1. Economic Issues Chapter 7
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2. Industrial Wage Differentials
What Wages and Benefits Represent
A standard of living for employees
A cost to be controlled for employers
Reasons for Wage Differentials
The degree of competition or monopoly in the product market
The value added by workers in a particular industry
The percentage of total product or service cost represented by labor costs
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3. Evaluating Jobs within the Organization
Job Analysis—What is the Job?
Job description
A listing of job factors (tasks, duties, and responsibilities) required to perform the job
Job specification
A listing of the knowledge, skills, abilities, and other factors (KSAOs) required to be possessed by holders of the job
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4. Evaluating Jobs…(cont’d)
Methods of Job Evaluation—What is the Job Worth to the Organization?
Ranking
Compares each job to every other job to create a hierarchy of jobs.
Classification
Groups similarly valued jobs into classes
Point system
Assigns points to each job based on the degree to which job (compensable) factors are present in the job
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5. Preferences for Determining Wage Structures during Collective Bargaining
Union Preferences
Include if favorable
Grievances
External Factors
Internal Factors
Wage Structures
Wage Surveys
Job Evaluation
Company Preferences
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6. Exhibit 7. Typical Wage Structure for a Manufacturing Firm
SOURCE: Adapted from Collective Bargaining Negotiations and Contracts (Washington, D.C.: Bureau of National Affairs Inc., 1992), p. 18:331.
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7. Surveying Firms’ Wage Structures
Sources of Wage Surveys
U.S. Department of Labor
National Compensation Survey (NCS)
Occupational Employment Statistics (OES)
Trade and professional groups
Employer-initiated surveys
Union-initiated surveys
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8. Exhibit 7.2 Typical Results from a Wage Survey
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9. Production Standards and Wage Incentives
Expected employee output consistent with the working capacities of normal (typical) operators.
Determined by time studies of effort and motion
Used as the basis for calculating standard and incentive wages
Goals for Wage-Incentive Plans
Increase employee productivity
Attract prospective employees
Reward employees monetarily
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10. Incentive Plans Employee Reward-Incentive Plans
Lump-sum bonuses
Profit sharing plans
Skill-base pay (SBP)
Group Gain-sharing Incentive Plans
Scanlon Plan
Sharing of savings from the reduction of total labor costs
Rucker Plan
Ratio of labor costs to dollar value added
Improshare Plan
Reduction in labor costs over base-period labor costs
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11. Arguments Used by Management and Union Officials in Wage Determination
General Factors in Wage Outcomes
Differential features of the job
Wage comparability
Organization’s ability to pay
Productivity
Cost of living
Competitive Factors
Operating efficiency
Cost-cutting
Productivity improvement
Internal Factors
Firm-specific labor costs
Expected profits
Labor market conditions
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12. Differential Features of the Work: Job Evaluation and the Wage Spread
Represents the internal distribution of the proposed or negotiated wage increase to the bargaining unit employees
Importance of Spread to Management
Retaining skilled employees
Motivating lesser-skilled employees
Union Focus
Equal pay for equal work = single rate pay
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13. Exhibit 7.3 Three Examples of Internal Wage Spreads
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14. Exhibit 7.4 Examples of Two-Tier Pay Scales
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15. Wage Determination Arguments
Wage Comparability
Wage rates are equal or related among comparable bargaining units.
Degree of Labor Intensity
Wages are less important and easier to bargain for when they are a low percentage of total costs.
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16. Wage Determination Arguments
Ability to Pay
Ability to pay has limited usefulness; focus is on firm performance, not on employee performance.
Unions expect a firm in good financial condition to pay higher wages, but not reduce wages when the condition of the firm declines.
Productivity
Conceptually, workers’ wages should vary with changes in their productivity (output to costs).
Productivity increases can occur for reasons unrelated to workers increasing their efficiency.
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17. Exhibit 7.5 Average Annual Rates of Change in Manufacturing Output per Hour for the United States and Selected Countries
SOURCE: U.S. Department of Labor, ‘‘International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2005,’’ News Release, September 26, 2006, p. 6.
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18. Wage Determination Arguments (cont’d)
Cost of Living
Unions demand higher wages to maintain real wage purchasing power when the cost of living rises.
Consumer Price Index (CPI)
An index that measures the monthly change in the prices of goods and services for a typical household.
Comparable Worth
The concept that different jobs that make comparable contributions to the organization should have the same pay rates.
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19. Wage Adjustments during the Term or Duration of the Labor Agreement
Methods for Adjusting Wages
COLA provisions—scheduled wage increases based on the degree of change in the chosen index
Selection of an index (generally, CPI-W) and base point
Frequency and timing of COLAs
Adoption of a formula (e.g., one cent increase in wages for each three-point rise in CPI)
Effects of COLA in increasing the costs of other compensation elements
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20. Wage Adjustments during the Term or Duration of the Labor Agreement (cont’d)
Methods for Adjusting Wages (cont’d)
Deferring wage increases in multi-year labor contracts
Back-loaded: larger wage increases occur later in the contract period.
Front-loaded: smaller wage increases occur later in the contract period.
Even-loaded: Wage increases are equal in all years of the contract.
Lump-sum pay adjustments
Lump-sum does not become part of regular compensation.
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21. Exhibit 7.6 Employer Costs per Hour Worked by Bargaining Status, March 2007
SOURCE: U.S. Bureau of Labor Statistics, ‘‘Employer Cost for Employee Compensation—March 2007,’’ News Release, June 21, 2007, p. 11.
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22. Health-Care Cost Containment
Cost Shifting to Employees
Co-payments, deductibles, and increased premium contributions by employees
Fee-for-Service Plans
Preferred Provider Organization (PPO)
Agree to a fixed/lower rate schedule of fees for their services to company employees.
Health Maintenance Organization (HMO)
Contracts with the employer to deliver services to company employees for a fixed contract amount.
Consumer-directed Health Care Plan
Involves a high deductible insurance policy combined with a health savings account.
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23. Income Maintenance Severance Pay
Provides employee with a lump-sum payment at the time of an employee’s termination.
Supplemental Unemployment Benefit Plan (SUB)
Pays an additional amount to an employee during the time when the employee is temporarily unemployed.
Work Sharing
In order to avoid a layoff, the parties agree to a less-than-40-hour work week.
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24. Premium Pay—Overtime Overtime Pay
Time-and-a-half rate for all hours worked beyond an 8-hour day
Fair Labor Standards Act requires overtime pay only after 40 regular hours of work in a week.
Double-time rate for Sundays and holidays
Equalization of overtime hours among workers, typically by seniority
Mandatory overtime requirements within a required minimum advance notice
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25. Premium Pay—Other Supplements
Shift Differential
Hourly premium paid for working undesirable shifts
Reporting Pay
Minimum guaranteed pay when employee is sent home due to no available work on a workday
Call-In Pay
Payment for working nonscheduled hours
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26. Payment for Time Not Worked—Holidays, Vacations, and Rest Periods
Incidental Nonwork Benefits
Bereavement leave
Jury duty leave
Sick leave
Military leave
Personal leave
Voting leave
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27. Payment for No Work—Holidays, Vacations, and Rest Periods
Major Paid-Leave Benefits
Holidays
Eligibility for pay
Typically, there is a required length of service before qualifying for holiday pay.
Must work scheduled work day before and scheduled work day after holiday to qualify for holiday pay.
Vacations
An employee’s amount of annual vacation time increases with the employee’s length of service.
Scheduling of vacations is based on an employee’s seniority.
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28. Pensions Age Discrimination in Employment Act (ADEA) Pension Plans
Prohibits mandatory retirement age requirements.
Pension Plans
Defined benefit plan
Plan pays retired employees a specific amount each month.
The employer must invest sufficient funds such that it can pay its obligations to the retired employees.
Defined contribution plan
An employer contributes a specific amount each month to the retirement account of each employee.
Payout is based on the financial performance of the invested contributions.
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29. Pensions—Other Union Effect on Pension Plans 401(k) Savings Plans
Increased pension coverage and larger benefits
Benefits skewed toward senior employees
Pensions equalized among bargaining unit employees
Higher increases in benefits after retirement
Earlier employee retirement age
401(k) Savings Plans
An employer may match the contributions of employees to their tax-deferred retirement accounts.
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30. Pensions—Other (cont’d)
Employee Stock Ownership Plan (ESOP)
Employees hold stock in their company.
Company stock is basis for employee retirement benefits.
The value of the stock can have a dramatic effect on the retirement prospects of employees.
Unions oppose ESOPs.
Cash Balance Pension Plans
A tax-deferred employee account to which the employee and employer contribute.
Employees have the option of receiving an annuity payment or a lump-sum payment.
Benefit-neutral to length of employee service.
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31. Pensions—Other (cont’d)
Vesting
Is sufficient service to acquire rights to retirement benefits
Is required by Employee Retirement Income Security Act
Cliff vesting schedule
After five years of service, employee is considered fully vested.
Graded vesting schedule
Employees are vested in stages over a period of time.
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32. Family and Other Benefits
Family and Medical Leave Act of 1993
Requires private employers to provide eligible employees with up to 12 weeks of unpaid leave.
Employee must have been employed for at least one year and worked at least 1,250 hours within the previous 12 months.
Other Benefits
Prepaid legal services
Employee assistance plans
Education tuition aid
Transportation subsidy
Child-care assistance
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33. Exhibit 7.7 Union Versus Nonunion Employee Median Weekly Earnings, 2006
Nonunion data include the earnings of managers and other salaried (nonbargaining unit) employees.
Data for both union and nonunion groups exclude employer-paid benefits although union members typically enjoy an even greater advantage in fringe benefit comparisons (See data in Exhibit 7.6, on pg. 311.
SOURCE: US. Department of Labor, “Union Members in 2006,” News Release, January 25, 2007, p. 10.
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34. Key Terms Degree of labor intensiveness Job evaluation Job analysis
Profit-sharing plans
Gain-sharing plan
Scanlon plan
Rucker plan
Improshare plan
Skill-based pay (SBP)
Wage spread
Skill pay differential
Two-tier pay plan
Wage comparability
Ability to pay
Labor productivity
Consumer Price Index (CPI)
Cost-of-living adjustment (COLA)
Deferred wage increase
Wage re-opener
Back-loaded
Front-loaded
Even-loaded
Lump-sum pay
Fee-for-service plans
Preferred provider organization (PPO)
Health maintenance organization (HMO)
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35. Key Terms Consumer-directed health care plan Severance pay
Supplemental unemployment benefit plan (SUB)
Work sharing
Premium pay
Shift differentials
Reporting pay
Call-in pay
Defined benefit pension plan
Defined contribution pension plan
Employee stock ownership plan (ESOP)
Cash balance plan
Pension Protection Act of 2006
Employee Retirement Income Security Act (ERISA) of 1974
Cliff vesting schedule
Graded vesting schedule
Family and Medical Leave Act (FMLA) of 1993
Prepaid legal service plans
Employee assistance plan (EAP)
Education tuition aid
Transportation subsidy
Home computer
Child-care assistance
Spillover effect
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