1. PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2009 Cengage Learning. All rights reserved. Economic Issues Chapter 7

2. © 2008 Cengage Learning. All rights reserved.7–2 Industrial Wage Differentials What Wages and Benefits RepresentWhat Wages and Benefits Represent  A standard of living for employees  A cost to be controlled for employers Reasons for Wage DifferentialsReasons 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

3. © 2008 Cengage Learning. All rights reserved.7–3 Evaluating Jobs within the Organization Job Analysis—What is the Job?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

4. © 2008 Cengage Learning. All rights reserved.7–4 Evaluating Jobs…(cont’d) Methods of Job Evaluation—What is the Job Worth to the Organization?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

5. © 2008 Cengage Learning. All rights reserved.7–5 Preferences for Determining Wage Structures during Collective Bargaining External Factors Internal Factors Wage Structures Union Preferences Company Preferences Include if favorable Wage SurveysJob Evaluation Grievances

6. © 2008 Cengage Learning. All rights reserved.7–6 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.

7. © 2008 Cengage Learning. All rights reserved.7–7 Surveying Firms’ Wage Structures Sources of Wage SurveysSources 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

8. © 2008 Cengage Learning. All rights reserved.7–8 Exhibit 7.2Typical Results from a Wage Survey

9. © 2008 Cengage Learning. All rights reserved.7–9 Production Standards and Wage Incentives Production StandardsProduction Standards  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 PlansGoals for Wage-Incentive Plans  Increase employee productivity  Attract prospective employees  Reward employees monetarily

10. © 2008 Cengage Learning. All rights reserved.7–10 Incentive Plans Employee Reward-Incentive PlansEmployee Reward-Incentive Plans  Lump-sum bonuses  Profit sharing plans  Skill-base pay (SBP) Group Gain-sharing Incentive PlansGroup 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

11. © 2008 Cengage Learning. All rights reserved.7–11 Arguments Used by Management and Union Officials in Wage Determination General Factors in Wage OutcomesGeneral Factors in Wage Outcomes  Differential features of the job  Wage comparability  Organization’s ability to pay  Productivity  Cost of living Competitive FactorsCompetitive Factors  Operating efficiency  Cost-cutting  Productivity improvement Internal FactorsInternal Factors  Firm-specific labor costs  Expected profits  Labor market conditions

12. © 2008 Cengage Learning. All rights reserved.7–12 Differential Features of the Work: Job Evaluation and the Wage Spread Wage SpreadWage Spread  Represents the internal distribution of the proposed or negotiated wage increase to the bargaining unit employees Importance of Spread to ManagementImportance of Spread to Management  Retaining skilled employees  Motivating lesser-skilled employees Union FocusUnion Focus  Equal pay for equal work = single rate pay

13. © 2008 Cengage Learning. All rights reserved.7–13 Exhibit 7.3Three Examples of Internal Wage Spreads

14. © 2008 Cengage Learning. All rights reserved.7–14 Exhibit 7.4Examples of Two-Tier Pay Scales

15. © 2008 Cengage Learning. All rights reserved.7–15 Wage Determination Arguments Wage ComparabilityWage Comparability  Wage rates are equal or related among comparable bargaining units. Degree of Labor IntensityDegree of Labor Intensity  Wages are less important and easier to bargain for when they are a low percentage of total costs.

16. © 2008 Cengage Learning. All rights reserved.7–16 Wage Determination Arguments Ability to PayAbility 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. ProductivityProductivity  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.

17. © 2008 Cengage Learning. All rights reserved.7–17 Exhibit 7.5Average 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.

18. © 2008 Cengage Learning. All rights reserved.7–18 Wage Determination Arguments (cont’d) Cost of LivingCost of Living  Unions demand higher wages to maintain real wage purchasing power when the cost of living rises. Consumer Price Index (CPI)Consumer Price Index (CPI)  An index that measures the monthly change in the prices of goods and services for a typical household. Comparable WorthComparable Worth  The concept that different jobs that make comparable contributions to the organization should have the same pay rates.

19. © 2008 Cengage Learning. All rights reserved.7–19 Wage Adjustments during the Term or Duration of the Labor Agreement Methods for Adjusting WagesMethods 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

20. © 2008 Cengage Learning. All rights reserved.7–20 Wage Adjustments during the Term or Duration of the Labor Agreement (cont’d) Methods for Adjusting Wages (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.

21. © 2008 Cengage Learning. All rights reserved.7–21 Exhibit 7.6Employer 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.

22. © 2008 Cengage Learning. All rights reserved.7–22 Health-Care Cost Containment Cost Shifting to EmployeesCost Shifting to Employees  Co-payments, deductibles, and increased premium contributions by employees Fee-for-Service PlansFee-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.

23. © 2008 Cengage Learning. All rights reserved.7–23 Income Maintenance Severance PaySeverance Pay  Provides employee with a lump-sum payment at the time of an employee’s termination. Supplemental Unemployment Benefit Plan (SUB)Supplemental Unemployment Benefit Plan (SUB)  Pays an additional amount to an employee during the time when the employee is temporarily unemployed. Work SharingWork Sharing  In order to avoid a layoff, the parties agree to a less- than-40-hour work week.

24. © 2008 Cengage Learning. All rights reserved.7–24 Premium Pay—Overtime Overtime PayOvertime 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

25. © 2008 Cengage Learning. All rights reserved.7–25 Premium Pay—Other Supplements Shift DifferentialShift Differential  Hourly premium paid for working undesirable shifts Reporting PayReporting Pay  Minimum guaranteed pay when employee is sent home due to no available work on a workday Call-In PayCall-In Pay  Payment for working nonscheduled hours

26. © 2008 Cengage Learning. All rights reserved.7–26 Payment for Time Not Worked—Holidays, Vacations, and Rest Periods Incidental Nonwork BenefitsIncidental Nonwork Benefits  Bereavement leave  Jury duty leave  Sick leave  Military leave  Personal leave  Voting leave

27. © 2008 Cengage Learning. All rights reserved.7–27 Payment for No Work—Holidays, Vacations, and Rest Periods Major Paid-Leave BenefitsMajor 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.

28. © 2008 Cengage Learning. All rights reserved.7–28 Pensions Age Discrimination in Employment Act (ADEA)Age Discrimination in Employment Act (ADEA)  Prohibits mandatory retirement age requirements. Pension PlansPension 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.

29. © 2008 Cengage Learning. All rights reserved.7–29 Pensions—Other Union Effect on Pension PlansUnion Effect on Pension 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 Plans401(k) Savings Plans  An employer may match the contributions of employees to their tax-deferred retirement accounts.

30. © 2008 Cengage Learning. All rights reserved.7–30 Pensions—Other (cont’d) Employee Stock Ownership Plan (ESOP)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 PlansCash 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.

31. © 2008 Cengage Learning. All rights reserved.7–31 Pensions—Other (cont’d) VestingVesting  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.

32. © 2008 Cengage Learning. All rights reserved.7–32 Family and Other Benefits Family and Medical Leave Act of 1993Family 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 BenefitsOther Benefits  Prepaid legal services  Employee assistance plans  Education tuition aid  Transportation subsidy  Child-care assistance

33. © 2008 Cengage Learning. All rights reserved.7–33 Exhibit 7.7Union Versus Nonunion Employee Median Weekly Earnings, 2006 SOURCE: US. Department of Labor, “Union Members in 2006,” News Release, January 25, 2007, p. 10. 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.

34. © 2008 Cengage Learning. All rights reserved.7–34 Key Terms Degree of labor intensivenessDegree of labor intensiveness Job evaluationJob evaluation Job analysisJob analysis Profit-sharing plansProfit-sharing plans Gain-sharing planGain-sharing plan Scanlon planScanlon plan Rucker planRucker plan Improshare planImproshare plan Skill-based pay (SBP)Skill-based pay (SBP) Wage spreadWage spread Skill pay differentialSkill pay differential Two-tier pay planTwo-tier pay plan Wage comparabilityWage comparability Ability to payAbility to pay Labor productivityLabor productivity Consumer Price Index (CPI)Consumer Price Index (CPI) Cost-of-living adjustment (COLA)Cost-of-living adjustment (COLA) Deferred wage increaseDeferred wage increase Wage re-openerWage re-opener Back-loadedBack-loaded Front-loadedFront-loaded Even-loadedEven-loaded Lump-sum payLump-sum pay Fee-for-service plansFee-for-service plans Preferred provider organization (PPO)Preferred provider organization (PPO) Health maintenance organization (HMO)Health maintenance organization (HMO)

35. © 2008 Cengage Learning. All rights reserved.7–35 Key Terms Consumer-directed health care planConsumer-directed health care plan Severance paySeverance pay Supplemental unemployment benefit plan (SUB)Supplemental unemployment benefit plan (SUB) Work sharingWork sharing Premium payPremium pay Shift differentialsShift differentials Reporting payReporting pay Call-in payCall-in pay Defined benefit pension planDefined benefit pension plan Defined contribution pension planDefined contribution pension plan Employee stock ownership plan (ESOP)Employee stock ownership plan (ESOP) Cash balance planCash balance plan Pension Protection Act of 2006Pension Protection Act of 2006 Employee Retirement Income Security Act (ERISA) of 1974Employee Retirement Income Security Act (ERISA) of 1974 Cliff vesting scheduleCliff vesting schedule Graded vesting scheduleGraded vesting schedule Family and Medical Leave Act (FMLA) of 1993Family and Medical Leave Act (FMLA) of 1993 Prepaid legal service plansPrepaid legal service plans Employee assistance plan (EAP)Employee assistance plan (EAP) Education tuition aidEducation tuition aid Transportation subsidyTransportation subsidy Home computerHome computer Child-care assistanceChild-care assistance Spillover effectSpillover effect