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
 Workingconditions
 Department
 levels
THANKYOU