INTER AND INTRA INDUSTRY COMPENSATION DIFFERENTIALS

WHAT IS COMPENSATION?

All forms of financial returns and tangible services and benefits that an employee receives as part of an employment relationship

COMPENSATION DIFFERENTIAL

Adam Smith argued that individual consider the whole advantages and disadvantages of different employments and make decisions based on alternative with greatest net advantage.

If job has negative characteristics i.e. expensive training , disagreeable working conditions,….. Then employers must offer higher pay to compensate these negative features

INTER INDUSTRY COMPENSATION DIFFERENTIALS

TYPE OF INDUSTRY

In FMCG and financial sectors salaries are high There are large compensation differentials across industries–

software, FIIs, foreign banks, consultancies and FMCG companies are top bracket paymasters while at lower rung are manufacturing, consumer durables and pharmaceutical companies.

In volatile industry like software packages are to retain employees as manpower is scarce

In industry like engineering there is heavy basic fixed component

In industry like financial services, treasury and banking, high variable component and paying for performance

GEOGRAPHIC

Abbott, Langer Association Surveys analyzed and compared pay data for over 3,900,000 employees in 54 benchmark jobs in 230 geographic areas in the U.S. and possessions, & published report entitled Inter-City Wage & Salary Differentials – 1998

According to the report, Secretaries III are paid 20% above the national average in the New York City (NY/NJ) metropolitan area, but 31% below the average in Grand Island-Hastings (NE).

Switchboard Operator/Receptionists in the New York City do 30% better than the average, whereas those in Butler County are 38% below the national average.

Key Entry Operators II do best in the Kokomo- Logansport (IN) area (52% above), and worst in the Louisville (KY/IN) area (31% below

The same hold true for technical jobs. E.G. Computer Systems Analysts II do best in NJ (20% above), and worst in Puerto Rico (27% below).

Blue-collar workers are certainly not exempt from geographic pay differentials. Maintenance Machinists are paid best in the San Jose (CA) metropolitan area (34% above average), and worst in Puerto Rico (40% below). Forklift Operators are paid 39% above average in NY, and least in the Rio Grande Valley (TX) area (50% below).

Naturally, pay in Alaska is almost always higher than the average national rate for the U.S. For example, Computer Operators III are paid 49% more than the national average in Alaska, General Clerks I 52% more, Drafter III 40% more, Shipper & Receiver 60% more, Maintenance Mechanic (machinery) 40% more, General Maintenance Worker 49% more, and Material Handling Laborer 60% more. However, the cost of living in Alaska is also significantly higher than any place in the continental U.S.

SIZE OF INDUSTRY

Larger size organizations’ characteristics are higher profits, a lower ratio of labor costs to total cost, few industry competitors, and unionization. These pay higher wages and benefits for a number of reasons :- They usually are able to. They have some financial surplus, which they can use in various ways. to attract a pool of competent applicants. perceived obligation to counter lower job satisfaction. The high-wage employer may be part of a national organization whose

major compensation decisions are made at the corporate level. For example, New York headquartered corporations often appear to

pay higher than local competitors.

Low-Compensation Employers

They have low-paying ability because of the constraints of their product market. Most of their compensation decisions may be explained by this low ability to pay.

Using compensation surveys, they usually pay attention to rates for specific jobs for which there is an active outside market. Jobs on which attention is focused obviously varies by industry.

The minimum feasible compensation is one that will obtain just enough employees to maintain desired employee levels for some period, typically six months. But often organizations pay above this minimum, hoping to obtain employees of higher quality; lower their turnover rates; and lower their recruitment, hiring, and training costs.

Market Rate Employers most common compensation level strategy followed by

organizations is to "pay the market." These organizations wish to treat their employees fairly and yet not to raise their costs significantly more than their competitors

To pay the market rate an organization collect compensation data and determine from that data exactly what the market rate is. This strategy can be characterized as being reactive to the market, so the organization keep constantly in touch with other organizations to find out what changes are occurring in employee pay

LABOR MARKETS

Low-pay organizations adjust to changes in labor demand by deciding how far they can lag behind high-paying organizations. During an economic upswing, high-pay employers will be increasing wages, salaries, benefits, and employment. Low-pay employers, to hold down turnover and to increase employment, will have to raise compensation more than high-paying firms. The compensation gap between high-paying and low-paying firms thereby narrows during an upswing.

During a downswing, high-pay firms stop hiring and may lay off employees. Low-pay firms find that they have more and better applicants and less turnover. This means they can lag further behind the compensation leaders and that the inter-company differential widens.

Inter-industry wage differentials in China have been increasing since 1988.

A theoretical analysis of the labour market indicates that inter-industry wage differentials are mainly due to

human capital variation among the employees of different industries and likelihood of monopoly rent sharing.

An empirical study finds that employee characteristics such as sex, age and education can only explain 60 percent of CVs in the period 2003 to 2005

and the rest may be due to the effect of monopoly rent sharing in certain industries.

Inter-industry and Firm-size Wage Differentials:

In two related articles Abowd, Kramarz and Margolis (AKM, 1999) and Abowd, Finer and Kramarz (AFK, 1999) provided a basic statistical framework for decomposing inter-industry

wage differentials and firm-size wage differentials into the sum of components due to individual heterogeneity and firm heterogeneity

AKM analyzes French data and finds that most of the inter-industry and the firm-size wage differentials are due to unmeasured individual heterogeneity.

The second of these articles, AFK, analyzes data from the State of Washington and finds that inter-industry wage differentials are due in equal proportions to individual and employer heterogeneity while firm-size wage differentials are due primarily to firm heterogeneity.

LET’S HAVE A LOOK AT TOP 5 COMPANIES

INTRA INDUSTRY COMPENSATION DIFFERENTIALS

Experience Knowledge and skills possessed Training Working conditions Department levels

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