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3 Pay Concepts and Definitions Pay is an important indicator of discriminatory practices. Employees with the same productivity and working conditions (including hours) in the same jobs at the same employer location could be subject to pay discrimina- tion if they are systematically paid differently because of their membership in a particular demographic group. Employment discrimination can affect pay through a number of different channels, such as different pay rates, different noncash compensation, different hours offered, and different job assignments to otherwise similar applicants. Each of these channels poses measurement challenges. A major challenge in considering an appropriate earnings measure to use in determining whether or not there is pay discrimination is that there is no standardized and universally accepted measure of earnings. Earnings (pay) can be represented in a variety of ways depending on the use to which the definition will be put: â¢ as annual, monthly, or weekly amounts; â¢ as totals, averages, rates, or pay bands; â¢ narrowly, as straight-time pay or regular salaries; â¢ broadly, to include straight-time pay or regular salaries and other forms of compensation, such as commissions, overtime, incentives, bonuses, shift differentials, stock options, and premium pay; and â¢ in relation to terms of employment, such as time worked, and the conditions of employment, such as whether the employee is full or part time and permanent or temporary. 46
PAY CONCEPTS AND DEFINITIONS 47 Although disparities in any of these measures could signal discrimina- tory practices, the most applicable earnings measure to comprehensively identify pay discrimination may well be a broad measure that encompasses all, or nearly all, measures of compensation, such as the broadest measure noted above, as well as the terms and conditions of employment. Such a measure, however, may not be easily collectable. Furthermore, even if it were collectable, it may not be fully comparable across demographic and job groupings, as discussed below. Thus, it may be that any earnings measure selected by the U.S. Equal Employment Opportunity Commission (EEOC) may depend as much on whether the information is available and collectable than on the purpose for which it is collected and how it will be used. In this chapter, we discuss the various components of employee com- pensation that can be considered when selecting the most appropriate defi- nition of earnings for antidiscrimination purposes. We also consider trends over time in compensation practices. Finally, we assess several possible definitions from the perspectives of scope, coverage, frequency, reliability, and collectability. ROLE OF COMPENSATION Compensation plays many roles in the modern economy. According to Kevin Hallock, director of the Cornell University Institute of Compensa- tion Studies, who discussed compensation issues with the panel, compen- sation depicts market pricing of an essential component in the production function, and, in most instances, helps to match supply and demand for a workforce and for particular skills and qualifications.1 It can be a measure of responsiveness to offers. It can be adjusted to fit time, place, and circum- stance by adjusting the pieces of compensation (wages, benefits, schedule, and other pay). Nowhere have these kinds of adjustments been more ag- gressive than with executive and highly paid professional compensation, for which a rich array of compensation options has emerged in recent years. Compensation policies also play a large role in business strategy. These policies undergird and give meaning to job analysis and job evaluation processes, and they enable pay-for-performance and other productivity enhancement strategies. They facilitate internal comparisons and, when data are available, facilitate external comparisons, which are a component of competitive analysis. 1â arious administrated pay systems (such as much of the civil service) and structures that V constrain supply (e.g., licenses and apprenticeship systems) may include departures from the generalization that compensation reflects the operation of the unfettered labor market.
48 COLLECTING COMPENSATION DATA FROM EMPLOYERS More and more, compensation policies are a key element in corporate strategies to improve efficiency, effectiveness, and marketplace viability. In a broad sense, they have been identified as âtotal rewardsâ strategies (WorldatWork Association, 2011). In addition to their importance as com- pensation in corporate business strategies, employers also seek through these policies to achieve balance in work-life considerations, performance and recognition policies, and development and career opportunities for their workforce. There are common elements to compensation strategies across the occupational spectrum. However, one result of strategic âfine tuningâ by businesses is that wages and total compensation have come to vary among occupational groups, which adds to the difficulty of making cross- occupational comparisons. Data from the National Compensation Survey (NCS)âadministered by the Bureau of Labor Statistics (BLS)âindicate that wages and salaries make up a larger proportion of its definition of compensation (wages and salaries plus benefits, including supplemental pay) for management, sales, and service workers than for construction and production workers: see Figure 3-1. Total compensation may encompass much more than hourly earnings, so it is important to consider broader measures of compensation. EARNINGS DATA AVAILABLE IN FIRMS It is important to define earnings in a way that makes economic sense, but it is also critical to define earnings in a way that reporting employers can understand. Earnings should be capable of being reported using records readily available in the firm because they are otherwise necessary to meet the requirements of law or regulation or because they are needed for the efficient operation of the firm. Existing laws and regulations help delineate the kinds of compensation and demographic data that employers maintain. At a minimum, all employers covered by the Fair Labor Standards Act (FLSA)2 must keep certain records for each covered, nonexempt worker.3 Although there is no required format for the records, the content of the re- cords is specified: The records must include accurate information about the employee and data about the hours worked and the wages earned, to include4 2â mployers covered by FLSA are those with at least two employees and an annual dollar E volume of sales or business of at least $500,000. See http://www.dol.gov/whd/regs/compliance/ whdfs14.pdf [December 2011]. 3â nder the FLSA, some employees are exempt from the actâs overtime provisions. These U employees include executive, administrative, professional, and outside sales employees who are paid on a salaried basis, some commissioned sales employees, and some seasonal employees. 4â or details, see http://www.dol.gov/dol/topic/wages/wagesrecordkeeping.htm [July 2012]. F
PAY CONCEPTS AND DEFINITIONS 49 $ Total Compensation Wages and Salaries Dollars per Hour All Management Sales Service Construction Production Major Occupation Group FIGURE 3-1â Hourly wage and salary and total pay by major occupational group, 2011. SOURCE: Presentation by Kevin Hallock at panel workshop on May 24, 2011, based on data from National Compensation Survey. Reprinted with permission. Figure 3-1 Bitmapped â¢ employeeâs full name, as used for Social Security purposes, and on the same record, the type for labels New employeeâs identifying symbol or number if such is used in place of name on any time, work, or payroll records; â¢ address, including zip code; â¢ birth date, if younger than 19; â¢ sex; â¢ occupation; time and day of week when employeeâs workweek begins; hours worked each day and total hours worked each workweek; â¢ basis on which employeeâs wages are paid; â¢ regular hourly pay rate; â¢ total daily or weekly straight-time earnings; â¢ total overtime earnings for the workweek; â¢ all additions to or deductions from the employeeâs wages;
50 COLLECTING COMPENSATION DATA FROM EMPLOYERS â¢ total wages paid each pay period; and â¢ date of payment and the pay period covered by the payment. Given these FLSA requirements, it is safe to assume that employers covered by FLSA will maintain wage information by gender. However, wage data may not be universally available by race and national origin (data on these characteristics are required by equal employment opportunity [EEO] legislation, but not necessarily with wage data associated with them). Other statutory and administrative requirements dictate the kind of data that employers should maintain on employee compensation. For ex- ample, those firms that have adopted employer-matching 401(k) plans called Safe Harbor plans must use the Internal Revenue Service definition of compensation, which includes all wages; salaries; other amounts received that are includible in the employeeâs gross income, including overtime; other items including commissions, fees for professional services, tips, bonuses, fringe benefits, and reimbursements for some other expense allowances; and foreign earned income. All of these compensation items must be ac- counted for: thus, for firms with this type of 401(k) plan, the compensation information is likely to be obtainable from the firmâs compensation records. Although FLSA coverage and other administrative reporting require- ments tend to define the mandatory wage information that is likely to be maintained by employers that report to EEOC, the specific data that are maintained by any particular employer are defined by the particular payroll and human resource systems that support the businessâs operations. In many cases, these systems are developed within the company, although, increas- ingly, company payroll and human resource systems are developed by outside firms that specialize in providing software or âturnkeyâ human resources and payroll management services (see Chapter 1). Thus, a good rule of thumb would be that earnings measures for EEOC reporting would need to be compatible with data elements available from vendor systems or, at least, only require changes that could be easily implemented in vendor software. FEASIBLE DEFINITIONS OF EARNINGS There is no single, commonly accepted definition of earnings. Table 3-1 shows the wide and rich variety of definitions embedded in the major sur- vey and tax collection systems (discussed in Chapter 2). Because earnings data are now being collected according to various definitions, any of the definitions could be considered collectable. However, not all definitions have a history of being collectable with the addition of occupational and demographic information. Two employer-based BLS data collections now bring together data on the establishment, compensation, occupation, and hoursâthe Occupational
TABLE 3-1â Comparison of Earnings Definitions and Data Availability for Key Earnings Data Sources Data Source Definition of Earnings Occupational Coverage Demographic Information Employer/Establishment-Based Surveys Occupational Wages for the OES survey are straight-time, gross The OES survey categorizes None Employment Survey pay, exclusive of premium pay. Earnings include workers into nearly 800 (Bureau of Labor base rate; cost-of-living allowances; guaranteed detailed occupations based Statistics) pay; hazardous-duty pay; incentive pay, including on the Office of Management commissions and production bonuses; and tips. and Budgetâs Standard Excluded are overtime pay, severance pay, shift Occupational differentials, nonproduction bonuses, employer Classification (SOC) system. cost for supplementary benefits, and tuition reimbursements. Current Employment Provides arithmetic averages (means) of the None None Statistics Survey hourly and weekly earnings of all production and (Bureau of Labor nonsupervisory jobs in the private nonfarm sector Statistics) of the economy. The hours and earnings are derived from reports of gross payrolls and corresponding paid hours. Payroll is reported before deductions of any kind, e.g., for old-age and unemployment insurance, tax withholding, union dues, or retirement plans. Included in the payroll reports is pay for overtime, vacations, holidays, and sick leave paid directly by the firm. Bonuses, commissions, and other types of nonwage cash payments are excluded unless they are earned and paid regularly (at least once a month). Employee benefits paid by the employer, as well as in-kind payments, are excluded. 51 continued
TABLE 3-1â Continued 52 Data Source Definition of Earnings Occupational Coverage Demographic Information National Compensation Wages and salaries, or earnings, are defined Standard Occupational None Survey (Bureau of as regular payments from the employer to the Classification (2010) Labor Statistics) employee as compensation for straight-time hourly definitions are used for work or for any salaried work performed. Includes initial data collection at an incentive pay, including commissions, production establishment. (The 2010 SOC bonuses, and piece rates; cost-of-living allowances; system contains 840 detailed hazard pay; payments of income deferred occupations, aggregated into because of participation in a salary reduction 461 broad occupations.) plan; and deadhead pay, defined as pay given to transportation workers returning in a vehicle without freight or passengers. EEO-4 Survey (state Annual salary including all special increments of Officials and administrators; White (not of Hispanic and local governments) an employeeâs annual earnings that are regular and professionals; technicians; origin); Black (not of recurrent. Overtime pay is not included. Where protective service workers; Hispanic origin); Hispanic; employees are paid on an other-than-annual basis, paraprofessionals; Asian or Pacific Islander; their regular earnings in the payroll period that administrative support American Indian or Alaskan includes June 30 are to be expanded and expressed (including clerical and Native, by male and female in terms of an annual income. sales); skilled craft workers; service-maintenance. OFCCP EO Survey Annual monetary compensation: the employeeâs (1) Officials and managers; (2) Minority females, non- base rate (wage or salary) plus other earnings, such professionals; (3) technicians; minority females, minority as cost-of-living allowance, hazard pay, or other (4) sales workers; (5) office males, non-minority males increment paid to employees regardless of tenure and clerical workers; (6) on the job. The annual monetary compensation craft workers; (7) operatives; measure was not to include the value of benefits, (8) laborers; and (9) service overtime, or one-time payments such as relocation workers. expenses.
Ontario Pay Equity Pay as of December 31 expressed in hourly, weekly, Job/position title Male and female Survey or annual amounts. Minnesota Pay Equity Minimum and maximum monthly salary. Job class Male and female Survey New Mexico Pay Total annual compensation converted to average EEO-1 job categories Male and female Equity Survey hourly wages in each job category are computed by adding the total compensation by gender divided by the total hours worked by that gender. Administrative Records Employerâs Quarterly Total quarterly wages paid to all regular, part- None None Contribution and Wage time, temporary, or casual employees, without Report regard to age; wages paid for services performed for a partnership by the wife, husband, child, or other relative of a partner; wages paid by an individual owner to a son or daughter who is 18 or more years of age; salaries and other payments made to corporate officers for their services to the corporation (including Subchapter S corporations); tips reported by employees for Internal Revenue Service purposes by the 10th day of the month of receipt; reasonable cash value of meals, lodging, merchandise, and other types of remuneration furnished for services; commissions and bonuses paid to employees; vacation payments; dismissal pay, severance pay, or wages in lieu of notice; salary reductions pursuant to Internal Revenue Code (IRC) Section 125 (cafeteria plans) or 401(k) plans. 53 continued
TABLE 3-1â Continued 54 Data Source Definition of Earnings Occupational Coverage Demographic Information IRS W-2 Form Wages and salaries, deferred compensation (part of None None total compensation, even if not taxable currently), and certain fringe benefits are reported in addition to capped Social Security earnings and uncapped Medicare earnings. IRS 941 and 943 Forms Total compensation; employer reported W-2 income None None and tips. Social Security Master OASDI and Medicare taxable wages, and total None Gender; self-reported race Earnings File wages reportÂ ble as IRS-taxable income on Form a and ethnicity data provided 1040, which includes wages above the OASDI on voluntary basis taxable maximum, noncovÂ red wages, and deferred- e compensation distributions, but not deferred- compensation contriÂbutions. Fair Labor Standards Time and day of week when employeeâs workweek Occupation Age; sex Act (FLSA) begins; hours worked each day and total hours worked each workweek; basis on which employeeâs wages are paid; regular hourly pay rate; total daily or weekly straight-time earnings; total overtime earnings for the workweek; all additions to or deductions from the employeeâs wages; total wages paid each pay period; date of payment and the pay period covered by the payment.
Safe Harbor 401(k) All wages; salaries; other amounts received that are None None Plans includible in the employeeâs gross income, including overtime; other items, including commissions, fees for professional services, tips, bonuses, fringe benefits, and reimbursements for some other expense allowances; and foreign earned income. NOTE: EEO = Equal Employment Opportunity, EO = Equal Opportunity Survey, IRS = Internal Revenue Service, OASDI = Old-Age, Survivors, and Disability Insurance Program, OES = Occupational Employment Survey, OFCCP = Office of Federal Contract Compliance Programs. SOURCES: Information from Current Employment Statistics forms (available at: http://www.bls.gov/ces/cescope.htm [July 2012]); Employerâs Quarterly Contribution and Wage Report (available at: https://uitax.nvdetr.org/crppdf/nucs-4072.pdf [July 2010]); and Recordkeeping Requirements under the Fair Labor Standards Act (available at: http://www.dol.gov/whd/regs/compliance/whdfs21.htm [July 2012)]. 55
56 COLLECTING COMPENSATION DATA FROM EMPLOYERS TABLE 3-2â Occupational Employment Statistics Survey Wage Intervals, May 2010 Wage Intervals Hourly Annual Range A Under $9.25 Under $19,240 Range B $9.25 to $11.49 $19,240 to $23,919 Range C $11.50 to $14.49 $23,920 to $30,159 Range D $14.50 to $18.24 $30,160 to $37,959 Range E $18.25 to $22.74 $37,960 to $47,319 Range F $22.75 to $28.74 $47,320 to $59,799 Range G $28.75 to $35.99 $59,800 to $74,879 Range H $36.00 to $45.24 $74,880 to $94,119 Range I $45.25 to $56.99 $94,120 to $118,559 Range J $57.00 to $71.49 $118,560 to $148,719 Range K $71.50 to $89.99 $148,720 to $187,199 Range L $90.00 and over $187,200 and over SOURCE: Bureau of Labor Statistics (2009). Employment Statistics (OES) survey and National Compensation Survey (NCS).5 These survey collections do not include demographic information: such information would have to be added to the compensation, occupation, and hours data collected in these two surveys to provide the information minimally needed for antidiscrimination purposes.6 The definitions of earn- ings in these surveys are discussed below. OES Wage Definition Earnings in the OES survey are defined as straight-time gross pay, exclu- sive of premium pay. The definition includes a base rate of pay; cost-of-living allowances; guaranteed pay; hazardous-duty pay; incentive pay, including commissions and production bonuses; and tips. The definition excludes overtime pay, severance pay, shift differentials, nonproduction bonuses, em- ployer costs for supplementary benefits, and tuition reimbursements. The OES survey collects wage data from private-sector employers in 12 intervals (or bands): see Table 3-2. For each occupation, respondents are 5â his discussion is limited to measures of compensation that can be collected from employ- T ers rather than from individuals because of the requirement to identify the possibility of pay discrimination at the point of employment, even though the most complete view of compensa- tion and demographics can be developed from household and individual surveys (Abowd and Hallock, 2007; Zhao, 2010). 6â s discussed in Chapter 2, data from these surveys are collected under a pledge of confi- A dentiality and are not available for enforcement purposes. However, the data could serve a benchmarking role for EEOC surveys; moreover, the surveys indicate the feasibility of data collection by establishment on occupation, hours, and earnings.
PAY CONCEPTS AND DEFINITIONS 57 asked to report the number of employees paid within each wage intervals. The effect of having a relatively large number of intervals in the OES survey is to narrow the bands so as to minimize the possibility of concealing pay disparities that could signal discrimination, which might occur with broad bands. The intervals are defined both as hourly rates and the computed corresponding annual rates: the annual rate for an occupation is calculated by multiplying the hourly wage rate by a typical work year of 2,080 hours. The responding establishments are instructed to report the hourly rate for part-time workers and to report annual rates for occupations that are typically paid at an annual rate but for less than 2,080 hours per year, such as teachers, pilots, and flight attendants. Other workers, such as some enter- tainment workers, are paid hourly rates, but generally do not work 40 hours per week, year round. For these workers, only an hourly wage is reported. NCS Earnings Definition7 In the NCS, wages and salaries, or earnings, are defined as regular payments from the employer to the employee as compensation for straight- time hourly work or for salaried work. The survey includes the following components as part of earnings: â¢ incentive pay, including commissions, production bonuses, and piece rates; â¢ cost-of-living allowances; â¢ hazard pay; â¢ payments of income deferred because of participation in a salary reduction plan; and â¢ deadhead pay, defined as pay given to transportation workers re- turning in a vehicle without freight or passengers. The following items are not considered part of straight-time earnings, and data on them are not included in the NCS: â¢ uniform and tool allowances, â¢ free or subsidized room and board, â¢ payments made by third parties (e.g., tips), and â¢ on-call pay. The following forms of payments are considered benefits and not part of straight-time earnings: 7â he T information in this section is largely taken from descriptions of the NCS, see http:// www.bls.gov/ncs/ncswage2010.pdf [July 2012].
58 COLLECTING COMPENSATION DATA FROM EMPLOYERS â¢ payments for shift differentials, defined as extra payment for work- ing a schedule that varies from the norm, such as night or weekend work; â¢ premium pay for overtime, holidays, and weekends; and â¢ bonuses not directly tied to production (such as Christmas and profit-sharing bonuses). The NCS annually publishes national, Census Bureau division, and local Â area occupational earnings estimates of mean hourly earnings, mean and me- dian weekly and annual earnings, and weekly and annual hours, for civilian Â workers (as defined by the NCS), private-industry workers, and state and local government workers. Occupational earnings data are published for Â some major and minor industry groups, by worker attributes (such as collec- tive bargaining status), and by establishment characteristics (such as number of workers in the establishment). Percentile earnings by worker attributes and establishment characteristics are also published. Earnings data are presented as mean and median hourly, weekly, and annual earnings (along with hours worked weekly and annually); as percentiles; by selected worker attributes (such as full time and part time, and union and nonunion); and by establish- ment characteristics (such as number of employees and geographic area). To calculate earnings for various periods (hourly, weekly, and annually), the NCS collects data on work schedules. For hourly workers, scheduled hours worked per day and per week, exclusive of overtime, are recorded, as well as the number of weeks worked annually. For salaried workers, field economists record the typical number of hours actually worked (salaried workers who are exempt from overtime provisions often work beyond the assigned work schedule). The NCS publishes earnings estimates for occupational groups and detailed occupations; it also presents earnings estimates by work levels and combined work levels. Work levels represent a ranking of the duties and responsibilities in an occupation. CONCLUSION Of the two feasible wage definitions that could be used, we conclude that the definition used in the OES should be considered for use for antidis- crimination purposes because its current coverage is so widespread. Most employers who are in the industries and size classes that report employment by gender, race, and national origin to the EEOC already have experience in assembling and reporting hours and earnings together by occupation in order to complete the OES (see Chapter 2). There is strong reason to believe that the information is available and retrievable in the firms that would be called on to report earnings data to the EEOC.