Chapter 2:

Contextual Influences
on Compensation
Practice

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 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.
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LO 2-1
Interindustry Wage Differentials
The pattern of pay and benefits associated with
characteristics of industries
Factors leading to interindustry wage differentials
 Industry’s product market: Where there is little
competition (e.g., mining, utilities), there is greater
flexibility for providing higher wages
 Capital intensity: The extent to which companies’
operations are based on the use of large-scale
equipment, and capital intensity is associated with
higher wages

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LO 2-1
Interindustry Wage Differentials

Factors leading to interindustry wage differentials:

 Industry profitability: Presumably, employee
higher levels of knowledge, skills and abilities
contribute to company profitability, which, in turn, is
associated with higher wages
 Unionization of the workforce: More highly
unionized industries pay more highly, in part,
because the collective bargaining process gives
labor greater leverage for negotiating higher wages
and benefits
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LO 2-1
Interindustry Wage Differentials

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LO 2-2
Occupational Wage Differentials

An occupation is a group of jobs, found at more

than one company, characterized by a:
 Common set of tasks, and related in terms of
 Similar objectives
 Methodologies
 Materials
 Products
 Worker actions
 Worker characteristics
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LO 2-2
Occupational Wage Differentials

Two examples of occupations include

 Office support (e.g., file clerks, clerk typists)
 Human resources management (e.g.,
compensation analyst, training and development
specialist)
 Lawyers, judges, and related workers
 Cooks and food preparation workers
 Law enforcement workers (e.g., bailiffs, police
officers)
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LO 2-2
Explaining Occupational
Wage Differentials
Job content based on knowledge, skills, and
abilities (KSAs)

Labor supply relative to employer demand for

labor

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LO 2-2
Occupational Wage Differentials:
Job Content
Between occupational differences
 Differences in the complexity of KSAs such as
• The building and grounds cleaning and maintenance
occupations
• Computer and mathematical occupations

Within occupational differences

 Differences in KSAs within an occupational group
• Pharmacy technician
• Pharmacist
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LO 2-2
Occupational Wage Differentials:
Supply and Demand
When labor supply < employer demand,
companies compete for limited talent
Wages are typically greater when labor supply <
employer demand
 Cybersecurity experts are in high demand given
the continued upward trends in cyberattacks
 Fast food restaurant workers are in high demand
since economic conditions improved, creating
higher paying alternatives, necessitating that many
restaurants pay higher wages
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LO 2-3
Geographic Pay Differentials

Relative pay differentials are often expressed as

the percentage difference between a specific
location and the national average
 The relative pay differential for Los Angeles is 20%
higher than the national average
 The relative pay differential for Lincoln, Nebraska
is 3 percent less than the national average
 Discuss the pay differences in the UAE

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LO 2-3
Geographic Pay Differentials
Pay rate differentials are expressed in dollars as
annual or hourly pay differences for occupations
based on particular geographic regions and the
nation overall
Cost-of-living differences between geographic
locations influence pay
 Oftentimes, average housing prices signal cost-of-
living differences (e.g., $389,000 in Boston;
$173,000 in Fargo, North Dakota)

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LO 2-3
Geographic Pay Differentials
Consistency in the direction of the relative pay
and pay rate differentials, but the magnitude
often differs
Differences in calculation method accounts for
these differences
 Relative pay differentials control for the influence
of other variables, for example,
• Unionization of the workforce
• Interindustry wage differentials

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LO 2-4
Labor Union Influence on Pay

In general, workers represented by unions

earn more, on average, than non-union
workers: $970/week vs $763/week in 2014
The collective efforts of labor, organized
through labor unions, have led to higher pay
than in settings where pay rate negotiation is
conducted between individual employees and
the employer

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LO 2-4
Labor Union Influence on Pay

The spillover effect suggests that non

union employers tend to pay higher than
they might otherwise pay in order to avoid
unionization

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LO 2-4
Decline in Union Representation

Since 1954 (highest union representation at

28.3%), the unionization rate has steadily
declined; yet, the wage advantage still
prevails
 About 30 years ago, the rate was 20.3%
 In 2014, union representation was at 11.1%

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LO 2-4
Some of the Causes for Decline
in Union Representation

Legislation prohibits unions from intimidating

workers to become members
Right-to-work laws prohibit requiring workers
to join unions as a condition of employment
Relocation of manufacturing operations from
the United States to other countries with fewer
labor laws

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 UAE labor laws ( compensation)

Please check related laws to

compensation and pay differential

Copyright © 2017 Pearson Education, Inc. Chapter 1- Slide 18

LO 2-5
Compensable Work Activities
Waiting time
On-call time
Rest and meal periods
Sleeping time and certain other activities
Lectures, meetings, and training programs
Travel time
 Home to work travel
 Home to work on special one day assignment
 Travel that is all in a day’s work
 Travel away from home community
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LO 2-5
Child Labor

Ages 14 and younger can’t work

Ages 14 and 15 can work
 3 hours on school nights
 18 hours per week when school is in
 40 hours per week when school is out
Ages 16 and 17
 No hourly restrictions
 Can’t work in hazardous conditions

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LO 2-5
Compensable Factors
Factor Definition
Skill Experience, training, education, and ability
as measured by the performance
requirements of a job
Effort The amount of mental or physical effort
expended in the performance of a job
Responsibility The degree of accountability required in
the performance of a job
Working The physical surrounding and hazards of a
conditions job, including dimensions such as inside
versus outside work, heat, cold, and poor
ventilation

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LO 2-5
Legal Pay Differentials

Payments made pursuant to a:

Seniority system
Merit system
Earnings measured by quantity or quality of
production
Differentials not based on gender

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LO 2-5
Equal Pay for Women

Lilly Ledbetter Fair Pay Act

 Overturned the 2007 Ledbetter Supreme
Court ruling
 Helps close the pay gap between men and
women
 Pay discrimination charge must simply be
filed within 180 days of a discriminatory
paycheck

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LO 2-5
Older Workers Benefit Protection Act
Under particular circumstances, employers may
require older employees to pay more for health
care, disability, or life insurance
This is the case because these benefits cost
more for older workers (e.g., an older worker
may be more likely to become ill)
Charging more cannot be a condition of
employment
Older workers could choose lower, less costly
levels of coverage
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LO 2-5

Civil Rights Act of 1991

Shifts burden of proof of disparate impact to

employers
Filing of discrimination claims changed
U.S. citizens working overseas may file suit
against U.S. businesses for discriminatory
employment practices
Extends coverage to U.S. Senate employees
and executive branch political appointees

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LO 2-5
Pregnancy Discrimination Act of 1978
(PDA)

Amendment to Title VII

Prohibits disparate impact of pregnancy
Pregnancy treated like disability
The protected rights include
 Credit for previous service
 Accrued retirement benefits
 Accumulated seniority
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LO 2-5
Family and Medical Leave( UAE Labor
law)

Job protection during family and medical

emergencies
Guarantees unpaid leave
Employee returns with same or similar
 Position
 Pay
 Conditions
 Benefits

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