As an illustration, think of all the factors that determine a person’s salary as a pie and let’s call it a ‘salary pie.’ The salary determination factors that go into the construction of the salary pie would include the human capital factors we have discussed. Human capital can also be related to employer level factors such as the division or department the employee works. For instance, the workplace culture in one job location may give lower level employees a greater level of responsibility and decision making power than other locations within the same firm.

Three-fourths of the reasons why employees in the same positions are paid differently have to do with what the employee brings to the table. What accounts for the other 25%? In addition to human capital factors, the second class of factors, which accounts for about 20% of an employee’s salary variation, is economic in nature.

These include factors such as the cost of living in the geographic location in which the employee works. It is not uncommon for employers with multiple locations to pay different wages to employees in order to stay competitive in the different labor markets. For some employers, the remaining approximate 5% of an employee’s salary variation within a given job can be quite nettlesome.

This 5% can sometimes reflect some truly demographic neutral factors. In other instances, it may be reflective of a disparate pay system within that particular employer. This last 5% of salary variation is particularly troubling for employers with jobs whose success depends on difficult to measure employee characteristics. In sum, while the percentages vary across employers, human capital is typically a very important salary determinant. Inaccurately modeling an employee’s human capital can cause employment attorneys to wrongly attribute (or fail to attribute), legitimate differences in salary to an individual’s age, race, gender, or nationality. The courts view on human capital For some time, courts have placed significant importance on human capital factors when weighing statistical evidence in salary discrimination cases.

One particularly insightful recent case is Cooper Michaels et al. v. Southern Company, Georgia Power Company, a race discrimination class action suit. In this case, African-American workers alleged Georgia Southern discriminated against them in terms of pay and promotions.

The district court, which denied the plaintiffs’ motion for class certification, was clear about the problems they found with the plaintiffs’ statistical expert’s model. The district court was especially clear on the issue of human capital and the failure to adequately account for it in the statistical model. In its denial of the plaintiffs’ motion for class certification, the district court observed that while the plaintiffs’ expert statistician did have some measures for the individual’s education, they were inadequate and unconvincing.

The court was particularly taken by the fact the quality of the educational institutions was not accounted for by the plaintiffs’ statistician. The court said, As the district court observed, [the plaintiffs’ expert]’s reports did not take into account the type or level of acquired skills of job applicants. [The plaintiffs’ expert]’s “education” component failed to take into account the field of study, the relevance of that field to any position in question, or the quality of the educational institutions involved, factors which may be important in some managers’ employment decisions.

In addition to the problems with the plaintiffs’ statistician’s education measures, the court also took issue with other human capital factors, such as their attempts to measure job specific experience. At the end, because of the expert’s lack of proper factors taken into consideration, the court ruled that the expert’s reports were unreliable.