People work in order to earn money, but the structure of compensation is quite diversified. The two broadest categories are salaries and wages. Salaries tend to be paid every other week or monthly; wages are typically calculated by the hour but paid by the week. As a consequence of legislative language, salary-earning employees are sometimes referred to as “exempt” employees and hourly workers as “non-exempt”; in other words the first are exempt from the requirements of Fair Labor Standards Act (discussed below), the latter group are covered.
Compensation may also take the form of commissions paid to sales people based entirely on some percent of the goods or services they sell; this type of compensation is often combined with a minimal salary to even out the ups and downs of commission earnings—but people on pure commission who fail to “earn back” their base salary rarely continue in the job long. Piece work, where pay is based on actual performance of some job measured by units produced, is a variant of this approach. People serving as wait-personnel in restaurants are typically compensated by a low wage inadequate to support them: they get the majority of their income from tips. In the socalled New Economy which began emerging in the 1990s, characterized by cutbacks and layoffs of salaried and professional employees, many individuals became self-employed of necessity but, often, continued working in actual “jobs,” much as before. The compensation of such people is based on contract revenues, but they receive no fringe benefits and are required to pay their own payroll taxes.
Compensation has a legal status and, once engaged, people can use the courts to enforce the employment agreement. Employee benefits (“fringe benefits”) have another status: they are provided at the employer’s option and may be withdrawn at will. As such they are not strictly speaking compensation although, in practice, they are viewed as a part of the full compensation “package.”
The employer’s payment of premiums for certain types of fringe benefits, such as health care coverage and insurance policies (disability, life insurance), are not viewed under tax law as part of the employee’s taxable income. Others, such as the provision of an automobile or housing, are taxable and therefore fall under the definition of “compensation.”
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Compensation And Time
For the non-exempt part of the workforce hours spent on the job are the measure of compensation to be paid.
Time spent at work is regulated by the government, and laws govern pay scales over and above the specified work week, typically 40 hours. The vast majority of exempt workers are also required to work a fixed number of hours a week—but the hours may be flexible under “flextime” rules set by the employer. For exempt employees, pay for “overtime” is not controlled by law in most cases. In other words, the typical administrative/ professional/executive employee is expected to work 40 hours—and as many more as the job may require, the extra hours compensated, if at all, by bonuses or time off.
In the case of people working for commissions, time spent on the job is only incidentally related to compensation. Normally, of course, such people spend a lot of time working—but one can imagine the highly charismatic (and lucky) sales person who, in a couple of hours a month, can move a million dollars worth of real estate… .
The Fair Labor Standards Act of 1938 (FLSA) is in a sense the basic law controlling employment and compensation issues and, through amendments passed later, the management of benefits packages. FLSA sets minimum wage, overtime pay, equal pay for men and women, controls child labor, and establishes record keeping requirements. On the whole FLSA is aimed at protecting the non-exempt work force—which was the overwhelming majority of all workers at the time of the law’s passage. Since that time the profile of the workforce has greatly change; amendments to FLSA have in part reflected these changes. As illustrated by state over-rides of FLSA’s minimum wage requirements (see below), states also actively regulate compensation and other aspects of the workplace.
The chief amendment of FLSA was passage of the Equal Pay Act of 1963 (EPA). EPA prohibits unequal compensation of men and women in the same workplace doing similar jobs. EPA makes exceptions for seniority, allows the use of merit systems, and recognizes compensation systems based on performance. EPA requirements do not differentiate between exempt and nonexempt employees.
Other legislation related to employment compensation issues includes: 1) the Consumer Credit Protection Act of 1968 which deals with wage garnishments; 2) the Employee Retirement Income Security Act of 1974 (ERISA), which regulates pension programs; 3) the Old Age, Survivors, Disability and Health Insurance Program (OASDHI), which forms the basis for most benefits programs; and 4) legislation implementing unemployment insurance, equal employment, worker’s compensation, Social Security, Medicare, and Medicaid programs and laws.
Major Compensation Issues
The two major issues related to compensation are the adequacy of the compensation, addressed by minimum wage laws, and pay equity—between women and men and between racial and ethnic groups—addressed by EPA and social anti-discrimination statutes.
Minimum Wage Non-exempt employees, for whom the definition is intrinsically tied to time, are also guaranteed a minimum wage of $5.15 per hour under federal law.
Six states (Alabama, Arizona, Louisiana, Mississippi, South Carolina, and Tennessee) have no minimum wage.
Fifteen states have higher minimum wage than the U.S.
as a whole: Alaska, California, Connecticut, Delaware, Florida, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New Jersey, New York, Oregon, Washington, and Wisconsin. The highest wage is in Oregon, $7.63 an hour; in 2006 Connecticut had a $7.40 per hour minimum wage to be raised to $7.65 in 2007. The rest of the states have the same minimum wage as the national rate. Under the federal rules, a non-exempt worker is entitled to receive the highest minimum wage available in the place where he or she works. Changes in state law are monitored by the U.S. Department of Labor and may be consulted at http://www.dol.gov/esa/minwage/america.htm.
Equal Pay for Women and Men Detailed data comparing income of men and women in the same occupation are not routinely collected so that the pay-equity issues remains somewhat in the dark, but more general data series give an indication of overall patterns. Based on data published by the U.S. Census Bureau, the average income of a man in 1954, but measured in 2004 dollars, was $20,992 a year. The average income of a woman, using the same method of calculation, was $9,358. On average, in 1954 a woman earned 44.6 percent of what a man earned. Women’s earnings were 41.1 percent of men’s in 1964, thus showing a decline, 42.2 percent in 1974 (still down from 1954), were up to 49.3 percent in 1984 but dropped again to 43 percent in 1994. In 2004, average male income was $42,832, average female income was $24,998. A gap of $17,834 separated men from women, but women were earning an all time high of 58.4 percent of what men earned on average.
In this 50-year period, women’s income grew at a faster rate than men’s (1.98 percent a year versus men’s income at 1.44 percent). Women’s participation rate in the work force grew in this period as well: female participation in the workforce increased from 34 percent to 59.2 percent, 1954 to 2004. At the same time, the difference in male-female income averaged around $17,000 a year in this period, strongly suggesting that women had a competitive advantage in the labor market. This is further substantiated by data, published in Social Trends and Indicators USA showing that more men than women (on a percentage basis) are laid off during periods recessions.
In a 2002 survey conducted by the U.S. Bureau of the Census and published in Current Population Survey data showing income differentials between men and women of the same educational attainment are presented.
This study showed that income differentials were substantial across the board: 2000 data showed women on average earning 57.5 percent of what men earned. The differentials were the following: for less than 9th grade education, 59.9 percent; for high school graduates, 59.3; for bachelor’s degree, 56.0; for masters, 59.7; for professional degrees, 55.9; and for doctoral degrees, 60.3 percent of what men with the same education attainment level earned.
Racial and Ethnic Differences The U.S. Bureau of the Census data cited above for all men and women also provide a look at racial and ethnic difference—and difference between men and women in those groups. Data cited are for 2004 only because long-term data are not uniformly available. The highest average earnings are achieved by Asians. Asian women have the highest earnings among all women but earn only 61.1 percent of the income of Asian males. Lowest earnings were reported for Hispanics, again for both males and females. Hispanic females earned 66.5 percent of what Hispanic males earned. Whites had the second highest earnings, but white women lagged farthest behind. They had 56.9 percent of white males’ earnings. Black women earned 75.5 percent of black males’ earnings. For these four racial and ethnic group comparisons, black women were highest in relation to men.
Compensation In The Small Business Sector
According to a Wells Fargo press release, announcing the latest Wells Fargo/Gallup Small Business Index, “Sixty percent of small business owners see the amount of compensation they can offer an employee as a critical disadvantage when compared to larger companies.”
Are small business owners simply grumbling? No.
Data for 2001 from the Census Bureau on firm size measured by employment and payroll show that the smaller the firm, the lower the average payroll per employee. Companies with 10,000 or more employees averaged $39,789 per employee, the smallest firms (1-4 employees) averaged $27,299. With the exception of companies with 5-9 employees, which were even lower than the smallest at $26,706, at each step up the sizescale payroll per employee went up.
Small firms dominate the corporate population.
Firms with less than 100 employees were 98 percent of all firms employing people, those with 100 or more employees were 2 percent of companies. But the small firms employed 36 percent of people working for companies in 2001 (41 million) and large firms employed 64 percent (74 million). In 2001 companies with fewer than 100 employees had payroll costs of $29,138 per employee, companies with 100 or more employees had costs of $37,265 per employee, for a differential of $8,127 a year.
In the mid-2000s, indeed in earlier periods as well, small business had certain advantages: it was adding while the large companies were shedding jobs. The small business sector also offers a work environment that is attractive to many individuals and this fact can be turn to an advantage when recruiting—even if with lower salaries. These include hands-on involvement in business activity, absence of bureaucracy, flexible and often more varied job assignments, more rapid and rational decision processes, and the ability of a small business to adapt to the special needs of an employee. Some employees also value closer contact with the customer; yet others, especially those with entrepreneurial ambitions, feel that they can learn more about business in a small enterprise than embedded deep in the structure of a large one.
A practical aid for the small business owner offered by the Bureau of Labor Statistics is an extensive and reasonably up-to-date tabulation of wages actually paid per occupation by area. This is the BLS Wages by Area and Occupation Program, accessible on the internet.
Close study of what wages actually are paid often shows that prevailing rates are frequently much more modest than generally believed because of local or regional economic conditions.