Challenges Facing Compensation Professionals

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Challenges Facing Compensation Professionals


1. Chapter 15 Challenges Facing Compensation Professionals

Chapter 15 Challenges Facing Compensation Professionals

Learning Objectives

When you finish studying this chapter, you should be able to:

1. 15 Explain the issues associated with a possible increase to the federal minimum wage rate and strengthening overtime pay protections.

2. 15 Discuss the issue of rising wages in China.

3. 15 Describe the issue of underemployment and the compensation–productivity gap.

4. 15 Explain the influence of changing workforce demographics on employee benefits practice.

Chapter Warm-Up!

Go to the Assignments section of your MyLab to complete the chapter Warm-Up!

Thus far in Strategic Compensation, we have studied the fundamentals of employee compensation and benefits programs. This approach to studying compensation arms compensation professionals with the knowledge to more effectively make compensation decisions that fit with companies’ competitive advantages. There is much more to consider besides the fundamentals. In this chapter, we will examine four key issues among many that will shape the work of compensation and benefits professionals in the future:

· Possible increase to the federal minimum wage rate and strengthening overtime pay protections

· Rising wages in China

· Underemployment and the compensation–productivity gap

· Workforce demographic shifts

Possible Increase to the Federal Minimum Wage Rate and Strengthening Overtime Pay Protections

1. 15.1 Explain the issues associated with a possible increase to the federal minimum wage rate and strengthening overtime pay protections.

In Chapter 2, we described the three central provisions of the Fair Labor Standards Act: minimum wage, overtime pay, and child labor. Over the years, there were public campaigns that call for increasing the minimum wage rate—we have watched these play out on the political stage. More recently, President Barack Obama made the case for changing the exemption criteria for overtime pay, such that more workers would qualify.

Raising the Minimum Wage

In 2013, President Barack Obama called for an increase in the hourly federal minimum wage rate from $7.25 to $10.10, effective 2016, only to be struck down by the U.S. Senate in early 2014. Even though the federal and some state governments raise the minimum wage from time to time, President Obama has argued that most workers who earn minimum wage cannot afford basic necessities. In the summer of 2013, fast food workers across the United States walked off their jobs to protest against what they believe is insufficient pay.

More than half the states plus the District of Columbia enacted minimum wage laws throughout the years, and several more states are debating the issue in the legislatures. Recently, some states have passed provisions to increase the minimum wage, including Maryland, Minnesota, Delaware, West Virginia, and Hawaii. Three of these states will make substantial increases to their minimum wage rates. In 2015, Maryland’s minimum wage will rise in increments from $8.25 until it reaches $10.10 by 2018. Minnesota’s minimum wage is increasing to $9.50 by 2016 and, beginning in 2018, the wage will be indexed to inflation. Until this change, Minnesota’s minimum wage was set to the federal level. In Hawaii, legislators approved a four-step hike from the state’s current wage floor of $7.25 to $10.10 by 2018.

Within some states, pushes for higher local minimum wage rates have taken hold. For example, in Los Angeles, unions are lobbying for a minimum wage rate for hotel workers—the lowest paid in the city—to $15.37. If successful, concerns about layoffs could arise. However, one study found municipalities with higher pay did not suffer job losses among low-wage restaurant workers.1 This study also found that restaurants often instituted modest price increases to avoid layoffs. Further, the study showed that higher wages often resulted in lower turnover due to the effect of higher wages.

Not all economists believe that raising the minimum wage will be harmless to the economy. Many argue that increasing the minimum wage will have negative ripple effects throughout the U.S. economy. These arguments are based on the economic principles of supply and demand. In this context, raising the minimum wage could lead to increases in the price of goods and services as companies try to offset higher labor costs. As the prices of goods and services increase, consumers are more likely to buy less. In turn, reduced demand for products and services stand to cut into profits, which may lead to cost reductions in the form of layoffs rather than further price increases.

Much scholarly research supports this conclusion. An exhaustive review of recent research concluded that approximately 85 percent of minimum wage studies provide strong evidence of negative employment effects resulting from minimum wage laws.2 However, a recent study by the Congressional Budget Office indicates mixed outcomes. On one hand, an increase in the minimum wage rate to $10.10 would likely lead to the loss of 500,000 low-skilled jobs. On the other hand, raising the minimium wage would raise pay of nearly 1 million workers to above the federal poverty levels.3 Some of the loss in labor would be offset by lower cost automation. In the fast food industry, for example, labor-cost saving alternatives include online ordering and touch-screen kiosks.

Notwithstanding these broader dyanmics, compensation professionals face the challenge of managing pay inequities between a company’s employees who are distributed across municipality or state lines where minimum wage rates differ. In addition, rising minimum wage rates stand to compress pay structures that include minimum wage jobs. Compression in this context occurs when a higher minimum wage rate boosts the pay range minimum rate. Unless all the pay rates are increased commensurately, the reduced pay differences effectively understate the relative value of higher paying jobs, creating opportunities for more highly paid employees to feel pay inequity.

Compensation professionals also face the challenge of planning budgets. Dozens of states are considering possible increases to their minimum wage rates. Political debates, business and labor lobbying efforts, and politicians’ interest in boosting re-election chances create uncertainty about whether minimum wage rates will increase, and, if increased, by what amount.

Finally, increases in the minimum wage force companies to reconsider its total compensation offerings. Mandated higher wage costs are not necessarily accompanied by increased total compensation budgets. It is possible that compensation professionals will have to eliminate or reduce the level of some benefits offerings. For example, a company could choose to offset the cost of a higher minimum wage by eliminating a tuition reimbursement benefit.

Rising Wages in China

1. 15.2 Discuss the issue of rising wages in China.

In recent decades, many U.S. companies relocated manufacturing facilities from the United States to other countries, such as the People’s Republic of China, because the cost of labor was substantially lower than in the United States. These companies’ goals focused on lowering the cost of production, ultimately, to maintain competitive prices and to preserve profits. In fact, many companies, such as Yongshua USA LLC., a manufacturer of computer cords and cables, deliberately started business operations in China rather than in the United States, to capitalize on lower costs. As we will discuss shortly, the costs of labor in China have been increasing rapidly as Yongshua has experienced. Rising costs are quickly reducing the labor cost advantage once gained from moving manufacturing operations to China. The Watch It! video discusses Yongshua’s experience.

Watch It!

If your professor has assigned this, go to the Assignments section of to complete the video exercise titled Yongshua USA, LLC: Value of Yuan in China.

One report predicted that cost differences in manufacturing between the United States and China are likely to become insignificant.6 However, some companies are choosing to return operations to the United States. Despite higher compensation costs in the U.S., many companies maintain that cost differences are offset by higher productivity of the American workforce.7

Among developing Asian economies, China’s average pay rate is highest (versus Indonesia, Philippines, Vietnam, and Bangladesh). Companies such as Nike Inc. are focusing manufacturing initiatives in Vietnam because of these cost trends.8 However, the business infrastructure in these other countries is not always considered to be sufficiently well developed to support massive business endeavors.

In recent years, the Chinese central government has been substantially raising minimum wage rates, creating pressure throughout the wage structure. Minimum wage rates increased an average of 24 percent across the country’s 31 provinces, and the government continued raising minimum wage levels through 2015. Average monthly income for migrant workers increased 13 percent (approximately $257.00).

Chinese policy makers are supportive of increased wages for the following reason: In recent history, the growth in the Chinese economy was based in large part on its trade surplus. A trade surplus occurs when the value of goods and services being shipped for sale outside the country, in this case, China, exceeds the value of goods and services shipped from other countries to China. Encouraging higher wages promotes domestic consumption, that is, the purchase and use of goods and services which are created within national borders. Increased domestic consumption will decrease the country’s reliance on exports to sustain growth. Reduced reliance on exports is particularly necessary as labor costs within China increase rapidly. As China’s labor costs rise, so would the cost of its exports, making the country less competitive in the global economy.

Labor shortages have also contributed to wage increases in China. These shortages are due, in part, to the rapidly aging Chinese population after 30 years of its one-child policy. This policy, still in effect, limits most couples to having one child only. The Chinese government implemented the policy to curb population growth in large cities. Economic growth is creating the need for new jobs; however, the one-child policy has slowed population growth as intended, vastly reducing the number of young workforce entrants. As a result, this policy has inadvertently contributed to an aging population. The largest segment of the Chinese population is currently in the 35–44 age range.

Underemployment and the Compensation-Productivity Gap

1. 15.3 Describe the issue of underemployment and the compensation–productivity gap.

In this section, we explore two enduring effects of the so-called Great Recession, which took hold during the December 2007–June 2009 period. The term economic recession refers to a general slowdown in economic activity. Evidence of economic recessions includes reduced gross domestic product (GDP), which we defined in Chapter 14, and increased unemployment rates. Multiple complex factors contribute to economic recessions. Reduced consumer spending is one of the causes of economic recessions. Among the most serious effects are underemployment and the compensation–productivity gap.


Underemployment refers to employees who wish to work full-time, but are forced to work part-time for economic reasons, such as poor business conditions or the inability to find a job. During October–November 2007, the 2-month period preceding the onset of the Great Recession, the number of underemployed workers in the United States was estimated to be slightly more than 4.2 million.9 Following the onset of the recession, the number of underemployed individuals rose dramatically. Table 15-1 displays the number of underemployed individuals just prior to the beginning of the recession through the end of 2014. Since then, the number of underemployed continued to rise; however, the number is slowly declining. Nevertheless, the number remains high. Compared to prerecession levels, the rise in the number of underemployed through the end of 2014 equals 62 percent.


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