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CHAPTER 2
Contextual Influences on Compensation Practice
Learning Objectives
2-1. Discuss the reasons for interindustry wage differentials.
2-2. Explain the factors that contribute to pay differentials based on occupational
characteristics.
2-3. Summarize the reasons for the occurrence of geographic pay differentials.
2-4. Discuss the role of labor unions in setting compensation.
2-5. Identify and discuss key employment laws pertinent to compensation practice.
Outline
I. Overview
II. Interindustry Wage Differentials
III. Pay Differentials Based on Occupational Characteristics
IV. Geographic Pay Differentials
V. Labor Unions
VI. Employment Laws That Influence Compensation Tactics
VII. Key Terms
VIII. Discussion Questions and Suggested Answers
IX.End of Chapter Case; Instructor Notes, and Questions and Suggested
Student Responses
X. Crunch the Numbers! Questions and Suggested Student Responses
XI. Assisted-Graded Questions
XII. Additional Case from the MyManagementLab Website; Instructor Notes and
Questions and Suggested Student Responses
Lecture Outline
I. Overview
A. Contextual influences on pay
1. Compensation professionals must understand patterns of pay differentials
to make informed decisions about pay
2. Must also make decisions within scope of employment and labor laws
3. Global context also influences compensation
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II. Interindustry Wage Differentials
A. The differences in wages and benefits across industries
1. Attributed to:
a. The industry’s product market
b. The degree of capital intensity
c. The profitability of the industry
d. Unionization
B. Companies in Product Markets with Little Competition
1. Generally pay higher wages
2. Exhibit substantial profits
3. Exhibit limited new competition because of:
a. Higher barriers to entry
b. Insignificant influence of foreign competition
4. Government regulations and extremely expensive equipment represent
entry barriers
C. Capital Intensity
1. Defined as the extent to which companies’ operations are based on the use
of large-scale equipment
2. The amount of average pay varies with the degree of capital intensity
a. Generally manufacturing jobs are capital intensive, service jobs are not
C. Profitability
1. Generally, the more profitable the industry, the higher the compensation
D. Unionization
1. Unionized industries tend to pay higher
2. Power of collectively negotiating leads to higher wages than individually
negotiating
III. Pay Differentials Based on Occupational Characteristics
A. Occupation
1. Group of jobs, found at one or more company, in which a common set of
tasks are performed or are related in terms of similar objectives
methodologies, materials, products, worker actions, or worker
characteristics
2. Pay variations can occur within occupations, based on the complexity of
the jobs
B. Knowledge, skills and abilities
1. Role of job analysis
2. Jobs that require formal education or early experience are paid more
C. Supply and demand
1. Companies demand for individuals relative to supply influences
compensation
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IV. Geographic Pay Differentials
A. Relative pay differentials
1. Occur between geographic areas
B. Pay rate differentials
1. Expressed in dollars as hourly or annual pay
2. For occupations based on particular geographic regions
3. Cost of living differences
V. Labor Unions
A. National Labor Relations Act of 1935 (NLRA)
1. Designed to remove barriers to free commerce and to restore equality of
bargaining power between employees and employers
2. Collective bargaining agreement is a written document that describes the
terms of employment approved by management and employees during
negotiations
B. Compensation Issues in Collective Bargaining
1. Union and management negotiations usually center on pay raises and
employee benefits
2. Cost-of-living-adjustments (COLAs)
a. Automatic pay increases based on changes in prices, as indexed by the
consumer price index (CPI)
b. Enables workers to maintain their standards of living by adjusting
wages for inflation
3. Union influence has declined because:
a. Legislation outlawed unions’ use of intimidation
b. Anti-discrimination laws provided protections for women and
minorities
c. Globalization increasing competition
d. Right-to-work laws that prohibit management and unions from entering
into agreements requiring union membership as a condition of
employment
e. Higher rates of unionization in the public or government sector
VI. Employment Laws That Influence Compensation Tactics
A. Legislative Actions
1. Four Amendments to the U.S. Constitution
a. Article 1, Section 8 (“The Congress shall have the power…to regulate
Commerce with foreign nations, and among the several States, and
with the Indian Tribes…”)
b. First Amendment (“Congress shall make no laws respecting an
establishment of religion, or prohibiting the free exercise thereof; or
abridging the freedom of speech, or of the press; or the right of the
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people peaceably to assemble, and to petition the Government for a
redress of grievances.”)
c. Fifth Amendment (“No person shall...be deprived of life, liberty, or
property without due process of law…”)
d. Fourteenth Amendment, Section 1 (“No state shall make or enforce
any law which shall abridge the privileges or immunities of citizens of
the United States, nor shall any State deprive any person of life,
liberty, or property without due process of law; nor deny any person
within its jurisdiction the equal protection of the law.”)
2. Government has three levels in U.S.
a. Federal government oversees the entire U.S. and territories
b. State governments enact laws that pertain exclusively to respective
regions
c. Local governments enact laws that are pertinent to smaller geographic
regions
B. Income Continuity, Safety, and Work Hours Laws
1. Three main factors
a. Great Depression
i. Passage of the Social Security Act of 1935 (Title IX)
ii. Passage of workers’ compensation programs
b. Family businesses to large factories
c. Division of labor
2. Fair Labor Standards Act of 1938 (FLSA)
1. Addresses three main issues of minimum wage, overtime pay, and
child labor provisions
a. Enforced by the U.S. Department of Labor
2. Minimum wage
a. Designed to ensure wages for a minimally acceptable standard of
living
b. Originally set at $0.25 per hour
c. Federal law supersedes state minimum wage law where the federal
minimum wage is greater than the state
3. Overtime pay provisions
a. Defined in FLSA
b. Most employers must pay time and one-half for over 40 hours
work in a period of 7 consecutive days
c. Executive, administrative, learned professional, creative
professional, computer workers, and outside sales employees are
generally exempt from the FLSA
d. Nonexempt employees are those subject to the FLSA overtime pay
provision
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e. Aaron v. City of Wichita Kansas provided some guidance in
determining what employees are exempt
d. Fair Pay Rules in 2004 added additional complexity in determining
what employees are exempt
e. Portal-to-Portal Act of 1947 defines the term hours worked to
include these compensable work activities:
i. Waiting time
ii. On-Call time
iii. Rest and meal periods
iv. Sleeping time and certain other activities
v. Lectures, meetings, and training programs
vi. Travel time
f. Equal Pay Act of 1963, which prohibits sex discrimination in pay
for employees performing equal work
4. Child labor provisions
a. Intended to protect children from being overworked, working in
potentially hazardous settings, and having their education
jeopardized due to excessive work hours
b. Children younger than age 14 usually cannot be employed
c. Children ages 14 and 15 may work in safe occupations outside
school hours with some limitations
d. Children ages 16 and 17 do not have hourly restrictions but annot
work in hazardous jobs (e.g., running heavy industrial equipment,
working around harmful substances)
C. Pay Discrimination Legislation
1. Came out of the Civil Rights Movement of the 1960s
2. Equal Pay Act of 1963
a. Enforced by the Equal Employment Opportunity Commission (EEOC)
b. Applies to jobs of equal worth according to the Department of Labor’s
definition of compensable factors, such as:
i. Levels of skill
ii. Effort
iii. Responsibility
. iv. Working conditions
c. Jobs must have “similar”, not necessarily the “same” working
conditions
d. Pay differentials are not always illegal; are legal where such payments
are made pursuant to:
i. A seniority system
ii. A merit system
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iii. A system which measures earnings by the quantity or quality of
production
iv. A differential based on any factor other than gender
D. Civil Rights Act of 1964
1. Legislators designed Title VII of this Act to promote equal employment
opportunities for underrepresented minorities
2. Disparate treatment discrimination
a. Represents intentional discrimination, occurring whenever employers
intentionally treat some workers less favorably than others because of:
race, color, religion, sex, or national origin
3. Disparate impact discrimination
a. Represents unintentional discrimination that occurs whenever an
employer applies employment practices to all employees
b. The practice leads to unequal treatment of protected employee groups
4. Title VII applies to:
a. Companies with 15 or more employees
b. Employment agencies
c. Labor unions
d. Labor management committees controlling apprenticeship and training
5. Lilly Ledbetter Fair Pay Act overturned the Ledbetter v. Goodyear Tire &
Rubber Co. case removing allowing women to file a pay discrimination
charge within 180 days of a discriminatory paycheck
6. The Paycheck Fairness act strengthens the remedies available to put
sex-based pay discrimination on par with race-based pay discrimination
7. Bennett Amendment (to Title VII)
a. Allows female employees to charge employers with Title VII violations
regarding pay only when the employer has violated the Equal Pay Act
of 1963
8. Age Discrimination in Employment Act of 1967 (ADEA)
a. Designed to protect workers age 40 and older (“baby boomers”) from
age discrimination
b. Older Workers Benefit Protection Act (OWBPA) places additional
restrictions on employers’ benefits practices
i. Employer may require older employees to pay more for health
insurance or life insurance coverage if the cost is significantly
greater than the cost for younger workers because these costs
generally rise with age
.ii. Equal benefit or equal cost principle which specifies that
employers do not have to provide equal benefits to older workers if
it costs them more to do so
9. Civil Rights Act of 1991
a. Designed to overturn several Supreme Court rulings
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i. Atonio v. Ward Cove Packing Company, shifted the burden of proof
from the employee to the employer
ii. Lorance v. AT&T Technologies - allows employees to file a
discrimination claim when the system is implemented or whenever the
system negatively affects them
iii. Boureslan v. Aramco- allows expatriates to file discrimination
lawsuits
E. Accommodating Disabilities and Family Needs
1. Pregnancy Discrimination Act of 1978 (PDA)
a. An amendment to Title VII of the Civil Rights Act of 1964 that prohibits
disparate impact discrimination against pregnant women for all employment
practices
b. Employers must not treat pregnancy less favorably than other medical
conditions covered under employee benefits plans
2. Americans with Disabilities Act of 1990 (ADA)
a. Prohibits discrimination against individuals with mental or physical
disabilities within and outside employment settings
b. Applies to employers with 15 or more employees
c. Title I requires reasonable accommodations may include such efforts as
making existing facilities readily accessible, restructuring jobs, and modifying
work schedules
3. Family and Medical Leave Act of 1993 (FMLA)
a. FMLA was designed to provide employees with job protection in cases of
family or medical emergency
b. Guarantees unpaid leave and the right to return to either the same position or a
similar position with the same pay, conditions, and benefits
F. Prevailing Wage Laws
1. Davis–Bacon Act of 1931
a. Established employment standards for construction contractors holding
federal government contracts valued at more than $2,000, including:
2. Walsh–Healey Contracts Act of 1936
a. Applies to contractors and manufacturers who sell supplies, material, and
equipment to the federal government with contracts worth at least $10,000
b. Requires contractors to meet guidelines relating to wages and hours, child
labor, convict labor, and hazardous working conditions
c. Prohibits contractors from exposing workers to conditions that violate the
Occupational Safety and Health Act of 1970
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End of the Chapter
VII. Key Terms
Interindustry wage differentials: Represent the pattern of pay and benefits associated
with characteristics of industries
Occupation: A group of jobs, found at more than one company, in which a common set
of tasks are performed or are related in terms of similar objectives, methodologies,
materials, products, worker actions, or worker characteristics
National Labor Relations Act of 1935 (NLRA): The purpose of this act was to remove
barriers to free commerce and to restore equality of bargaining power between employees
and employers
Collective bargaining agreement: A written document that describes the terms of
employment approved by management and employees during negotiations
Spillover effect: Occurs when management of nonunion firms generally offered
somewhat higher wages and benefits to reduce the chance that employees would seek
union representation
Right-to-work-laws: Prohibit management and unions from entering into agreements
requiring union membership as a condition of employment
Concessionary bargaining: Unions departed from concessionary bargaining by vowing
to negotiate for wage increases
Federal constitution: Forms the basis for employment laws
Federal government: Oversees the entire United States and its territories
State governments: Enact and enforce laws that pertain exclusively to their respective
regions
Local governments: Enact and enforce laws that are most pertinent to smaller
geographic regions
Great Depression: Triggered legislation designed to stabilize the income of an
individual who became unemployed because of poor business conditions or workplace
injuries
Social Security Act of 1935 (Title IX): Provided temporary income to workers who
became unemployed through no fault of their own
Workers’ compensation: Granted income to workers who were unable to work because
of injuries sustained on the job
Fair Labor Standards Act of 1938 (FLSA): Establishes minimum wage, overtime pay,
recordkeeping, and youth employment standards affecting employees in the private sector
and in Federal, State, and local governments
Exempt: Employees not covered by the FLSA including generally executive,
administrative, learned professional, creative professional, computer workers, and outside
sales employees
Nonexempt: Jobs that are subject to the FLSA overtime pay provision
Aaron v. City of Wichita, Kansas: Case that illustrates that classifying jobs as either
exempt or nonexempt is not always clear-cut
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FairPay Rules: Revised FLSA guidelines by the Department of Labor
Portal-to-Portal Act of 1947: Defines the term hours worked that appears in the FLSA
Integrity Staffing Solutions, Inc. v. Busk et al.: Case that helped determine
compensable time
Equal Pay Act of 1963: Prohibits sex discrimination in pay for employees performing
equal work
Civil Rights Act of 1964: Key legislation designed to protect designated classes of
employees and to uphold their rights individually against discriminatory employment
decisions
Compensable factors: Skill, effort, responsibility, and working conditions
EEOC v. Madison Community Unit School District No. 12 39 Title VII: Case that
sheds light on whether jobs are equal
Disparate treatment: Represents intentional discrimination, occurring whenever
employers intentionally treat some workers less favorably than others because of their
race, color, sex, national origin, or religion
Disparate impact: Represents unintentional discrimination
Ledbetter v. Goodyear Tire & Rubber Co.: U.S. Supreme Court case that rendered a
very strict interpretation as to when the statute of limitations period begins for women to
sue their employers for discrimination in pay
Lilly Ledbetter Fair Pay Act: Restores prior law providing that a pay discrimination
charge must simply be filed within 180 days of a discriminatory paycheck
Paycheck Fairness Act: Strengthens the Equal Pay Act of 1963 by strengthening the
remedies available to put sex-based pay discrimination on par with race-based pay
discrimination
Bennett Amendment: Allows female employees to charge employers with Title VII
violations regarding pay only when the employer has violated the Equal Pay Act of 1963
Age Discrimination in Employment Act of 1967 (ADEA): Protects workers age 40
and older from illegal discrimination
Baby boom generation: Generation born roughly between 1946 and 1964 and
represented a swell in the American population
Older Workers Benefit Protection Act (OWBPA) The 1990 amendment to the ADEA
—placed additional restrictions on employer benefits practices
Civil Rights Act of 1991: Overturned several Supreme Court rulings
Atonio v. Wards Cove Packing Co.: Supreme Court case overturned by the Civil
Rights Act of 1991 resulting in the shifting of the burden of proof from employees to
employers
Lorance v. AT&T Technologies: Supreme Court case overturned by the Civil Rights Act
of 1991 resulting in employees being able to challenge the use of seniority systems either
when the system is implemented or whenever the system negatively affects them
Boureslan v. Aramco: Supreme Court case overturned by the Civil Rights Act of 1991
that now allows U.S. citizens working overseas to file suit against U.S. businesses for
discriminatory employment practices
Pregnancy Discrimination Act of 1978 (PDA): Prohibits disparate impact
discrimination against pregnant women for all employment practices
Americans with Disabilities Act of 1990 (ADA): Prohibits disparate impact
discrimination against pregnant women for all employment practices.
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Title I: Of the ADA requires that employers provide reasonable accommodation
Family and Medical Leave Act of 1993 (FMLA): Provides guaranteed leave and the
right of the employee to return to either the position he or she left when the leave began
or to an equivalent position with the same benefits, pay, and other terms and conditions of
employment
Davis–Bacon Act of 1931: Establishes employment standards for construction
contractors holding federal government contracts valued at more than $2,000
Walsh–Healey Public Contracts Act of 1936: Mandates that contractors with federal
contracts meet guidelines regarding wages and hours, child labor, convict labor, and
hazardous working conditions
Occupational Safety and Health Act of 1970: Ensures safe and healthful working
conditions for working men and women by authorizing enforcement of the standards
under the act
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