978-0134320540 Chapter 2 Lecture Notes

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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

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

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

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

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

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

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

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

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.

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