.0001 685.8483504 1320.818316
Rating = 9 1072.982456 149.558018 7.1744 < 0.0001 777.121021 1368.843891
Rating = 10 1337.843137 150.752908 8.8744 < 0.0001 1039.617925 1636.06835

Scatterplot of Residual vs Fit

800.0

600.0

400.0

200.0
Residual

0.0

-200.0 0.0 500.0 1000.0 1500.0 2000.0 2500.0

-400.0

-600.0

-800.0
Fit

Figure 13: Regression analysis, with salary as the dependent variable and performance rating as the
independent variable. This regression model proves that, when you add race into the equation, it is
insignificant, showing that race has little impact on salary decisions.

Multiple R-Square Adjusted StErr of

 Summary R R-Square Estimate
0.8457 0.7153 0.7111 242.3920514

Degrees of Sum of Mean of

F-Ratio p-Value
ANOVA Table Freedom Squares Squares
Explained 2 20222808.37 10111404.19 172.0976 < 0.0001
Unexplained 137 8049285.201 58753.90658

Standard Confidence Interval 95%

Coefficient t-Value p-Value
Regression Table Error Lower Upper
Constant 608.4969706 67.26670755 9.0460 < 0.0001 475.4816835 741.5122577
Rating 153.2942785 8.810938738 17.3982 < 0.0001 135.8712532 170.7173038
Race = 2 30.48261231 44.54886556 0.6843 0.4950 -57.60970492 118.5749295

Figure 14: A box-and-whisker plot displaying employee tenure. On average, whites have been employed
for a longer period of time (3.4 years versus 2.43 years), and at least 27 minority employees were hired
after the AA policy took place.

Box Plot Comparison

Tenure(Min.)
Data Set #3

Tenure(Wh.)
Data Set #3

0 1 2 3 4 5 6

Figure 15: A box-and-whisker plot displaying salary versus performance rating. This graph proves that
employees who receive a higher rating are paid more.
 Box Plot Comparison

Salary(10) / Data Set

#4

Salary(9) / Data Set

#4

Salary(8) / Data Set

#4

Salary(7) / Data Set

#4

Salary(6) / Data Set

#4

Salary(5) / Data Set

#4

Salary(4) / Data Set

#4

Salary(3) / Data Set

#4

Salary(2) / Data Set

#4

0 500 1000 1500 2000 2500 3000

Question 2
1. The estimated regression model is: ADJEAR = 116.58 – 3.9916(UNEMP) – 325.74(PARTY). β₁ tells
us that the monthly adjusted earnings index for British workers decreased by 3.9916 for every
point that unemployment rose. β₂ tells us that the monthly adjusted earnings index for British
workers decreased by an additional 325.74 points whenever the Labor party was in control.
2. Technically, since this is a 3-D model (given it is a multiple regression output) we are unable to
draw on paper the best fit regression line. Because we have more than one independent
variable describing the dependent variable, ADJEAR, our line exists in a plane, not in a 2-
dimensional graph.
3. No. In fact, the ADJEAR is typically about 325.74 points lower when the labor party is in power,
as shown in the regression equation.
4. ADJEAR = 116.58 – 3.9916(.05) – 325.74(0) = 116.38