1.) Using The Fortune 500 List, identify one company that uses Lowest-Cost Strategy and one company that uses Differentiation Strategy. Explain how these strategies work and why these particular companies use them. Do not use any of the companies given as examples in the textbook or used by another student.Don’t not use any of the below companies:Dollar TreeIKEAAppleThe Walt Disney Company GEICOCoca-ColaCostcoKrogerAmazon.comWalmart FOX Business News2.) The Coca-Cola Company, currently based in Atlanta, GA, is relocating their headquarters to your city (or the city nearest to you). In doing so, Coke hopes to convince many of their current Atlanta-based employees to relocate to your city. What are some considerations that Coke should make for their employees regarding geographic pay differentials between Atlanta and your city? How can Coke persuade their employees to move with the company? Consider the factors mentioned in chapter 2, as well as the CNN Money cost of living calculator.
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2 Contextual Influences on Compensation Practice
When you finish studying this chapter, you should be able to:
1. 1 Discuss the reasons for interindustry wage differentials.
2. 2 Explain the factors that contribute to pay differentials based on occupational
3. 3 Summarize the reasons for the occurrence of geographic pay differentials.
4. 4 Discuss the role of labor unions in setting compensation.
5. 5 Identify and discuss key employment laws pertinent to compensation practice.
If your professor has assigned this, go to the Assignments section of mymanagementlab.com to
complete the Chapter Warm-Up! and see what you already know. After reading the chapter,
you’ll have a chance to take the Chapter Quiz! and see what you’ve learned.
In Chapter 1, we discussed strategic compensation. That discussion revealed that compensation
professionals plan, develop, and implement compensation practices to help achieve competitive
advantage. From this perspective, it is imperative that compensation professionals understand the
broader context in which compensation decisions are rendered. Compensation professionals
should understand the patterns of pay differentials outside their companies to help make
informed decisions about fair and competitive pay practices. Also, with these data, they may
make compelling requests to the Chief Financial Officer (CFO) for monetary resources necessary
to appropriately fund compensation programs for competitive advantage. These factors include
interindustry wage differentials, occupational pay differentials, geographic pay differentials, and
the role of labor unions. We will present basic statistical information to illustrate these
differentials as well as discuss possible explanations for them.
Besides these various patterns of pay differentials, compensation professionals make decisions
within the scope of pertinent employment and labor relations laws to maintain compliance with
government mandates, and, in doing so, protecting the welfare of employees and serving the
interests of company shareholders. Employment and labor relations laws are essential to
maintain a balance of power between employers and employees. In a nutshell:
The freedom to contract is crucial to freedom of the market; an employee may choose to work or
not to work for a given employer, and an employer may choose to hire or not to hire a given
applicant. As a result, the employment relationship is regulated in some important ways.
Congress tries to avoid telling employers how to manage their employees . . . . However,
Congress has passed employment-related laws when it believes that the employee is not on equal
footing with the employer. For example, Congress has passed laws that require employers to pay
minimum wages and to refrain from using certain criteria, such as race or gender, in arriving at
specific employment decisions. These laws reflect the reality that employers stand in a position
of power in the employment relationship. Legal protections granted to employees seek to make
the power relationship between employer and employee one that is fair and equitable.1
In this regard, compensation professionals strive to establish and maintain a fair pay-effort
bargain (that is, appropriate pay for performing work according to standard), and to collaborate
with managers and supervisors to ensure that employee performance is appropriately rewarded
It should be noted that compensation professionals operate in a global context in which
compensation practices may require modification to attract and retain employees on important
international assignments. Also, it is necessary to understand the role governments and cultural
values in other countries play in compensation practices. The global stage presents an important
contextual factor. We will address those issues in Chapters 13 and 14.
Interindustry Wage Differentials
1. 1 Discuss the reasons for interindustry wage differentials.
Are equivalent workers performing similar work paid more in some industries than in
others? Most often, the answer is yes. In a competitive labor market, companies attempt
to attract and retain the best individuals for employment partly by offering lucrative wage
and benefits packages. Some companies are unable to compete with companies in
other industries on the basis of wage and benefits because of persistent interindustry
wage differentials. Interindustry wage differentials represent the pattern of pay and
benefits associated with characteristics of industries. Interindustry wage differentials can
be attributed to a number of factors, including the industry’s product market, the degree
of capital intensity, the profitability of the industry, and unionization of the
workforce.2 The basis for interindustry wage differentials will be explained
shortly. Table 2-1 displays the average weekly earnings in various industries for select
years between 2007 and 2015. Utilities and mining establishments generally pay the
highest wages; retail trade and leisure and hospitality establishments generally pay the
lowest wages. In 2013, for instance, general office clerks who were employed in the
coal mining industry earned an hourly wage, on average, of $16.02. In the full service
restaurant industry, the average hourly wage was $12.85.3
Average Weekly Earnings by Industry Group, Select Years 2007–2015
2015 figures are for January.
Source: U.S. Bureau of Labor Statistics. Employment, Hours, and Earnings. Data Retrieval.
Available: www.bls.gov/webapps/legacy/cesbtab3.htm, accessed February 13, 2015.
Table 2-1 Full Alternative Text
Companies that operate in product markets where there is relatively little competition
from other companies tend to pay higher wages because these companies generally
exhibit substantial profits. This phenomenon can be attributed to factors such as higher
barriers to enter into the product market and virtually have no influence of foreign
competition. Government regulation and extremely expensive heavy or robotic
equipment represent entry barriers. The U.S. defense industry and the public utilities
industry have high entry barriers and virtually no threats from foreign competitors.
Capital intensity refers to the extent to which companies’ operations are based on the
use of large-scale equipment. Capital intensity also explains pay differentials between
industries. The amount of average pay varies with the degree of capital intensity. On
average, capital-intensive industries (e.g., manufacturing) pay more than industries that
are less capital intensive (e.g., retail). Capital-intensive businesses require highly
capable employees who have the aptitude to learn how to use complex physical
equipment such as casting machines and robotics. Workers usually receive on-the-job
training, sometimes including employer-sponsored technical instruction. In addition,
some employers may require specialized training or an associate’s degree for the most
skilled assembly and fabrication jobs. Employment settings include automotive
assembly, aircraft engine assembly, and ship building.
Service industries such as retail are not capital intensive, and most have the reputation
of paying low wages. The operation of service industries depends almost exclusively on
employees with relatively common skills. Most retail sales workers receive on-the-job
training, which usually lasts a few days to a few months.
Furthermore, companies in profitable industries tend to pay higher compensation, on
average, than companies in less profitable industries. Employees in profitable industries
presumably receive higher pay because their skills and abilities contribute to
companies’ success and are more productive; however, as more companies have failed
to meet financial goals over the past few years, they have struggled with how best to
pay for performance.
As we will discuss shortly, companies in highly unionized industries tend to pay higher
wages, on average, than do companies in lesser unionized industries. In general, the
power of collectively negotiating employment terms, including pay, is greater than the
negotiating power of a single individual. Employees’ right to strike could cripple not only
their employer, but also hurt companies that rely on receiving raw materials or finished
goods. In 2015, for instance, workers in the Los Angeles area ports refused to load or
unload ships’ cargo, delaying the delivery of automobiles to dealerships. At the same
time, most highly unionized industries (e.g., manufacturing, construction, and mining)
are capital intensive, requiring employees with the aptitude to learn and use complex
production technology such as the cranes and hoists for loading and unloading massive
Pay Differentials Based on Occupational Characteristics
1. 2 Explain the factors that contribute to pay differentials based on occupational
An occupation is 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.4 File clerk, clerk typist,
administrative clerk, staff secretary, and administrative secretary are jobs in the office
support occupation. Compensation analyst, training and development specialist,
recruiter, and benefits counselor are jobs in the human resources management
occupation. Considerable variation in pay between occupations can be explained by the
complexity of knowledge, skills, and abilities (KSAs) that define jobs (for example,
surgeons and building service workers). Another important factor is the labor market
dynamics of the supply and demand for qualified employees.
Pay variations can also be observed within occupations, also based on the complexity of
KSAs associated with different jobs that define an occupation, and we will look at some
examples shortly. It should be noted that references to differences in KSAs or relative
worth of different jobs are based exclusively on job content and demand for individuals
who possess the required KSAs. These references do notconvey value judgments about
the worth of these jobs in society or to the value placed on the people who hold different
jobs. The same applies to pay level references.
Knowledge, Skills, and Abilities
In Chapter 6, we will address the role of job analysis to provide detailed descriptions of jobs
based on differing combinations of KSAs. Typically, jobs that are based on knowledge and
skills, which are developed based on formal education (vocational education, college education)
or early job experiences such as internships or apprenticeships (for example, in the cases of
medical doctors or plumbers, respectively) are highly valued as measured by pay levels. Jobs
with less specialized or complex KSAs are typically paid much less.
Let’s consider one job from the health care practitioners and technical operations occupation and
one from the office and administrative support occupation. According to the Occupational
Outlook Handbook, anesthesiologists focus on the care of surgical patients and on pain relief.
They also work outside of the operating room, providing pain relief in the intensive care unit,
during labor and delivery, and for those who suffer from chronic pain. Anesthesiologists work
with other physicians and surgeons to decide on treatments and procedures before, during, and
after surgery. Preparation for becoming an anesthesiologist requires advanced training that
includes completion of medical school, internships, residencies, and attaining medical board
certification. In May 2013, the average annual salary was $235,070.6
According to the Occupational Outlook Handbook, secretaries and administrative assistants
usually answer telephones and take messages or transfer calls, schedule appointments and update
event calendars, arrange staff meetings, handle incoming and outgoing mail and faxes, draft
routine memos, billing, or other reports, and maintain databases and filing systems. Typically,
high school graduates who have basic office and computer skills qualify for entry-level positions.
Most secretaries learn their job in several weeks. In May 2013, the average annual salary was
Pay differences are also evident within occupations because of different job requirements. Let’s
consider pharmacist and pharmacist technician jobs, which are part of the health care occupation.
According to the Occupational Outlook Handbook, pharmacists possess advanced training to
give them the knowledge and skills to safely fill prescriptions, verifying instructions from
physicians on the proper amounts of medication to give to patients, check whether the
prescription will interact negatively with other drugs that a patient is taking or any medical
conditions the patient has, and instruct patients on how and when to take a prescribed medicine
and inform them about potential side effects they may experience from taking the medicine.
Pharmacy technicians support the work of pharmacists while under their supervision. For
example, technicians, take the information needed to fill a prescription from customers or health
professionals, measure amounts of medication for prescriptions, package and label prescriptions,
and organize inventory. Pharmacy technicians do not require advanced education; most of their
training takes place on the job. Average annual pay reflects these differences. In 2013,
pharmacists earned $116,500 while pharmacy technicians earned $30,840.10
Supply and Demand
Companies’ demand for qualified individuals for particular jobs relative to supply often
influences compensation. There are upward pressures to raise starting pay when the demand for
qualified workers in particular jobs is greater than supply. These market dynamics require that
companies compete for limited qualified workers. This appears to be the case for information
security analysts. According to the Occupational Outlook Handbook, demand for information
security analysts is expected to be very high. Cyberattacks have grown in frequency and
sophistication over the last few years, and many organizations are behind in their ability to detect
these attacks. For instance, the retailer Target experienced a breach of their databases that
contained customers’ credit card numbers. Analysts will be needed to come up with innovative
solutions to prevent hackers from stealing critical information or creating havoc on computer
networks. Also, the federal government is expected to greatly increase its use of information
security analysts to protect the nation’s critical information technology (IT) systems. Further, as
the healthcare industry expands its use of electronic medical records, ensuring patients’ privacy
and protecting personal data are becoming more important. More information security analysts
are likely to be needed to create the safeguards that will satisfy patients’ concerns.
A common assumption is that high demand for workers applies only to highly skilled jobs. But,
that assumption is not correct. Recently, retailer Wal-Mart announced that it would raise the pay
for all of its U.S. employees to at least $9 per hour, which would exceed the federal minimum
wage level by $1.75 per hour (when this book went to press).12 Through the middle of 2015,
there were 14 states that have a minimum wage requirement that is the same as the federal
minimum wage requirement. This move would raise the pay of more than one-third of the
company’s workers. Wal-Mart made this decision, in part, because it has been more difficult to
hire well-qualified workers at lower pay rates, particularly since the unemployment rate has
Geographic Pay Differentials
1. 3 Summarize the reasons for the occurrence of geographic pay differentials.
Overall, there are relative pay differentials between geographic areas. Most typically,
these are focused on comparisons between the nation and small geographic areas such
as city or state. Based on the most recent comprehensive analysis published by the
U.S. Bureau of Labor Statistics, all Los Angeles, California area employees were paid,
on average, 20 percent more than the national average.13 In Lincoln, Nebraska,
employees were paid 3 percent less than the national average. This is an example
of relative pay differentials.
We can also consider pay rate differentials (expressed in dollars as hourly or annual pay)
for occupations based on particular geographic regions (for instance, Massachusetts,
and the city of Boston) and the United States, overall. On a day-to-day basis,
compensation professionals focus on pay rates and pay rate differentials. It is important
to note that pay rate differentials do not fully match relative pay differentials because
relative pay differential measures control for the influence of various variables, and pay
rate differentials do not, which we will discuss shortly. Nevertheless, we generally
observe consistency in the direction of the relative pay and pay rate differentials. For
instance, both statistics show that typical pay rates in the San Francisco area are higher
than the national average. However, the magnitude of the differences captured by these
statistics is most often different. For example, the relative pay differential for installation
workers employed in the San Francisco area was 17 percent higher than in the United
States, overall.14 However, the pay rate difference was 33 percent.15
These disparities are partly based on the calculation methods. Compared to relative
rate differences, the relative pay differential calculation takes into account (controls for)
other factors that can explain pay differences within a defined area. The idea is to
present a clearer picture of regional-based pay differences. For example, as we have
learned, interindustry wage differentials represent an important factor. Other control
factors include the union status of the workforce, which we will discuss shortly, and
whether employees work on a full- or part-time basis, which we will also discuss
in Chapter 12. Additional control factors include occupational type, work level, whether
firms operate on a profit or not-for-profit basis, and skill-level differences between
employees who are performing the same job.16Thus, it is important for compensation
professionals to consider both types of statistics when evaluating geographic
differences in compensation decisions.
Cost-of-living differences between geographic locations also provide an additional
explanation. Compensation professionals sometimes consider cost-of-living differences
between locations. For example, let’s assume that a company was to offer starting pay
to two equally qualified individuals who have been hired to perform the same job, but
placed in different cities—Boston, Massachusetts and Fargo, North Dakota. If a
differential was to be considered, it might be based on the cost of housing. Housing
costs are among the largest financial obligations most individuals assume. The median
home price in Boston was $389,000, and only $173,000 in Fargo.17 The company may
consider offering the Boston-based employee a higher salary to help offset some of the
difference in cost-of-living. The idea is to help employees in similar jobs to maintain
comparable standards of living, which will help with recruitment and retention of
qualified employees. Other spending categories include food, utilities, transportation,
and health care. Oftentimes, companies choose to take into account all of the spending
categories when setting pay rates. Cost-of-living comparison calculators (for example,
one furnished by CNN, http://money.cnn.com/calculator/pf/cost-of-living/) may be useful.
Based on this calculator, a $50,000 salary in Fargo is equivalent to a $73,000 salary in
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