BUS 434 WEEK 1 DQ 1 & 2

MUST USE SCHOLARLY SOURCES AND INTEXT CITATIONS

DISCUSSION 1

Compensation Strategy

Select an organization with which you are familiar and describe the type of compensation strategy it uses.

Guided Response:

Be sure your response is between 200-300 words and includes at least two scholarly references, one of which should be our course text. Respond to at least two classmates’ posts.

DISCUSSION 2

Overview of Compensation & Benefits

Compare and contrast compensation and benefits strategy of the “people department” of Southwest Airlines to overall strategies of two other airlines. What distinguishes each approach from the others? What are the strengths and weaknesses of each?

Guided Response: Be sure to include links to the companies, as well as the course text, among a minimum of five references. Respond to at least two classmates’ posts.

REFERNCE

Weathington, B. L. & Weathington, J. G. (2016).

Compensation and benefits: Aligning rewards with strategy

[Electronic version]. Retrieved from https://ashford.content.edu

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Learning Objectives

After reading this chapter, you will be able to:

1. Describe the historical development of compensation.

2. Explain the broad context within which a total rewards program operates.

3. Discuss the primary goals of a compensation system.

4. Describe the key components of a total rewards system.

5. De�ine core compensation and list its components.

1 An Overview of Compensation andBene�its

iStock/Thinkstock

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Introduction
Consider the following situations:

A �inancial services �irm has grown to the point where it needs to add account managers to
handle the client accounts. What is the best way for the company to pay the account managers so
that they are rewarded for getting new client accounts as well as servicing existing client
accounts? Should the account managers be paid a salary, a commission, a bonus, or some
combination of all of these options?

••••

Two retail companies are in direct competition. One company pays an average of $15.00 an hour
but provides no company-paid holidays or vacation. Another company pays an average of $10.00
an hour but also provides company-paid holidays and vacation. Is one method better than the
other? For the company? For the employees? Could either approach lead to a competitive
advantage over the competition?

••••

An automobile company has run into dif�icult times and must cut expenses. Recognizing that
payroll is often the single largest expense in organizations, what is the impact on the company if
it cuts wages? What impact will that have on the morale, motivation, and retention of current
employees? Will this impact the ability to attract new employees?

Managers, executives, business owners, and human resources (HR) professionals ask questions such as
these every day. Why? Because it helps them stay in business!

It must be remembered that employees are individuals with their own desires, motivations, and needs.
Properly designed, a compensation and bene�its strategy that addresses the needs of not only the business
but also its employees will support the company’s overall business strategy, helping the company be
successful in an ever-changing, competitive environment. The key is to align the goals and efforts of
employees with those of the organization for which they work. Questions such as those above must be
answered in a way that enhances, rather than detracts from, the operation of the company. Since employee
talent is a critical resource for a company, the compensation, which includes bene�its, of that talent is a
vital component of how a company operates.

In this book, we will explore the need for aligning compensation and bene�it strategy with business
strategy. Speci�ically, we will address the contributions an effective compensation and bene�its system
makes to ensure successful achievement of the �irm’s strategy. We will examine all aspects of what it takes
for an employer to attract, motivate, recognize, reward, and retain the most talented and skilled work
force possible. While not every company will have a dedicated compensation professional, much less a
compensation department, these decisions must still be made in all types and sizes of businesses, and it is
our goal in this book to provide you with the knowledge and background to make these kinds of informed
strategic decisions.

We begin this chapter by providing a brief overview of the history of compensation and how
compensation systems evolved into what they are today. We then shift our attention to the primary factors
that go into creating a compensation system, namely, an organization’s culture, business strategy, and
administration, and how the three interact. We then end with the primary goals that any compensation

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system hopes to accomplish and the types of compensation that can be utilized to design a cohesive
compensation and bene�its plan.

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Christie’s Images Ltd./Superstock

Bartering arose as the �irst monetary
system.

1.1 A Brief History of Compensation
It is important to understand where we came from in order to understand where we are and where we are
going. Understanding how modern compensation practices evolved can assist in identifying best
approaches to aligning corporate strategy with both short- and long-term goals.

Bartering: The First Compensation System

One way to examine human culture is by considering the three waves (or ages) of revolutionary change
that have, arguably, had the greatest impact on society (see Tof�ler, 1970). The �irst of these was the
agricultural revolution (beginning about 9000 BCE), when humans began transitioning from primarily
living as hunter-gatherers to growing crops and beginning to live a more settled existence. The next is the
Industrial Revolution (from the late 18th century through the beginning of the 20th century), which was
characterized by a dramatic growth in technology and the movement from an agricultural-based to a
manufacturing-based economy. The last, which began in the mid-20th century and is still going on, is the
information revolution, exempli�ied by the creation and growth of computer-related technology.

Our standards with regard to what is considered both
valuable and useful in our lives have shifted accordingly.
For example, how people live has changed, from the
extended families necessary to sustain an agrarian
society to nuclear families during the industrial period
to the working-parent families of today. Similarly,
business during the agrarian age was conducted by the
family, by bureaucracies during the Industrial
Revolution, and by teams in the current information
age. Underlying all of these economic shifts and the
subsequent ways in which we organize society has been
the method by which we compensate each other for
labor.

Without a developed monetary system, compensation
for one’s labor entailed using what one had grown or
made by hand, such as making clothes from cotton
grown in the �ields. People quickly �igured out that this system was limiting and would not work well. As
such, bartering, or the direct exchange of goods or services for other goods or services, arose as a system
of exchange for one’s labors. In bartering, a fur trapper, for example, might trade pelts to a dairy farmer in
exchange for milk, eggs, or cheese. The quantities exchanged between the two would be determined by
their mutually agreed-upon valuation. They might agree, for example, that two dozen eggs was worth one
small pelt, or that the trapper would provide trapping services for the farmer over the time frame of a
winter in exchange for the farmer’s supplying milk for the same duration. Much of the impetus for the
creation of written language came directly from the need for keeping track of bartered goods over time
(Robinson, 1995).

The direct-exchange compensation system was helpful in addressing immediate needs, but this method
was limiting in its utility in that the resources available were restricted to those in the immediate
exchange. A dairy farmer’s milk was worthless to a locksmith, for example, if that locksmith also owned a
cow, as there would be nothing the farmer could give to acquire the locksmith’s services.

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This is why a medium of exchange, such as the various currencies we use today, is so vital to an exchange
system—it allows for people to acquire goods, services, and resources beyond a direct one-to-one trade.
Instead of a dairy farmer having to trade milk for another direct good or service, such as pelts or a
locksmith’s services, the farmer could receive a tangible item (the medium of exchange) with an agreed-
upon value that could be saved and used for an altogether different need or purpose at a future time. The
medium of exchange, in effect, then becomes a means of storing value. This exchange allows goods and
services to obtain a certain universally accepted value, often resulting in the medium used for the
exchange becoming valuable in itself. Perception of value is the key component of this system. All parties
involved must accept the value for an item in order for it to maintain its value.

The actual items used in exchange and as a store of value have also evolved with time. Lumps of base
metal, such as copper or tin, were used as a medium of exchange since at least the beginnings of the
Bronze Age, or about 1000 BCE, while modern coinage is much more recent and began as simply a method
for identifying the weight and quality of the metal being exchanged. People could exchange their particular
goods or services for one of these metals and then trade elsewhere the metal they acquired for whatever
they wanted or needed.

Today, our mediums of exchange are even more diverse. We still use coinage for smaller exchanges, but we
also use paper, plastic, and even electronic means of compensating individuals and groups. All of these
different means of exchange have liberated individuals and organizations alike to form ever more complex,
mutually acceptable relationships that address wants and needs. While the mechanism of exchange has
changed over time, this core concept of storing value for later use and exchanging what we have today for
what we want or need in the future has not changed. HR professionals use this concept of exchanging one
item (an employee’s labor) for another (compensation and bene�its) every day. Designed properly, this
exchange relationship serves to align the employee’s labors with the company’s goals and strategies.

The Industrial Revolution: The Basis for Modern Compensation Practices

Our complex system of compensation used today has its roots in the late 18th century with the beginning
of the Industrial Revolution. The advent of tools such as the cotton gin, patented by American inventor Eli
Whitney in 1794, signaled the decline of individual hand labor and the beginning of the proliferation of
mechanical devices capable of much greater productivity. The increasing complexity of heavy industrial
machinery, however, necessitated the systematic training of workers, and training, in turn, represented an
increased cost in terms of both time and money. Therefore, companies needed to �ind a way to both utilize
that increased training and retain those trained workers. The method of rewarding workers for labor
needed to evolve.

Such technological changes in the economy also required workers to move from the family farm to more
population-dense urban areas where manufacturing was booming. Individuals and families required—at a
minimum—food, safety, and shelter in this new urban environment. Compensating workers for their time,
skills, and efforts became a requirement. This dramatic shift in how and where people worked and lived
added yet another dimension to compensation—hence the need for a comprehensive compensation
system that would attract, retain, and motivate employees while enabling the company to make a pro�it.

Taylor’s Scienti�ic Management Theory

In addition to proper training, guidelines and rules related to how the new industrial worker was to be
managed were required. Compensation methods that mirrored the realities of the Industrial Revolution

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were also needed.

This void was �illed by Frederick Winslow Taylor, who has been called the father of “scienti�ic
management” due to his work aimed at improving industrial ef�iciency. Taylor, a trained mechanical
engineer in the United States, believed that through a detailed analysis of a given task, using techniques
such as the detailed study of both the time taken to accomplish actions and the actual physical motions
performed (“time and motion” studies), it would be possible to discover one best way to perform a task
(Kanigel, 2005).

Based on his research and observations, Taylor developed four rules for scienti�ic management:

1. Create work methods based on a scienti�ic study of speci�ic tasks.
2. Scienti�ically select, train, and develop each employee.
3. Provide detailed instructions for speci�ic tasks.
4. Divide work nearly equally between managers and workers.

While conducting research using time and motion studies, Taylor found that workers and managers
typically did not interact with one another. At the time, there was little to no standardization in factory
work, and little motivation on the part of managers or their subordinates to work except to maintain an
employed status. In the late 1800s, standardizing tasks and focusing on employee motivation were radical
ideas, which is precisely what Taylor proposed.

One of the most in�luential ideas Taylor introduced at the time was the notion of providing a fair wage for
a fair day’s work. Additionally, he highlighted the need for selecting, training, and developing each
employee. Although Taylor was focused on the scienti�ic side of work—and as a result would often forget
that the workers were people and not machines themselves—many of the ideas he put forth related to the
need to fairly compensate workers for their labor. Taylor’s ideas laid the groundwork for the modern
workplace and the need for a comprehensive compensation system.

Fayol’s Principles of Management

Building on Taylor’s scienti�ic management theory, Henri Fayol, a mining engineer in France, developed 14
principles of management (Fayol, 1949), three of which have direct implications for the compensation and
bene�its programs of today. They are remuneration, initiative, and equity.

Remuneration—Employee satisfaction depends, in part, on a fair day’s pay for a fair day’s work, a
re�lection of Taylor’s in�luence on Fayol’s thinking.
Initiative—Productive employees take responsibility for their work and put forth effort and ideas
to better the organization.
Equity—Employees should be compensated commensurate to their output. The compensation
employees receive must be aligned with not only what they believe they and the job they perform
are worth but also with what others who perform similar work receive.

Taken together, Taylor’s and Fayol’s ideas have in�luenced business practices since their inception and
continuing into the modern day.

Today, organizations have evolved beyond just providing pay for work to providing other forms of care and
support for employees. Changes in society have necessitated the creation and growth of laws and
government regulation. Additionally, the �ield of psychology has taught us that people are not easy to
understand and are driven by individual goals and motivation. Both of these factors will be addressed

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extensively in future chapters. Remember, however, as we will repeat numerous times throughout this
book, the hallmark of an effective compensation and bene�its program is consistency. In order to attain
consistency, we need to understand what compensation actually is.

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Critical Thinking

Select an organization with which you
are familiar and describe the type of
compensation strategy it uses.

1.2 Components of a Compensation System
A compensation system is a systematic approach to providing rewards to employees in exchange for
work provided, with the goal of helping organizations attract, motivate, and retain the best talent. Of
course, many different components factor into not only a proposed compensation plan but also the
execution of that plan. An organization needs to take into account how much it can afford as well as what
the market demands, what potential talent might expect, and also how current employees might react.
Let’s consider the following scenario:

A German software company became aware of an extremely talented senior marketing executive
from a U.S. company who had become dissatis�ied in her current position. The woman, Anne
Prevost, had risen through the ranks at her current company and had been promoted as far as
possible. The German �irm saw that Prevost had engineered an advertising campaign that helped
her company make signi�icant inroads into the German �irm’s marketplace. The current head of
marketing for the German �irm, Jürgen Mehr, recognized that Anne might be open to changing
employers and would be a valuable addition to the company. However, Jürgen was dismayed that
Anne’s salary was already almost identical to his, and wooing her away from her current
employer might require offering a potential subordinate a higher salary than he made himself. In
discussing the situation with the head of human resources, Mehr discovered Prevost had a �irm
offer with another of their competitors, a highly leveraged start-up that offered a lower base
salary but substantial stock options. Prevost spoke excellent German and was quite interested in
moving to Germany and rearing her sons there, even though the cost of living in Germany was
substantially more than what she was used to. Additionally, the CEO of the German company was
sold on the idea of having Prevost join the team, especially since their current strategy was to
increase international revenues by 10%, and he �irmly believed Prevost could help achieve that
goal. (Fryer, 2003; used by permission)

As is evident in the above scenario, there are several elements Anne Prevost �inds important in a rewards
program: compensation, bene�its, work-life, recognition, and developmental and career opportunities. If
this German �irm wants to recruit Prevost, it needs to take her needs into consideration. However, an
effective compensation strategy also will take into account issues related to what is best for the company
in terms of the productivity gains it accrues by making the hire, how much it is able to afford, how it will
affect the standing of current talent in the �irm, and so on.

A compensation strategy, therefore, must align with the company’s overall strategic vision and goals. The
company’s management must answer these questions: What will it cost not to have this employee on
board (due to not bene�iting from her talents as well as the potential of a competitor bene�iting instead)?
What problems do we expect her to solve? How can she help us achieve our long-term market objectives?

Part of this equation is taking into consideration the
personal costs and changes for the potential hire. In the
particular case of Anne Prevost, the �irm must consider
cost-of-living differentials between the United States
and Germany, effective cultural integration support, and
other elements key to her success. After all, little will be
gained by a company in hiring an employee for perhaps
less up-front money, only to have that employee be
unable to ef�iciently and effectively make the personal
and occupational transition. Fundamentally, the goal of

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an effective compensation strategy must address what it will take to keep the new potential hire focused
on performance and not distracted by personal matters that may in part arise due to being hired by the
organization in the �irst place. In the case of Anne Prevost, the German hiring �irm would not want to hire
her to have her distracted with issues such as differences in exchange rates or tuition for her sons’
schooling or excessive cultural or language barriers. Such issues would decrease her performance at work,
which would diminish the company’s investment in her talent. Worse, persistent problems on the
personal front might also result in her leaving the �irm, which would mean that the hunt for talent would
need to begin all over again, costing the �irm yet more time and more money. We will further examine
issues like this in future chapters.

For now, however, let’s look brie�ly at three factors that are integral to the creation of any compensation
system.

WorldatWork (www.worldatwork.org (http://www.worldatwork.org) ), formerly known as the American
Compensation Association, has provided compensation professionals with resources and education since
1955. The organization created a compensation model called the total rewards model that highlights the
impact of organizational culture, business strategy, and HR strategy on attracting, motivating, and
retaining employees. The model is presented in Figure 1.1.

Figure 1.1: WorldatWork’s total rewards model

A company’s reward strategy is not just for the employee’s bene�it. It impacts
the overall business performance while also boosting employee engagement.

http://www.worldatwork.org/

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Critical Thinking

Discuss the WorldatWork model and
how it can be used to understand the
relationship between rewards and
performance.

The WorldatWork Total Rewards Model provides a way
to conceptualize the way employee rewards impact
business performance. In the center of the model is the
employee. An employee’s performance is dependent, in
part, upon satisfaction with (and other attitudes such
commitment to) an organization and engagement with
the organization’s purpose and mission. These interact
to in�luence overall business performance. Centered
around the employee in the model are the key goals of a
reward system, namely, to attract, motivate, engage, and
retain quality employees. These goals are of course
in�luenced by the total rewards strategy, including compensation, bene�its, work-life effectiveness,
recognition, performance management and talent development. However, this strategy is directly
impacted by the macro level strategic facets of the organization: organizational culture, business strategy,
and human resource strategy. We will now discuss these strategic elements in depth.

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Organizational Culture

Organizational culture represents the shared norms and values of an organization, such as a company or
charity, that dictate not only how goals are accomplished but also the ways in which those goals are
achieved. The culture of any organization can be operationalized in numerous ways, but generally, and
more informally, it can be viewed as “the way we get things done around here.” As opposed to formal
academic de�initions, this description is, perhaps, more straightforward and may be more easily
understood by all employees and managers and communicated more effectively.

A healthy organizational culture helps get all employees on the same page as management in terms of
goals and behavior, which leads to a positive environment that motivates employees to be successful and
promotes loyalty to the organization as well as unity within the organization. An unhealthy organizational
culture has the opposite effect and leads to a negative environment that runs counter to what
management wants to accomplish. To achieve a healthy organizational culture, the management team is
critical in setting the culture and maintaining it through policies, procedures, reward systems, and
everyday ways of conducting business.

To understand organizational culture, we must also understand the nature of the society in which the
company is embedded. Hofstede (http://geert-hofstede.com/) (1983b) developed a model for international
management and cross-cultural communication utilizing six dimensions that capture the essential
elements of a country’s culture. The dimensions are power distance, individualism, masculinity,
uncertainty avoidance, pragmatism, and indulgence. In keeping with our scenario at the beginning of this
section, we’ll look at the comparison of Germany in relation to the United States with regard to these six
dimensions in Figure 1.2.

1. Power distance considers the degree to which a society recognizes and accepts authority. In our
German example, Anne would need to know that in Germany the power distance is less than in
the United States, so participative meetings and communication in general will be more common.
Additionally, leader actions and decisions are more likely to be challenged.

2. Individualism accounts for how strongly a culture emphasizes individual achievement over group
and community achievement. Since Anne comes from the United States, a country that
emphasizes individualism more strongly than Germany does, she must be aware of this difference
and make adjustments to how she interacts and works with others in her department and the
company as a whole. While the German culture values individualism at a relatively high level, it is
not nearly as high as in the United States.

3. Any society with a high score in masculinity will be driven by competition, success, and
achievement—all characteristics of U.S. and German culture. In terms of this dimension, Anne will
be able to transition easily to the German culture.

4. In the United States, taking reasonable risks in business is encouraged. In Germany, on the other
hand, not taking as many risks is more the norm due to the tendency toward uncertainty
avoidance.

5. Pragmatism refers to societies that do not have a need to explain everything but to lead a virtuous
life and accept that positive results will occur. Pragmatism is using a practical approach to
problems, focusing on the situation, and not being pulled into ideas and theories. Germany and
the United States are at extreme ends of the spectrum on this characteristic. As such, Anne would
need to be prepared to operate in a generally more pragmatic manner than would be required in
her current company.

6. Indulgence de�ines the degree to which people in a society control their desires and impulses and
behave in a more cynical and pessimistic way. We see in Figure 1.2 that German people are more

http://geert-hofstede.com/

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restrained, control self-grati�ication, and tend not to emphasize leisure activities. These are
cultural qualities Anne will need to be mindful of.

Figure 1.2: Cross-cultural comparison: Germany and the
United States

Using Hofstede’s six dimensions, it becomes clear which cultural
qualities Anne will need to be mindful of when she begins working in
Germany.

Source: The hofstede centre. www.geert-hofstede.com (http://geert-hofstede.com/)

In addition to broader national issues related to culture, organizations also take on characteristics that
de�ine the way they conduct business and what it is like to work for or interact with the organization. The
norms and values of an organization in�luence factors from employee selection and retention to
compensation as well as corporate strategy (Giorgi, Lockwood, & Glynn, 2015). When designing a
compensation and bene�its system, the company needs to put a plan in place that reinforces and helps
build its culture. Consider the example of Southwest Airlines that is presented in the following feature.

Compensation and Bene�its in the Real World: Business Strategy at
Southwest Airlines

Southwest Airlines was an idea created by Herb Kelleher and Rollin King in the late 1960s, though,
due to court challenges from other airlines, the company did not get off the ground (literally) until
June 1971. The airline began by �lying among just three cities in Texas (Houston, Dallas, and San
Antonio) as a way to minimize barriers to entry such as the then-restrictive federal transportation
laws. Beginning with a �leet of only three used Boeing 737s, Southwest Airlines parlayed its
approach of a low-cost differentiation strategy into one of the most pro�itable and fastest-growing
airlines in the world. By its second year of operations, the company charged only $20.00 for one-
way fares between its three destination cities, whereas other airlines charged $28.00. It truly had a
competitive position.

http://geert-hofstede.com/

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Critical Thinking

Why is an understanding of
organizational culture important to
developing and implementing a
successful total rewards system? Select
an organization with which you are
familiar and describe its culture. In
other words, how do things get done in
the organization?

Since its beginnings, Southwest has maintained its low-cost differentiation strategy using only the
Boeing 737, thus requiring its mechanics, �light, and ground crews to be familiar with only one type
of aircraft. Its “People Department” (i.e., Human Resources) hires employees who are extroverted
and verbally skilled and then supports them with training programs emphasizing Positively
Outrageous Service for customers. (Southwest employees and customers, for example, tell stories of
the company’s employees offering to pet-sit dogs while a customer was on vacation or an employee
offering her home to a customer while undergoing cancer treatment in a distant city.) Southwest
has a reputation for having employees who love their jobs and who share that enthusiasm with
their customers. Humor is widely used on Southwest �lights not only to entertain passengers but
also to inform them of key safety requirements, as can be seen in this video on YouTube:
http://www.youtube .com/watch?v=K9Fcndt2aOc (http://www.youtube.com/watch?
v=K9Fcndt2aOc) .

To deploy its low-cost differentiation strategy, Southwest needs to operate ef�iciently and
effectively. This requires achieving signi�icant operating ef�iciencies, such as

a 15-minute gate turnaround time instead of the industry norm of 45 minutes,
pilots who pitch in to handle baggage,
�light crews who help clean the plane while on the ground, and
a point-to-point �light travel pattern instead of the traditional hub-and-spoke approach.

To achieve these operating ef�iciencies, employees need
to want to help the company achieve its goals. This
requires a compensation and bene�its program that
rewards employees for taking action that enables the
company to be successful with its low-cost
differentiation strategy. It also requires consistently
reinventing total employee reward systems, such as
being the �irst airline to offer employee stock ownership
plans (ESOPs) and paying employees more than the
industry average.

In other words, a �irm with the proper strategy, good
execution, and an effective employee reward system,
such as Southwest has, is more likely to be successful,
even in an extremely tough and competitive market like
the airline industry.

Business Strategy

Business strategies differ based on a number of factors, such as the time period covered, the market the
company operates in, the supply and demand trends within a market, and the company’s particular short-
term objectives and long-term goals. That said, there are three broad strategies that companies can follow
in trying to realize their goals: (1) a low-cost strategy, (2) a differentiation strategy, and (3) a focus
strategy.

http://www.youtube.com/watch?v=K9Fcndt2aOc

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A low-cost business strategy is one in which the company competes on the basis of the lowest possible
cost, while a differentiation business strategy is one in which the �irm sets itself apart in the
marketplace by offering unique and unusual products or services (Porter, 1980). A focus business
strategy means a company concentrates its resources in order to enter a speci�ic niche within an industry
segment. For example, Toyota Motor Corporation wanted to appeal to younger drivers in the 16- to 28-
year-old age group, so it designed the Toyota Scion, which sells for an affordable base price that appeals to
its niche target group of young potential buyers.

Though Porter originally described the low-cost and differentiation strategies as mutually exclusive,
organizations such as Southwest Airlines, discussed previously, continue to combine both strategies quite
successfully.

Human Resource Strategy

Human resource strategy involves the planning, organizing, leading, and controlling of people who are
needed to support the organization. The strategic function of the HR department is to develop policies and
practices that support the overall strategy of the company. The HR department puts into place programs
that will reinforce the company’s business philosophy and will support the company in attaining its goals.
The following story illustrates how this works:

Shortly after World War II, R. G. Barry Corporation invented a unique product for that time: a
soft, washable, easy-to-wear woman’s house slipper. R. G. Barry was in fact widely acclaimed for
its innovation in developing and implementing human resource management systems (Likert &
Likert, 1976). Since the company was based on using and encouraging innovation and creativity,
the human resources department needed to set up its programs and procedures in a manner that
supported this overall strategy of the company. As an example, the company used its
compensation practices to reinforce its management philosophy of team-based management.
The company wanted to create an environment where employees worked together to resolve
issues, so it paid employees for time away from the manufacturing �loor to present and solve
production problems in a team environment. The HR department also provided training on
effective management, leadership, communication, and problem-solving skills. One result of the
company’s management and rewards practices included an annualized

employee retention

rate
of 98% (or only 2% employee turnover each year). This retention rate resulted in reduced labor
costs and made it easier to plan labor needs. Such company-wide practices also created a long
list of job applicants waiting for an opportunity to work for R. G. Barry, which allowed the
company to select from the most quali�ied applicants. R. G. Barry was successful in mirroring its
human resources strategy with its business strategy so that its HR programs added to the
accomplishments of the company.

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Critical Thinking

Why is it important that compensation
systems are consistent?

1.3 Goals of Compensation Systems
The goals of an organization’s compensation system are, of course, complex and highly contingent on
multiple factors, both internally and externally. However, there are some common primary goals of the
compensation function that tend to be consistent across organizations. They are as follows:

Ensure internal and external consistency.
Attract high-quality talent.
Motivate and retain talent.
Meet legal requirements.

We will spend the next sections discussing each of these elements.

Internal and External Consistency

The �irst goal of a compensation system is to create a system that is consistent on an internal and an
external basis. Internal consistency refers to the nature of compensation as perceived by employees.
Employees will ask questions such as, How fair is my pay relative to that of others performing the same
job? Is what I am paid equitable or fair in terms of the actual work I have to perform? External
consistency, however, looks at compensation from the employer’s viewpoint. Employers want to know if
they are paying a fair wage relative to their direct and indirect competition and relative to the geographic
area in which they operate.

While the goal is to maximize both internal and external consistency, in the real world, external
consistency is often the easiest to quantify and therefore is most often used. This results in the
compensation and bene�its plan being predominantly focused on the money or bottom line (i.e., the
employer’s perspective). This creates a lopsided plan that doesn’t meet all the needs of its constituents,
since one perspective is not included. To counter or minimize this impact, careful planning must be done
to strive for a plan that is both internally and externally consistent. How this is achieved varies by
organization but takes into account factors such as fairness, cost, and culture in order to make sure both
perspectives are considered and are incorporated into the design of the organization’s compensation and
bene�its plan.

Compensation and bene�its professionals will utilize salary and bene�its surveys to ensure both external
consistency and perceived equity. As noted earlier, R. G. Barry chose an equitable but average wage for the
areas in which its manufacturing plants were located. Part of R. G. Barry’s compensation competitive
analysis included companies whose employees performed similar activities but did not produce the same
or even similar products. This was done to ensure that the �irm’s compensation strategy aligned with the
business goals and to address employees’ concerns about how their pay compared to employees’ in
nearby companies. HR departments use wage and salary data collected by professional survey consulting
�irms, along with local information gathering, to benchmark their own compensation policies and
practices against those of other companies, thus ensuring external consistency.

Internal consistency is built from a variety of tools, such
as attitude and bene�its surveys, job descriptions, job
analyses, and job evaluations. An attitude survey is a set
of written questions completed by employees
expressing their reactions to the employer’s policies,
practices, management style, compensation, training,

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Knowledgeable, hard-working employees
are essential in making a strategic plan a
success.

bene�its, and other measures important to a given �irm.
If used effectively—meaning employees receive useful
feedback on their aggregated results in a timely manner—such surveys are instrumental in creating and
revising effective compensation and bene�its programs.

Attract High-Quality Talent

The second goal of a compensation system is to attract high-quality talent. Having knowledgeable, hard-
working employees is a key component of a company’s success. A well-designed compensation system can
help obtain that talent. Attracting talented employees consists of a variety of elements, beginning with a
strategic analysis of the company and ending with the types of reward systems needed to accomplish
organizational goals.

The company starts by performing a SWOT analysis. SWOT is an acronym standing for the internal
strengths and weaknesses an organization possesses and the opportunities and threats it must address in
its competitive marketplace. The SWOT analysis is used to prepare (or revise) a strategic plan that is used
to help guide the company in achieving its goals. A strategic plan consists of the company’s mission and
vision statements and outlines the strategy the company will use to achieve its goals. The strategic plan
will detail where the company wants to go, how it will look when it gets there, and how it will deliver its
products and services—all of which require hiring high-quality talent.

The �irm’s mission is the expression of the company’s purpose in light of the larger market environment.
The mission will answer two questions:

1. Why do we exist?
2. What need in society do we intend to ful�ill?

When an organization can answer these two questions clearly, it can begin to seek out talented employees
who will help realize the mission of the organization, using the compensation systems that it has put in
place to help in this critical process.

The organization’s vision is the picture of the future it
seeks to create moving forward; therefore, it will
answer one additional question: What will we look like?
To be meaningful and effective, the answer must be
owned and supported by the entire organization, right
down to the talent that best aligns with the
organization’s vision of itself.

A strategy de�ines what products and services will be
delivered, to which customers, and how they will be
delivered. A successful strategy

1. makes the �irm different,
2. has value in customers’ eyes, and
3. is deliverable.

Once in place, the �irm’s strategy becomes the
benchmark upon which the compensation strategies are

created.

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Critical Thinking

What motivates you to do your best
work in a job?

Motivation and Retention

Once identi�ied, recruited, and on board, talented employees who can contribute positively to the bottom
line must be retained and motivated. A well-designed compensation and bene�its plan can help with these
goals.

Motivation can be de�ined as that which energizes, directs, and sustains behavior. While motivating
employees is a dif�icult task since motivation can be viewed as a door that we open from the inside only,
there are techniques companies can utilize to better motivate their employees. When looking at
motivating employees, companies need to take into account the two basic types of motivation: intrinsic
motivation and extrinsic motivation.

Intrinsic motivation is that which drives people from within. Intrinsically, then, people are drawn to jobs
they enjoy doing and are good at performing, so HR departments need to make sure they are putting
people in jobs that are right for both the employee and the company. How employees feel about their jobs
is related to the culture of the organization, the amount of value they believe they contribute to their
organization, and whether the effort they apply to their work is worth the rewards.

Companies can also put policies and methods in place to enhance and create positive feelings toward the
company, which brings us to extrinsic motivation, or factors derived from outside a person that might
incentivize behavior. For example, employees might be attracted to, and therefore motivated by, extrinsic
factors such as a higher salary, longer vacations, a better insurance plan, and enhanced retirement
bene�its. A comprehensive, strategically planned compensation and bene�its package can go a long way in
motivating employees to be productive and ef�icient. In Chapter 3, we will discuss this further and
examine several theories of motivation.

Employee retention is the ability to keep employees
working for a company. Companies accomplish this
through factors such as the compensation and bene�its
they offer, the work involved, the promotion
opportunities available, and the culture of the company.
In order to manage retention effectively, the concept of
attracting and retaining employees needs to be
considered in a strategic manner. One practice that is
common in some industries, such as banking and

information technology, is to “poach” the best employees from other �irms whenever possible. While this
helps gain talented employees in the short term, it is not always a valid long-term solution. In essence, the
time, money, and effort spent in developing employees at best is wasted and at worst serves to bene�it
competitors. Having a comprehensive plan for addressing employee retention will help companies avoid
this pitfall and help them focus on identifying and recruiting quality, experienced employees, both
internally and externally.

Firms must adapt to the reality that it is the total marketplace for talent, not each organization’s individual
perspective, that in�luences what salary level and rewards are valued most by prospective employees. For
example, Prudential Insurance integrates recruiting, training, rewarding, and retention efforts to attract
and satisfy a highly mobile Generation Y group of employees. Generation Y, also known as Millennials, are
much less likely than older generations were to stay with one company for life, so companies must be
honest with themselves and evaluate how long they truly believe they will be able to retain talented
employees. Moreover, they must actively plan for who they want to keep onboard and how they will do so,

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A Policy Perspective

Clarify Principles and Policy
From Title: Reward and Remuneration

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and utilize carefully crafted and �lexible methods for recruiting potential new employees. Compensation
and bene�its are key elements in such an equation.

To better motivate and retain employees, companies need to examine themselves in terms of their
compensation philosophy and practices. An important and insightful question companies can ask
themselves is, Will we be willing to consider employees in the same manner as we treat our customers?
This question draws on applying a marketing perspective to handling employees and can be answered in
many ways, all with different connotations that will impact and guide a company’s compensation practice.

On one end of the spectrum is borrowing the marketing practice of segmentation. With segmentation, a
company segments, or divides, its customers into tiers, such as high, medium, and low. The “high”
customers are those who generally purchase high-margin products, spend more dollars, are loyal, and
require few inducements to remain loyal, while the “low” customers are the opposite and could actually
cost the company money due to time spent on catering to them or the negligible amount of money those
customers spend. The extent to which companies are willing and able to rank current and potential
employees as high, medium, and low may dictate how successful the company is in acquiring and retaining
talented pools of employees.

Jack Welch, former CEO of General
Electric, viewed his employees in this
manner. He used a performance
differentiation strategy to separate his
best performers from his worst. His
goal was to not only become
competitive in sourcing his employees
but also ensure his company remained
competitive. Using solid job analyses,
descriptions, and evaluations, he had
everyone throughout the organization
evaluated following strict guidelines.
Employees, managers, and executives
who were in the bottom 10% of people
doing that particular job were replaced
with new hires, transfers, and
promotions. While sometimes accused
of being cruel, Welch believed that a
transparent set of expectations,
meticulously followed in a fair manner,
was best not only for the company but
also for the employee. Welch was
successful during his tenure at General
Electric, giving credence to this approach. However, General Electric became known as a breeding ground
that groomed executives who then left to lead their own companies, which reduced the retention part of
the equation. Additionally, times are different from the 1980s and 1990s, when Welch led General Electric,
so this approach might not be as applicable or appropriate in today’s environment.

On the other end of the “employees = customers” spectrum is the notation that employees should be
highly valued like customers are. While the adage “the customer is always right” can’t be blindly applied to
employees, the sentiment behind the adage can be. Treating employees in a manner that gives them the

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tools they need to do their jobs, fairly compensates them for their work, and values them as people who
are vital to a company’s success can go a long way in retaining and motivating high-quality employees, a
win-win for both parties.

Finally, compensation packages in this evolving environment must continually innovate and be creative in
what they offer. Base pay alone is often not enough. SAS Institute, a privately held software company based
in Cary, North Carolina, for example, is often cited as an employer that effectively uses nonwage bene�its to
attract and retain employees. Health, dental, and vision insurance programs are available even to part-
time employees. Among many other types of bene�its, the company provides dependent-care �lexible
spending accounts, domestic partner bene�its, group-rate tickets to events, numerous vendor discounts
for SAS employees, on-site health care centers, and many more programs to entice talented employees to
stay onboard. SAS has been successful in motivating and retaining its employees by offering a
comprehensive compensation and bene�its package and not just relying on monetary compensation for
employee attraction and retention.

Meet Legal Requirements

Compensation practices exist within a broader and constantly evolving legal context that regulates both
what types of rewards can be provided to employees and how those rewards can be given. One of the
major goals of compensation systems is to not violate these laws. As will be discussed more extensively in
Chapter 2, there are both historical and societal reasons for why regulations and laws exist. For moral and
legal reasons, those responsible for administering monetary compensation and nonwage bene�its in
organizations need to remain aware of current regulations and evaluate their plans based on this shifting
legal landscape.

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iStock/Thinkstock

In addition to core compensation, indirect
bene�its such as insurance, retirement
options, and equity-based or ownership
options can be offered in a total rewards
model.

Elements of the Compensation Package

1.4 Types of Rewards
In the past, it was adequate to pay employees money for work done and that was the end of the
relationship. As the workforce and business environment became more complex and global in nature, the
methods for rewarding employees became more sophisticated. As such, the total rewards model is
currently the most commonly used method for rewarding employees. The total rewards model includes
everything and anything valued by both employers and employees that also impacts the business. Under
this model, compensation (both direct and indirect), work-life balance, performance and recognition, and
individual and career development are included as ways to reward employees. Direct compensation
refers to hourly wages or salaries, sales commissions, and bonuses. Indirect compensation refers to
bene�its such as insurance programs, retirement options, and equity-based or ownership options.

The total rewards model developed by WorldatWork
considers the framework within which the
compensation system operates as essential, in part due
to the ongoing and growing impact of a global economy.
In a global survey of HR professionals conducted by the
Society for Human Resource Management (SHRM),
Mauer (2014) found that “the top challenge of the next
three years for HR leadership across the globe centers
on talent—�inding it, motivating it, and keeping it.” The
top �ive global priorities are

aligning total rewards with business strategy by
attracting, motivating, and retaining employees,
reducing the costs of providing health care and
other noncash bene�its to employees,
motivating staff when pay increases are �lat or
nonexistent,
demonstrating appropriate return on
investment for reward expenditures, and
creating a rewards program that re�lects the
culture and goals of the organization.

The �indings from the above survey highlight the critical need for a company to create and implement an
effective compensation and bene�its program. As indicated by the total rewards model, there are a lot of
components that make up a compensation and bene�its program. Let’s go into detail about each of the
components.

Core Compensation

The �irst component is core compensation, which consists of the base wages and salaries, cost-of-living
adjustments (COLAs), seniority pay, merit pay, incentive pay, and pay for knowledge and skills provided by
employers to employees in exchange for work. A company can choose to provide any combination of these
components as well as vary what makes up core compensation based on positions within the company.

When evaluating its core compensation
policies, companies calculate labor
costs, which are the costs associated

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What Constitutes the Package
From Title: Reward and Remuneration

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with the pay provided employees. They
also look at labor rates, which take into
account how productive the employees
are while working. It is crucial for
companies to look at both of these
because an analysis of labor costs
compared to labor rates can show if
paying more would be bene�icial to a
company by correspondingly
increasing productivity. Sometimes,
paying more leads to less productivity
per dollar spent, an undesirable
situation.

As an example of this, consider two
different manufacturers. One
manufacturer pays an average hourly
wage of $18.07, while the second pays
an average of $21.52 an hour. At �irst
glance, the �irst manufacturer is doing

better because its labor costs are lower ($18.07 an hour versus $21.52 an hour, on average). However, we
don’t actually have enough information to make this determination. When productivity is taken into
account, the second manufacturer may actually be in a better situation. Determining which manufacturer
is doing better would depend on production numbers, waste produced, quality of the �inal product, and
many other factors, of which only one is pay. Paying more doesn’t necessarily mean getting more value,
and paying less doesn’t automatically result in cost savings. This is why it is so critical to evaluate the total
compensation picture when devising plans for recruiting and retaining talent.

Base Pay
Hourly wages and salary are commonly known as base pay, the foundation of total compensation. The key
difference between salary versus hourly wages is that salary is paid regardless of hours worked, while
hourly wages are paid based on the number of hours worked. A salary employee receives his or her annual
salary divided by the number of pay periods in a year, such as 24 if paid semimonthly or 12 if paid
monthly, regardless of how many hours the employee worked. An hourly employee, on the other hand, will
receive pay based on the number of hours worked in a pay period times the hourly rate.

Employees are concerned about the amounts they receive since it represents an easily quanti�iable
measure of the worth of their work to the �irm, has an impact on their own feelings of self-worth, and
directly impacts what type of lifestyle they can live and the things they can buy. Base pay must be
perceived as being both internally equitable and externally competitive in order to be effective in
attracting, retaining, and motivating employees.

Pay is determined by the strategy the company chooses to pursue, the nature of the industry, the
marketplace, equity or fairness considerations, and the location of the organization. For example, because
there is no state income tax in Florida to reduce workers’ pay by the tax amount, companies may choose to
pay employees less, thus reducing the cost of labor to the company while maintaining comparable take-
home pay for workers (Oi, 1983). In the 1990s, the federal government formally recognized these regional
cost differences and began to offer locality adjustments to base pay as part of the Federal Employees Pay

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Comparability Act of 1990 (FEPCA (http://www.opm.gov/policy-data-oversight/pay-leave/pay-systems/general-
schedule/pay-agent-reports/2001report ) ; Report on locality-based comparability payments, 2001).

Companies also need to take into account any government regulations related to pay when creating and
administering their compensation plans. For example, the Fair Labor Standards Act (FLSA) sets the
minimum wage that workers must receive as well as the amount of overtime pay required when
employees work more than the standard 40 hours a week. As another example, the Equal Pay Act requires
evaluation of skill, effort, responsibility, and working conditions. The worth or value of a job relative to
another job in a given company can be determined by factors common to the two jobs in question.
Compensation specialists refer to these as compensable factors. While some companies develop their
own lists, most use approaches provided by �irms specializing in the area or who have extensive
experience in the �ield. For example, Walmart uses knowledge, problem-solving skills, and accountability
as its compensable factors.

The FLSA along with the Equal Pay Act and other legal issues related to compensation and bene�its will be
covered in more detail in Chapter 2.

Cost-of-Living Adjustments
Cost-of-living adjustments, or COLAs, are periodic increases in base pay to offset in�lation and the
corresponding negative effect on employees’ purchasing power. Usually, COLAs are tied to an economic
indicator such as the Consumer Price Index (CPI), which, in recent years, has averaged between 2% and
3%. While any organization may use a COLA, union-based organizations, typically negotiated within a
collective bargaining agreement, routinely include such annual adjustments.

Seniority Pay
Seniority pay rewards tenure within a given organization and is used to make decisions on salary
increases, promotions, and the like. Incremental wage increases are provided primarily on the basis of
length of employment, although sometimes consideration may be given to performance. The aim of
seniority pay is to enhance employee retention and increase employee engagement. Some companies may
use seniority as a component of the decision-making process, while others, such as union shops, are
required to use seniority for pay increases, promotions, and preferential treatment during layoffs and
downsizings.

On the plus side of the equation, organizations that exclusively use seniority pay may predict their labor
costs with a solid degree of accuracy, and employees cannot claim favoritism in pay-raise decisions. Such
pay systems offer stability and reward loyalty and longevity.

On the negative side, seniority pay, without any additional types of remuneration such as bonuses or other
incentives, generally do not motivate newer employees to work more productively and may cause them to
leave the company since they have little or no chance of being rewarded. Additionally, long-term
employees may become less motivated and productive since they will be rewarded just for sticking around
rather than for their performance.

Merit Pay
Merit pay primarily considers performance as the basis for wage increases. For merit pay to work
properly, there need to be mutually agreed-upon goals, a clearly communicated and understood set of
expectations, and demonstrated results. Merit pay is applied using the notion that pay increases should be

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Critical Thinking

In your opinion, what type of core
compensation system will work best for
you: seniority, merit, or incentive? Why?

tied to improvements in productivity by the employee, usually connected with performance measurement
systems.

Merit pay requires detailed administrative work to monitor the program. Merit pay also permanently
increases base pay for subsequent years, causing companies to spend more and more on paying
employees. Merit pay, however, is effective in motivating employees to do their jobs well, and it helps
retain valuable employees who have demonstrated that they can achieve positive results for the company
(Scott, Somersan, & Repsold, 2015). This is illustrated by more than 90% of Malcolm Baldrige National
Quality Award–winning companies using some form of merit or performance-based compensation system
(Greene, 2010).

Incentive Pay
Incentive pay is based chie�ly on meeting organizational and individual performance targets. Incentive pay
is similar to merit pay in that it is based on meeting performance goals. It is different from merit pay
because it is typically a one-time payment that has no impact on base pay, whereas merit pay is added to
base pay and is paid from that point on.

For incentive pay to work, rewards should be tied to goals that are dif�icult yet obtainable and that are
easy to communicate, understand, and measure. Some �irms also include team performance in their
incentive plans. Incentive plans may include partial payments if, say, 80% of the goals are met, while
others pay only if the full goal is reached. Virtually all plans include a maximum payout amount, even if
goals are exceeded. Incentive pay can include both short-term (e.g., pro�it sharing) and long-term (e.g.,
stock options) elements or may simply be in the form of a bonus check.

Companies have developed a large array of plans based
on providing incentives for completing work. For
example, a piecework plan involves paying a �ixed
amount for each unit produced. A Taylor differential
piecework plan, based on Frederick Taylor’s principles,
applies two different pay rates: one for equaling or
exceeding a predetermined standard and a lower one
for not achieving the established standard. Other plans
might include a point incentive system that involves
establishing a standard, which is then translated into a
set of point values. Pay is based on an employee’s ability to exceed the standard. The chief value in such a
system is that it is possible to compare dissimilar jobs by using the points established.

Pay-for-Knowledge
Pay-for-knowledge is a pay system that rewards employees who set learning goals and acquire new
knowledge. Employees are rewarded after they learn and are able to demonstrate new knowledge, skills,
and competencies related to their current or other jobs in the organization. Often, companies will pay for
such a program and then require a commitment from the employee to stay with the organization for a set
period of time after the employee completes the training program. Otherwise, the employee must
reimburse the company for the cost of the program.

Pay-for-knowledge plans have the potential to lower absenteeism and turnover, increase workforce
�lexibility, create opportunities for leaner staf�ing, and promote employee growth and development
(Gupta, Schweizer, & Jenkins, 1987). Such plans can be used to reward any level of employee as long as

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Critical Thinking

Why is market-driven competition for
employee talent important to
understand?

consideration is given to the �irm’s managerial philosophy, commitment to the pay-for-knowledge plan,
and attitudes toward employees.

Whereas pay-for-knowledge is based on the fundamentals of a competency-based job analysis, pay-for-
skills is used primarily for jobs requiring speci�ic kinds of physical work. Research shows that this method
can be quite effective. In one study (Murray, B., & Gerhart, 1998), using a skill-based pay system resulted
in improving productivity by 58%, lowering how much it cost to produce each part by 16%, and reducing
scrap (waste) by 82%.

Employee Bene�its

The next component that makes up a compensation and bene�its program is employee bene�its. Employee
bene�its deal with the indirect �inancial and non�inancial payments that employees receive for performing
their jobs and that are added to compensation programs as an additional method for attracting, retaining,
and motivating the best talent possible. It includes both legally required bene�its (e.g., Social Security,
unemployment insurance, workers’ compensation) and market-driven, discretionary bene�its (e.g.,
various types of employee retirement planning, on-site services such as child-care assistance, pay for time
not worked). Traditionally, health care was voluntary but is now mandated by the federal Affordable Care
Act that was signed into law in March 2010 (more on this in Chapter 2).

Other examples of discretionary bene�its, among many
possibilities, are employee assistance programs, elder
care, �lexible work schedules, and executive perks such
as supplemental life insurance or a car allowance. Key
factors that employers need to consider when designing
bene�its programs include whether retirees or
“probationary” employees should be included, cost-
containment procedures, how to �inance the plans,
employer tax incentives as well as effective methods of
communicating what the plans involve, eligibility

requirements, and why such bene�its are valuable to employees. Usually, discretionary bene�its are
in�luenced by market-driven competitive pressures for talent.

Work-Life Programs

Another component is work-life programs, or the desire to create
balance between an employee’s work life and personal life. The
cultural expectations about what that balance should be change
over time. For example, company loyalty, in which an employee
would feel inclined to stay with a single organization throughout
the span of his or her career, was the hallmark of the Silent
Generation and the Baby Boom generation (i.e., those born
between 1925 and 1964). Younger generations such Gen Xers and
the Millennials, however, don’t hold that same allegiance to a
single organization, and many younger people want more of a
balance between their work life and their personal life, illustrating
why assessment of work-life programs has become such an
integral part of the total rewards compensation system in today’s

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Fuse/Thinkstock

The desire to balance work and
life guides many decisions.

work environment. See, for example, the video “Teetering on the
Edge of Work-Life Balance,” https://www.youtube.com/watch?
v=YN1vtXeNCos&index=20&list=PL5F629B44FC6F04BB
(https://www.youtube.com/watch?
v=YN1vtXeNCos&index=20&list=PL5F629B44FC6F04BB) .

Essentials of an effective work-life program consider �lexible
working arrangements, paid and unpaid time off, community
involvement and �inancial support, voluntary bene�its such as
long-term care, and organizational cultural initiatives such as
team-building and women’s advancement programs.

Performance and Recognition

Another aspect of a compensation and bene�its program is
performance and recognition initiatives. Performance represents a
set of mutually shared expectations and goals that align with those
of the organization and are clearly communicated and understood
by the employee and the organization. Recognition includes both
formal and informal acknowledgment of results achieved by
employees.

To be able to reward based on performance, there needs to be a
mechanism in place to accurately and fairly measure performance. Chapter 4 covers this topic in detail,
but in general, measurement of performance includes comparison of goals and expectations to the
behaviors of the employees as well as the employees’ knowledge, skills, abilities, and other characteristics
(KSAOs) that are used to produce results in the workplace. Ongoing feedback and improvement complete
the circle of performance measurement.

An effective performance appraisal system needs to be prepared with consideration for employee
perceptions and be tied to corporate, business unit, and departmental strategy. Such a system contributes
to a sense of accomplishment and equitable treatment on the part of employees, important aspects that
demonstrate consistency in a total rewards system. An effective performance measurement system should
be derived from measurable goals, and the results should be agreed upon in advance of the actual
appraisal. The process includes establishing expectations and providing ongoing, continuous feedback as a
routine part of the job.

In conjunction with performance is the recognition of that performance. Recognition for good work may
be formal, such as completing the appraisal process or providing an award for salesperson of the year, or
informal, such as giving a written note or verbal praise. The keys are effective recognition is that
employees receive the recognition in a timely fashion, it is tied to discernable performance, and it
represents something valued by the employee.

For example, customer service representatives for a national credit card–processing company may receive
bonuses for the most effective service provided during a given week or month. Another example would be
implementing an “Employee of the Month” designation that allows the employee to park in a specially
designated spot next to the front entrance. In group situations where an entire team exceeded
expectations for a month, casual Friday could be extended for an entire week. The type and amount of the

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recognition will vary based on the company’s culture and the impact and importance of the performance
being recognized.

Development and Career Opportunities

The �inal component in a compensation and bene�its program is offering development and career
opportunities to employees. Development represents a set of learning experiences designed to produce
more effective, ef�icient, and thus productive employees. Tuition reimbursements and discounts for
additional education and licensing in particular �ields are examples of developmental practices. Coaching
and mentoring activities also may be used to both develop employees and provide them with guidance
needed for employee advancement.

Career opportunities are plans and activities used to advance employees for future positions of more
responsibility and bigger challenges within the organization. Together with the other elements in the
WorldatWork model, development and career opportunities contribute to the primary goal of attracting,
motivating, and retaining the best available talent.

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Critical Thinking

Will compensation and a bene�its
package be your primary consideration
for taking a job now? How about 10
years from now? How about 20 years
from now?

1.5 Designing a Compensation Plan
A company will use a combination of the factors mentioned in the previous sections to design a
compensation and bene�its program that will work within the context of the company’s business strategy,
culture, industry, and market conditions. The ultimate goal in a compensation and bene�its program is to
support and enhance the company’s strategy by attracting, motivating, and retaining the best employees
for that company. Typically, a company will create a standard system for the “rank-and-�ile” employees,
with relatively stringent parameters, but will provide more customized plans, with enhanced and more
numerous features, for the executive-level employees.

To bring it all together and better understand how a compensation and bene�its program might be
designed, let’s look at our example of Anne Prevost, the talented marketing executive from the United
States who is being recruited by a German software company as well as a competing �irm. In our example,
salary is an issue—both for Anne, who would be moving to a higher-cost-of-living country and thus would
need more money to account for these higher costs, and for Jürgen Mahr, who would have a direct report
(Anne) making almost as much as or even more than he does. Plus, the company would have dif�iculties
increasing Anne’s salary in the future since it couldn’t raise her salary without raising Jürgen’s.
Management at the company, however, really wants Anne to be a part of the team because it feels strongly
that she will be able to meaningfully contribute to the company’s success and add value to the company.
Therefore, management needs to design a total compensation and bene�its package that will meet both
Anne’s needs and the company’s needs.

The company needs to look beyond just offering a
salary if it hopes to successfully recruit and retain Anne
while keeping with the company’s strategy and culture
and not upsetting currently valued employees, most
notably Jürgen. In addition to a competitive salary, the
company could offer to pay for her sons’ educational
expenses at the German-American school as well as
college tuition in the United States. Relocation expenses
could be paid along with twice-yearly trips back to the
United States. Stock options could be awarded,
matching the offer from the competing �irm that is also
trying to recruit Anne. Offering a combination of such

elements would not add to her overall base salary, thus giving the company a “buffer zone” so she would
not be at the top of her salary range, allowing room for later salary increases while maintaining
consistency in the company’s salary ranges.

There are other ways that the company could create a total rewards plan for Anne to satisfy all parties’
needs. The key in designing a compensation and bene�its plan is to take into account all the elements
we’ve discussed and have a cohesive approach to offering compensation and bene�its.

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Summary & Resources

Summary
We began this chapter by developing an understanding of the history, goals and uses of, and types of
reward systems. We discussed how people have moved from an agrarian through an industrial to an
information age and the related changes to compensation and bene�its that are found in the workplace.
We presented the WorldatWork model to provide a global perspective of a total rewards system and then
discussed why an understanding of rewards systems is important from the perspective of compensation
and bene�its.

In examining organizational strategies and strategic planning, we reviewed the basic elements of strategy
in any organization and brie�ly reviewed motivation. Next, we turned our attention to retention and
growth through reputation in a marketplace dominated by organizations competing head-to-head for
talented employees.

Finally, we brie�ly discussed the elements of pay related to increments of time and performance. While
each of the topics we touched upon will be examined in more depth throughout the text, an overview of
the key elements is a good jumping-off point to help the reader understand the challenges and future of
compensation and bene�its.

Key Terms

bartering
The direct exchange of goods or services for other goods or services.

compensable factors
Aspects, or attributes, of jobs that are used to determine the value of those jobs to the organization.

compensation system
A systematic approach to providing rewards to employees in exchange for work provided, with the goal
of helping organizations attract, motivate, and retain the best talent.

core compensation
The base wages and salaries, cost-of-living adjustments (COLAs), seniority pay, merit pay, incentive pay,
and pay for knowledge and skills paid by companies to employees in exchange for work.

differentiation business strategy
Business strategy in which the �irm sets itself apart in the marketplace by offering unique and unusual
products or services.

direct compensation
Refers to hourly wages or salaries, sales commissions, and bonuses.

employee bene�its
The nonwage, indirect �inancial and non�inancial payments that employees receive for performing their
jobs.

employee retention

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The ability to keep employees working for a company.

external consistency
Compensation from the employer’s viewpoint; employers want to know if they are paying a fair wage
relative to their direct and indirect competition and relative to the geographic area in which they
operate.

extrinsic motivation
Factors derived from outside a person that might incentivize behavior.

focus business strategy
A business strategy in which a company concentrates its resources in order to enter a speci�ic niche
within an industry segment.

indirect compensation
Refers to bene�its such as insurance programs, retirement options, and equity-based or ownership
options.

internal consistency
Compensation as perceived by employees; mainly concerned with perceptions of equity and fairness.

intrinsic motivation
That which drives people from within.

low-cost business strategy
Business strategy in which the company competes on the basis of the lowest possible cost.

motivation
That which energizes, directs, and sustains behavior.

organizational culture
The shared norms and values of an organization that dictate not only how goals are accomplished but
also the ways in which those goals are achieved.

SWOT analysis
Looks at a company’s internal strengths and weaknesses as well as the opportunities and threats (SWOT)
a company must address in its competitive marketplace; used to prepare (or revise) a strategic plan that
is used to help guide the company in achieving its goals.

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Learning Objectives

After reading this chapter, you should be able to:

1. Discuss the origins of federal laws related to compensation.

2. List and explain critical early compensation laws.

3. Discuss the progression of minimum wage standards and the laws that are critical in its
implementation today.

4. Cite and explain antidiscrimination laws that impact the workplace today.

5. Cite and explain compensation law that impacts families and those with disabilities.

6. Discuss the difference between mandatory and discretionary bene�its.

7. Cite and explain laws that guide nonwage bene�it rewards today.

2 Compensation and the Law

Stockbyte/Exactostock-1491/Superstock

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Introduction
Who pays when a worker gets hurt on the job?

What is the minimum that a worker has to be paid?

When can a company pay one person differently than another person?

Where can a worker turn during times of job loss?

Why do we have Social Security?

Questions such as these are answered in part by laws and regulations that have been created over time in
response to factors such as key historical events and changes in society’s norms and priorities. Companies
also answer these questions using their own business strategies, goals, and culture as guides, all while
staying within the framework dictated by the legal system.

Some laws and regulations directly impact compensation and bene�its, whereas others are more broad in
nature and impact general human resource practices. Given that the legal system has its own professionals
—lawyers and judges—and is very complex in and of itself, this chapter will not attempt to cover all
employment law. Instead, we will focus on the key laws that impact the creation, implementation, and
maintenance of compensation and bene�it programs. However, an overview of the broader business
regulatory environment is needed to better understand the in�luence this environment has on
compensation and bene�its, so a brief overview will be covered for these areas as well.

While this chapter is written with a focus on laws and regulations in the United States, every country has
its own legal history and philosophy with regard to compensation and bene�its. To be an effective
compensation and bene�its professional, you will need to have a solid understanding of the speci�ic laws
and regulations of the country in which your company operates.

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The Art Archive/Superstock

The Great Depression caused a large
number of people to lose their jobs.

2.1 Origins of Laws Impacting Reward Systems
For the �irst 150 years after the founding of the United States, the workplace went largely unregulated.
While there were incidents of workers banding together to try to improve their situation, such as �ighting
for higher wages or better working conditions, these incidents were typically isolated and temporary. For
example, a printer’s union was formed in New York City in 1778 that achieved its goal of higher wages, but
the �irst large national union, the National Labor Union, was not formed until 1866, almost 90 years later
and just after the Civil War. The National Labor Union was successful in persuading Congress to require an
eight-hour workday that applied to all federal employees; however, the union lasted less than 10 years and
was dissolved in 1874. The regulations and laws that emanated from the efforts of labor unions were
patchwork, addressing a particular grievance at a particular time. This began to change during the 1930s
in response to the economic conditions of the time.

Throughout the 1920s, there was a sense of euphoria in the aftermath of World War I, the end of an
in�luenza epidemic, and sustained economic prosperity. During this time period, known as “The Roaring
Twenties,” there was excessive spending on new inventions and leisure activities. The nation’s total wealth
more than doubled between 1920 and 1929, and the stock market more than quadrupled in value due to
speculation. This all came to abrupt end in October 1929 when the stock market crashed. The Great
Depression, the worst economic crisis in United States history, had begun.

Following the stock market crash, investors lost tremendous amounts of money, with many losing all that
they had. People began to panic, especially when rumors started that the banks were failing. This caused
“runs on the banks” where people would attempt to withdraw the cash they had placed in the banks for
safekeeping. The banks, however, did not have the money available to pay all demands—the money had
been loaned out and was not sitting in the banks’ vaults—so banks collapsed
(https://www.youtube.com/watch?v=_Er69b4HMl8) .

This created a downward spiral of failing companies that had to lay off workers who then were unable to
afford their homes, food, and other purchases. This resulted in a huge drop in demand for companies’
goods, so many employers went out of business and the vicious cycle continued.

The Great Depression lasted throughout the 1930s and
was characterized by failing companies, high
unemployment, plunging tax revenues, reduced
consumer spending, and severe homelessness. At its
height in 1933, close to a quarter of the American
workforce was unemployed and an additional 25% of
the remaining workforce had their wages and hours
drastically reduced. The unemployment rate was over
15% for most of the decade.

The severity of the economic downturn induced the
government to pass federal laws in an attempt to boost
the potential for economic recovery and get people back
to work. It took World War II to move the United States
fully out of the Great Depression, and the war itself led
to changes in the workplace through factors such as
wage and price controls. The laws passed during the
1930s and 1940s represented a categorical shift in the way government dealt with business in the United
States.

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Let’s begin by taking a look at some of the laws passed during this time period that would directly impact
compensation systems as well as broader economic and business practices. We’ll then explore relevant
laws, with a focus on those that in�luence compensation systems, that have occurred since then on up to
the modern day. Of course, due to the constantly evolving legal landscape, an overview of laws is not a
substitute for consulting with a legal professional who is up to date with the most current legislation.

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2.2 Early Compensation Law
Throughout the Industrial Revolution and during the midst of the Great Depression, large numbers of
people were seeking work at any wage they could get. As such, workers had little or no in�luence on their
wages. Paired with rapid changes in technology and a societal shift from a primarily agrarian economy to
one based on manufacturing, regulations and laws did not keep pace with changes in the workplace. As
mentioned previously, that began to change during the Great Depression. Following are key laws that were
passed in the 1930s that built the foundation for addressing issues such as minimum standards on how
much workers should be paid and how to help needy groups such as the elderly and poor.

Davis-Bacon Act of 1931

Under the Davis-Bacon Act (http://www.dol.gov/whd/contracts/dbra.htm) , employers, for the �irst time,
were required to provide laborers and mechanics on covered federally �inanced or assisted construction
contracts in excess of $2,000 (approximately $36,600 in today’s dollars) the right to receive at least the
locally prevailing wage rate (the de�inition of the locally prevailing wage rate was left vague in the law, but
it essentially meant the typical wage being paid in a particular area). This act offered a benchmark for
future federal and state wages and bene�its related to government contracts and even the private sector.

Norris-LaGuardia Act of 1932

The Norris-LaGuardia Act (http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?
article=3121&context=fss_papers) outlawed the practice of employers mandating that workers pledge not to
join a labor union (also called yellow-dog contracts). The act curtailed the use of court injunctions that
employers had been using to stop union strikes, picketing, and boycotts. Although it had few enforcement
powers, the act was one of the �irst federal labor laws supporting organized labor, and it marked a
signi�icant change in labor reform. Its passage fostered a trend toward more favorable government labor
policies, including compensation practices, in the years to come.

The National Labor Relations (Wagner) Act of 1935

With passage of the Norris-LaGuardia Act, the groundwork was laid for an even more important labor bill
—the National Labor Relations Act of 1935 (http://www.nlrb.gov/resources/national-labor-relations-act)
(also called the Wagner Act). The Wagner Act continued the mission of reforming and regulating labor
relations. Unions acquired fundamental rights and powers, including the right of collective bargaining,
which is good-faith negotiations between an employer and a group of employees aimed at reaching
agreements related to employment issues, and the recognition of unfair labor practices, which are
tactics used by employers to prevent employees from joining unions and to disrupt union activities in the
workplace. (For more detailed information on collective bargaining visit:
http://www.dol.gov/dol/topic/labor-relations/collbargaining.htm
(http://www.dol.gov/dol/topic/labor-relations/collbargaining.htm) ). This act also established penalties for
violating these rights and powers. The Taft-Hartley Act of 1947 amended the National Labor Relations Act
by extending the prohibition of unfair labor practices to labor unions, not just employers as under the
1935 law.

The gain of power by labor unions has had a big impact on compensation issues, such as wages paid and
bene�its offered. The impact of labor unions has lessened in many industries in current times, although

http://www.dol.gov/whd/contracts/dbra.htm

http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=3121&context=fss_papers

http://www.nlrb.gov/resources/national-labor-relations-act

http://www.dol.gov/dol/topic/labor-relations/collbargaining.htm

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some industries, such as automobile manufacturing and law enforcement, continue to have a signi�icant
labor union in�luence.

The Social Security Act of 1935

On August 14, 1935, President Franklin D. Roosevelt became the �irst president to advocate federal
assistance for the elderly. As part of his Second New Deal, the Social Security Act of 1935
(http://www.ssa.gov/history/35act.html) was signed into law to establish old-age bene�its at the federal level.
The bene�its were to be paid in proportion to the previous earning of individuals, and a reserve fund to
pay for the bene�its would be created by a tax paid equally by employees and employers. Originally, only
employees in industrial and commercial occupations were eligible for bene�its, but numerous important
amendments since then have expanded those covered under the act.

Additionally, the act provided money and bene�its to the unemployed, funded by a tax on employers. It
also enabled states to make provisions for those needing the most help. See Franklin D. Roosevelt’s
statement on signing the Social Security Act here: http://www.presidency .ucsb.edu/mediaplay.php?
id=14916&admin=32 (http://www.presidency.ucsb.edu/mediaplay.php?id=14916&admin=32) . Prior to the
passage of the act, there was no federal unemployment compensation and states did not universally or
evenly support older Americans or those who were blind, dependent and disabled children, welfare for
mothers and children, and public health.

Walsh-Healey Public Contracts Act (PCA) of 1936

The Walsh-Healey Public Contracts Act (PCA) (http://www.dol.gov/whd/govcontracts/pca.htm) was the
�irst federal act to provide employees the right to be paid at least the minimum wage for all hours worked
and to be paid for overtime work at a rate not less than one and one-half times the regular rate of pay
(“time and a half”) for any hours worked beyond 40 hours per week. The act applies only to companies
that provide materials, supplies, articles, or equipment to the U.S. government or the District of Columbia
and covers employees who produce, assemble, handle, or ship goods under such contracts. Executive,
administrative, and professional employees and outside salespersons are exempt from the minimum wage
and overtime provisions of the act. While the act was limited in its focus—covering only federal contracts
—it was the beginning of providing wage protection in the form of minimum wages and overtime pay to
employees.

Fair Labor Standards Act (FLSA) of 1938

The Fair Labor Standards Act (FLSA) (http://www.dol.gov/whd/�lsa/) expanded on the Walsh-Healey Act
and established minimum wage, overtime pay, record keeping, and child-labor standards affecting full-
time and part-time workers in both the private and government sectors. The law also set the current
standard of a 40-hour workweek for private industry.

Not all jobs, however, are covered by overtime and minimum wage requirements. Executive, professional,
and administrative professionals are generally considered to be exempt from FLSA provisions. Most other
jobs are considered to be nonexempt and covered by FLSA regulations. Keep in mind that receiving a
salary does not automatically mean that you are exempt from FLSA requirements. While a salary
employee is typically exempt from overtime and minimum wage requirements, it is not always the case, as
salary is not the determining factor as to whether an employee is exempt or nonexempt under FLSA. See

http://www.ssa.gov/history/35act.html

http://www.presidency.ucsb.edu/mediaplay.php?id=14916&admin=32

http://www.dol.gov/whd/govcontracts/pca.htm

http://www.dol.gov/whd/flsa/

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Critical Thinking

Which federal law established during
the Great Depression era do you believe
has the most in�luence today? Why?

http://www.�lsa.com/coverage.html (http://www.�lsa.com/coverage.html) for additional information on
exempt versus nonexempt status of jobs.

The Wage and Hour Division (WHD) of the U.S.
Department of Labor administers and enforces the
FLSA with respect to private employment, state and
local government employment, and federal employees.
Its enforcement umbrella includes wages, family and
medical leave, break time for nursing mothers, child
labor, government contracts, immigrant workers,
agricultural employment, special employment (such as
workers with special needs), and even lie detector tests
used in employment practices (through the Employee

Polygraph Protection Act of 1988).

Today, more than 130 million American workers are covered by the provisions of the FLSA. Together, the
Social Security Act of 1935 and the FLSA of 1938 were sweeping bills that introduced a change in attitudes
toward the role of government and generated an array of programs to aid numerous groups of Americans.

http://www.flsa.com/coverage.html

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Critical Thinking

Review the regulations set forth in the
Fair Labor Standards Act. Do you think
the modern workplace would be the
same had such legislation not been
passed? If so, how? If not, why?

2.3 Basic Wage Standards
Numerous dif�iculties occurred early in the implementation and administration of the FLSA. It quickly
became apparent that there were both logistical and tactical dif�iculties with the enforcement of
legislation across various regions and industries. For example, the statutory minimum wage was likely to
produce undesirable effects upon the economies of Puerto Rico and the Virgin Islands if applied to all of
their covered industries because they didn’t have the developed economies that the rest of the United
States had. Consequently, on June 26, 1940, a special committee was set up that ultimately allowed
minimum wage levels in Puerto Rico and the Virgin Islands to be less than the rates applicable elsewhere
in the United States.

On May 14, 1947, the FLSA was amended by the Portal-to-Portal Act. This legislation was signi�icant
because it resolved some issues as to what constitutes compensable hours worked (i.e., had to be paid)
under FLSA, establishing that activities that bene�ited employers were compensable, but activities such as
commuting to work were a normal part of the work process and not normally compensable. In 1949, the
FLSA was amended to extend child labor coverage, raise the minimum wage 40 cents an hour to 75 cents
an hour for all workers, and expand minimum wage coverage to include workers in the air transport
industry. The minimum wage was increased again in 1955 to one dollar per hour.

The 1961 amendments greatly expanded the scope of the FLSA within the retail and service sectors and
also increased the minimum wage for previously covered workers to $1.15 an hour in September 1961
and an additional ten cents an hour two years later. In 1974, Congress included under the FLSA all
nonsupervisory employees of federal, state, and local governments and many domestic workers.

Between 1978 and 2006, the federal minimum wage was raised in stages from $2.90 to $5.15. The Fair
Minimum Wage Act of 2007 raised the minimum wage, over time, such that as of 2015, covered,
nonexempt workers are entitled to a federal minimum wage of not less than $7.25 per hour.

In each of the cases and stages of increases, Congress, which has legislative authority over federal
spending, has from time to time provided challenges to increasing the minimum wage. The Supreme Court
also has made its share of contributions to questioning and interpreting the FLSA.

Some states and municipalities have legislated a minimum wage higher than that speci�ied by the federal
government, while others don’t designate a minimum wage at all, in which case the federal wage rate
applies (see Table 2.1). President Obama signed an executive order that applies to public contractors—
those who hold federal contracts—requiring them to pay a minimum wage of $10.10 per hour beginning
on January 1, 2015.

Debate about the minimum wage has been ongoing
since it was introduced, with ardent supporters on both
sides. Currently, the debate revolves around the issue of
raising the minimum wage in response to the rising cost
of living. Numerous companies have chosen to act on
their own and pay their workers above the mandated
minimum wage levels. For example, Aetna announced at
the beginning of 2015 that it set $16 an hour as its
lowest level of pay, with the stated goals of the change
being to recruit top talent and reduce turnover. Gap Inc.
and Starbucks Corp.TM are also companies that have

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recently raised the minimum amount they pay their workers (Mathews & Francis, 2015).

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The Pay Gap

2.4 Antidiscrimination Laws
Throughout history, numerous groups have faced discrimination, bias, and unfair treatment in all facets of
life. This has occurred in employment practices as well. As such, numerous laws have been passed to
protect the rights of applicants and employees from discrimination, including in their compensation. The
U.S. Equal Employment Opportunity Commission (EEOC) enforces these antidiscrimination laws. Below
are some of the key laws related to preventing discrimination in compensation and bene�its practices.

Table 2.1: Consolidated state minimum wages as of 09/01/2014

Greater than federal
minimum wage*

Equal to federal minimum
wage of $7.25*

Less than federal
minimum wage*

No minimum
wage required*

AK – $7.75 MN – $8.00 HI NH AR – $6.25 AL

AZ – $7.90 MO – $7.50 IA OK GA – $5.15 LA

CA – $9.00 MT – $7.90 ID PA WY – $5.15 MS

CO – $8.00 NJ – $8.25 IN SD SC

CT – $8.70 NM – $7.50 KS TX TN

DC – $9.50 NV – $8.25 KY UT

DE – $7.75 NY – $8.00 MD VA

FL – $7.93 OH – $7.95 NC WV

IL – $8.25 OR – $9.10 ND WI

MA – $8.00 RI – $8.00 NE

ME – $7.50 VT – $8.73

MI – $8.15 WA – $9.32

23 states + DC 19 states 3 states 5 states

* Where federal and state law have different minimum wage rates, the higher standard applies.

Note: Like the federal wage and hour law, state law often exempts particular occupations, industries, or sizes of employers from the minimum
labor standard generally applied to covered employment. Particular exemptions are not identi�ied in this table. Users are encouraged to
consult the laws of particular states in determining whether the state’s minimum wage applies to a particular employment. This information
often may be found at the websites maintained by state labor departments. Links to these websites are available at
www.dol.gov/whd/contacts/state_of.htm.

Souce: United States Department of Labor. http://www.dol.gov/whd/minwage/america.htm (http://www.dol.gov/whd/minwage/america.htm)

Equal Pay Act (EPA) of 1963

During World War II, with most men of
working age �ighting overseas, women
had to �ill important jobs, particularly
in the manufacturing sectors, that had
formerly been held by men. In
December 1940, the number of active
military personnel in the United States

http://www.dol.gov/whd/minwage/america.htm

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The Pay Gap: Sexism or Something Else?

Critical Thinking

The Equal Pay Amendment was passed
in 1963, yet by some estimates, women
still make on average 77 cents to every
dollar men earn. Does such a disparity in

totaled approximately 800,000, but by
June 1945, this number had grown to
12.3 million. Over this time period, the
number of women in the workforce
increased from 10 million to 19 million.

The increasingly female workforce,
however, highlighted a discrepancy in
monetary compensation practices in
that women were being paid less
simply for the fact that they were not
men. The War Labor Board, established
in 1942 to resolve disputes between
workers and employers to ensure that
disputes didn’t disrupt the war effort,
addressed the issue by specifying that
equal pay should be provided to both
men and women performing similar
jobs. Employers, however, routinely
circumvented this requirement by
either assigning women to lower-skill-
level jobs or by reclassifying jobs so
they would not have to provide equitable pay.

It would take two decades before any federal legislation was passed to formally address this issue. In
1963, the Equal Pay Act (http://www.eeoc.gov/laws/statutes/epa.cfm) was passed and signed into law,
asserting that gender-based discrimination was prohibited and, within the same workplace, men and
women were to be given equal pay for equal work. The concept of what constituted comparable pay was
interpreted to mean that jobs need not be identical; instead, equality is established by the requirement of
substantially equal knowledge, skills, and abilities as well as the production of similar results. Hiring for
“women’s jobs” and “men’s jobs” with unequal compensation policies became unlawful.

Speci�ically, the Equal Pay Act contains the following language:

Employers may not pay unequal wages to men and women who perform jobs that require
substantially equal skill, effort, and responsibility, and that are performed under similar working
conditions within the same establishment.

The content and performance of a job, not the title of the position, determines whether jobs are
substantially equal.

Lilly Ledbetter Fair Pay Act of 2009
The Lilly Ledbetter Fair Pay Act
(http://www.gpo.gov/fdsys/pkg/PLAW-
111publ2/html/PLAW-111publ2.htm) was enacted to
clarify that a discriminatory compensation decision is
considered to have occurred each time compensation is
paid, and not just at the time an employer makes an
initial discriminatory decision. This act basically

http://www.eeoc.gov/laws/statutes/epa.cfm

http://www.gpo.gov/fdsys/pkg/PLAW-111publ2/html/PLAW-111publ2.htm

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pay mean that that EPA has failed in its
mission? Explain your rationale.

Jakob Helbig/Cultura/Getty Images

Race, sex, and religion are equally protected
against discrimination.

extends the statute of limitations for �iling a lawsuit that
asserts violation of equal-pay legislation.

Title VII of the Civil Rights Act of 1964

Broad-sweeping legislation against discrimination was created with the Civil Rights Act of 1964
(http://www.eeoc.gov/laws/statutes/titlevii.cfm) . Speci�ically related to employment, Title VII of this act
protects individuals against employment practices that discriminate based on race, color, national origin,
sex, or religion. Title VII applies to employers with 15 or more employees, employment agencies, labor
organizations, and local, state, and federal governments.

This law states that equal employment opportunity cannot be denied any person because of his or her
racial group or perceived racial group, race-linked characteristics (e.g., hair texture, color, facial features),
or because of marriage to or association with someone of a particular race or color. Title VII also prohibits
employment decisions, including compensation practices, based on stereotypes and assumptions about
abilities, traits, or the performance of individuals of certain racial groups. Sex and religion are also equally
protected against discrimination, and bias against a person’s sex or religion is prohibited from impacting
employment decisions. The prohibitions apply regardless of whether the discrimination is directed at
Caucasians, African-Americans, Asians, Latinos, Arabs, Native Americans, Native Hawaiians and Paci�ic
Islanders, multiracial individuals, or persons of any other race, color, sex, religion, or perceived national
origin.

Disparate Treatment and Adverse Impact
It is important to note that Title VII of the Civil Rights
Act of 1964 covers not only intentional discrimination
against protected groups but also accidental
discrimination if such discrimination could have been
reasonably prevented.

Disparate treatment represents intentional
employment discrimination. Evidence of disparate
treatment may be direct, such as a policy that women or
members of a racial group may not be hired for a given
set of jobs. Evidence may also involve a mixed motive,
which occurs when a protected characteristic, such as
sex, and a legitimate reason, such as a lack of skill sets,
are commingled and thus contribute to a denial of
hiring or promotion. To make an adequate
determination if disparate treatment occurred, four factors are involved:

1. The person is in a protected class,
2. The applicant for a job was quali�ied,
3. Rejection occurred in spite of quali�ications, and
4. The position remained open and recruiting continued in spite of having a quali�ied applicant

available.

Adverse impact occurs when an individual in a protected group is unintentionally discriminated against
due to the way employment practices are carried out. An example of this is a company that requires an

http://www.eeoc.gov/laws/statutes/titlevii.cfm

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Critical Thinking

Describe the differences between
disparate treatment and adverse impact
in compensation and bene�its decisions.

Critical Thinking

Do you think the Civil Rights Act of 1964
has been successful in making the
workplace free from discrimination? In
what ways do you feel it has succeeded?
In what ways do you think it has failed?

employee to not have an arrest record. Since an arrest is
different than a conviction (innocent until proven
guilty!), this practice could be discriminatory if a
particular group, such as men or minorities, are more
likely to have been arrested. While the company is
probably just intending to not hire criminals, because of
the way the company is going about this—looking at
arrests rather than convictions—unintentional
discrimination can occur. Adverse impact focuses on the

effect of the actions taken, rather than underlying motives or intentions.

Age Discrimination in Employment Act (ADEA) of 1967 (as Amended in 1978, 1986, and
1990)

The Age Discrimination in Employment Act of 1967 (http://www.eeoc.gov/laws/statutes/adea.cfm)
protects individuals who are 40 years of age or older from employment discrimination based on age. The
ADEA’s protections apply to both employees and job applicants. Under the ADEA, it is unlawful to
discriminate against a person because of his or her age with respect to any term, condition, or privilege of
employment, including hiring, �iring, promotion, layoff, compensation, bene�its, job assignments, and
training. It also prohibits mandatory retirement in most sectors.

It is also unlawful to retaliate against an individual for opposing employment practices that discriminate
based on age, for �iling an age discrimination charge, and for testifying or participating in any way in an
investigation, proceeding, or litigation under the ADEA.

It is important to note that the ADEA does not cover individuals who are younger than 40 years of age.

Older Workers Bene�it Protection Act (OWBPA) of 1990
As a result of the aging of the Baby Boom Generation, the 1990 Older Workers Bene�it Protection Act
(http://www.eeoc.gov/eeoc/history/35th/thelaw/owbpa.html) was created as an amendment to the ADEA to
provide additional support for older workers. The OWBPA prohibits employers from denying employee
bene�its to older workers based on age. The amendment was created to protect older workers who were
laid off from receiving unfavorable severance packages in relation to younger workers. It also covers other
employee bene�its, such as health insurance, by dictating that employers may not charge older workers
more for health care even though illness is more likely with older workers.

Civil Rights Act of 1991

The Civil Rights Act of 1991
(http://www.eeoc.gov/eeoc/history/35th/1990s/civilrights.
html) was passed to update and clarify the Civil Rights
Act of 1964. Legislators noted that additional federal
remedies were required to prevent unlawful
harassment and that additional protections against
unlawful discrimination were necessary. Additionally,
several Supreme Court decisions had weakened the
original law, particularly in Wards Cove Packing Co. v.

http://www.eeoc.gov/laws/statutes/adea.cfm

http://www.eeoc.gov/eeoc/history/35th/thelaw/owbpa.html

http://www.eeoc.gov/eeoc/history/35th/1990s/civilrights.html

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Atonio, 490 U.S. 642 (1989), in which the Court determined that the employee, not the employer, held the
burden of proof to show which speci�ic practice created adverse impact. The passage of the Civil Rights Act
of 1991 reversed this practice, shifting the burden of proof to employers such that they must show that
the company practice being challenged is a business necessity. The act also expanded the geographical
scope of protection against job discrimination to include American employers and American-controlled
companies operating abroad.

Compensation and Bene�its in the Real World: Walmart Stores Inc.

For legal, �inancial, and ethical reasons, it is critical that employers consider both laws and
employee perceptions when designing compensation systems. It can be quite costly in terms of
money and resources when issues occur.

Walmart can attest to this. In 2010, Walmart paid $11.7 million to settle a sex discrimination case
(http://www.eeoc.gov/eeoc/newsroom/release/3-1-10.cfm
(http://www.eeoc.gov/eeoc/newsroom/release/3-1-10.cfm) ). The settlement of this case, however, did
not end Walmart’s legal issues. For several years, Walmart has been involved in a lawsuit brought
by a group of current and former female employees, led by Betty Dukes, that alleges the
corporation engaged in company-wide gender discrimination by paying women less than men,
promoting fewer women to management positions, and promoting male employees more quickly.
In 2011, the Supreme Court of the United States ruled that the employees did not have standing to
sue Walmart as a class action (http://www.supremecourt.gov/opinions/10pdf/10-277
(http://www.supremecourt.gov/opinions/10pdf/10-277 ) ). The ruling, however, did not rule on
individual discrimination claims, so plaintiffs have narrowed the scope of the class and �iled new
suits (http://www.tennessean.com/story/news/2015/07/09/ruling-reopens –
discrimination-claims-women-walmart/29935131/
(http://www.tennessean.com/story/news/2015/07/09/ruling-reopens-discrimination-claims-women-
walmart/29935131/) ).

Walmart continues to �ight legal issues that have had a negative impact on its reputation in the
marketplace. Walmart illustrates the critical need to follow both the spirit and the letter of the law
when setting compensation and bene�its practices.

http://www.eeoc.gov/eeoc/newsroom/release/3-1-10.cfm

http://www.supremecourt.gov/opinions/10pdf/10-277

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JGI/Jamie Grill/Getty Images

The Pregnancy Discrimination Act of 1978
protects the rights of pregnant women in
regard to hiring, leaves of absence, and
fringe bene�its.

2.5 Accommodating Disabilities
To clarify and make earlier laws related to equity in the workplace more explicit, the Pregnancy
Discrimination Act of 1978, the Americans with Disabilities Act of 1990, and the Family and Medical Leave
Act of 1993 were passed. These laws provide speci�ic legal requirements and guidelines related to
individuals and families to meet the needs of a changing society.

Pregnancy Discrimination Act (PDA) of 1978

The Pregnancy Discrimination Act of 1978
(http://www.eeoc.gov/laws/statutes/pregnancy.cfm)
amended Title VII of the Civil Rights Act of 1964 to
preclude any form of discrimination toward pregnant
women. The act affects employers with 15 or more
employees and impacts hiring, leaves of absence due to
pregnancy and maternity, and fringe bene�its. With
respect to hiring, employers may not refuse to hire any
pregnant woman due to her pregnancy, pregnancy-
related condition, or the prejudices of others in the
workplace.

Special procedures may not be used to determine
ability to perform job duties unless the same
procedures are used for all employees. Inability to
perform a job by a pregnant woman must be treated in

the same manner as afforded any other temporarily disabled employee. A pregnant employee must be
permitted to work as long as she is capable of doing so, and an equivalent job must be available when she
returns to work, the same as for any employee otherwise on sick or disability leave.

Employer-provided health insurance plans must cover all pregnancy-related expenses and
reimbursements on the same basis as any other covered medical expense. Limitations, exclusions, and
amounts payable for health-related costs must be equally applied to pregnancy-related conditions (i.e., the
company cannot charge more for pregnancy-related medical expenses). Additionally, the same level of
health bene�its for spouses of either male or female employees must be provided.

If an employer provides any bene�its to workers on leave, the same bene�its must be provided to those on
leave for pregnancy-related conditions. Any bene�its such as vacation accrual, temporary disability
bene�its, seniority calculations, and pay increases provided to any employees on leave are required to be
provided to pregnant employees.

Americans with Disabilities Act (ADA) of 1990

The Americans with Disabilities Act of 1990 (http://www.ada.gov/) prohibits discrimination against
quali�ied individuals with disabilities in job application procedures, hiring, �iring, advancement,
compensation, promotions, seniority accrual, job training, and other terms, conditions, and privileges of
employment. The ADA covers employers with 15 or more employees and also includes employment
agencies, labor organizations, and local and state governments. The ADA’s nondiscrimination standards
also apply to federal employees under Section 501 of the Rehabilitation Act.

http://www.eeoc.gov/laws/statutes/pregnancy.cfm

http://www.ada.gov/

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Critical Thinking

Do you think employers generally do
enough to accommodate disabilities?

Under this act, an individual with a disability is a person who

has a physical or mental impairment that substantially limits one or more major life activities,
has a record of such impairment, or
is regarded as having such impairment.

It is important to note that if a person is perceived to have a disability but does not actually have one, he or
she is still covered under the act.

Family and Medical Leave Act (FMLA) of 1993

The Family and Medical Leave Act (http://www.dol.gov/whd/fmla/) became effective in August 1993 and
entitles eligible employees to take up to 12 weeks of unpaid, job-protected leave in a 12-month period for
speci�ied family and medical reasons, such as long-term illnesses of the employee or the employee’s
immediate family members. FMLA applies to all public agencies, including state, local, and federal
employers; local education agencies (schools); and private-sector employers who employ 50 or more
employees in 20 or more workweeks in the current or preceding calendar year, including joint employers
and successors of covered employers.

When the law was initially signed, many employers did not have well-thought-out policies and practices to
deal with its implications, so some employees �igured out how to manipulate the system. For example, the
12-month period was assumed to be a calendar or �iscal year. Therefore, employees would apply for the
12-week leave period at the end of the calendar (or �iscal) year and then reapply for another 12-week
leave period at the start of the next calendar (or �iscal) year. Such actions allowed the employee to
combine the two periods into a six-month leave of absence. In some cases, of course, this time off was
necessary; however, others would take advantage of the company’s lack of effective policy management
and receive an extended period of time off.

Companies also found it cost-prohibitive to remove an employee from their group plans (e.g., health
insurance) and then reinstate the employee upon his or her return to work. Consequently, companies kept
the employee actively enrolled in their plans, paying the expenses for noncontributory employees since
there was no other procedure in place.

Once �irms integrated their HR practices with the new law, most developed policies that required
employees intending to use FMLA to �irst use any accrued sick or vacation leave before going on FMLA
leave. Most, if not all, companies also now have policies in place stating that the leave of absence provided
through the FMLA is based on a “rolling year.” That is, once an employee utilizes his or her leave option,
the 12-month clock begins again upon the employee’s return to work.

Amendments to the FMLA by the National Defense
Authorization Act for FY 2008 (NDAA), Public Law 110-
181, expanded the FMLA to allow eligible employees to
take up to 12 weeks of job-protected leave in the
applicable 12-month period for any “qualifying
exigency” arising out of the fact that a covered military
member is on active duty or has been noti�ied of an
impending call or order to active duty in support of a
contingency operation. The NDAA also amended the

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FMLA to allow eligible employees to take up to 26 weeks of job-protected leave in a “single 12-month
period” to care for a covered service member with a serious injury or illness.

It is important to note that leave under FMLA is not required to be paid for by the company. Many
employers do continue to pay an employee for at least a portion of the leave, but that is the company’s
choice, not mandated by the law. The law just speci�ies that the employee will still have a job when he or
she returns after the leave.

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Everett Collection/Superstock

President Franklin Roosevelt signs the
Social Security Bill in 1935.

2.6 Nonwage Bene�its
The change in the workforce during World War II (that is, the increase in working women due to the men
�ighting), along with wage and price controls, spurred a growth in nonmonetary bene�its. Companies had
to �ind other ways to attract, motivate, and retain employees since they couldn’t just give raises or pay
more due to the wage and price controls in place at the time. Also, the need to maintain a steady
production �low in order to meet the demands of war caused companies to offer perks to workers to
reduce absenteeism and turnover. For example, the federal government provided on-the-job training and
on-site cafeterias, while some private companies, such as Kaiser Steel and Boeing, offered child-care
facilities adjacent to their factories. These were key incentives to entice and enable women to successfully
enter the workforce at a time when they were greatly needed.

These nonwage bene�its have since become an important part of an employee’s compensation package
and account for an increasing percentage of total payroll costs. In the early 1900s, nonwage bene�its
accounted for only about 3% of payroll costs—hence, the name “fringe” bene�its, since they were on the
edge of basic and common compensation practices—while today, nonwage bene�its can account for over
50% of a company’s payroll costs, with payroll costs composing the largest operating expense for most
companies.

Some bene�its—Social Security, unemployment, and
worker’s compensation—are required by law. Health
insurance is now required by law per the Patient
Protection and Affordable Care Act (PPACA) of 2010,
but on the level of the individual. Other bene�its are
discretionary or not mandated by law. Examples of
discretionary bene�its include dental insurance, 401(k)
retirement plans, and paid time off for vacation or sick
days. (Note: Time is given for qualifying illness under
FMLA, as discussed above, but the time off is not
required to be paid. The term paid sick days covers the
voluntary bene�it of paying an employee when he or she
is not working due to a short-term illness such as the
�lu.) An important aspect of discretionary bene�its that
must be kept in mind is that if a company offers that
bene�it, then it falls under any laws that regulate that
type of bene�it. For example, if a company offers a 401(k) retirement plan, then the company must adhere
to the provisions of the Employee Retirement Income Security Act (ERISA) even though the offering of a
401(k) retirement plan itself is not required.

We’ll begin by discussing the laws related to required bene�its, followed by a discussion of legislation
impacting commonly given discretionary bene�its.

Federal Insurance Contributions Act (FICA)

The Federal Insurance Contributions Act (http://www.gpo.gov/fdsys/granule/USCODE-2011-
title26/USCODE-2011-title26-subtitleC-chap21/content-detail.html) funds the federal system of old-age,
survivors, disability, and hospital insurance (OASDI) as established under the Social Security Act of 1935.
Social Security bene�its comprise payments made to workers after they have retired from work as well
as payments made in cases of disability where a worker can no longer work and payments made to a

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Critical Thinking

The cost and implementation of Social
Security is often a source of political
debate. After reading this section, what’s
your assessment of how Social Security
is implemented in the workplace?

spouse and dependent children in the case of a worker’s death. This is the “old-age, survivors, disability”
portion of the act. The hospital insurance portion is �inanced by the Medicare tax.

The system works by requiring payment of a percentage of the employee’s wages, with equal amounts
paid by both the employee and the employer. Employee wages are subject to Social Security and Medicare
taxes irrespective of the employee’s age or whether he or she is receiving Social Security bene�its under
the system. The current tax rate for Social Security is 6.2% for the employee and 6.2% for the employer, or
12.4% total. The current tax rate for Medicare is 1.45% for the employee and 1.45% for the employer, or
2.9% total.

For Social Security, the amount of wages that is taxable
is capped at a certain amount ($118,500 as of 2015),
but this amount is subject to change. After the limit is
reached, the employee and the employer both no longer
pay the Social Security tax for that calendar year. In
1993, the Consolidated Omnibus Budget Reconciliation
Act (COBRA) (covered below) removed the taxable
wage limit for Medicare tax so that all covered wages
are subject to a Medicare tax.

The amount of Social Security bene�its a worker
receives at retirement varies based on the worker’s

earnings, length of time working, and the age at which the worker begins to collect bene�its. Table 2.2
shows the change in an employee’s full retirement bene�it that will be received if an employee retires and
starts to draw Social Security either earlier or later than normal retirement age.

Table 2.2 Social Security bene�it

Year of
birth

Reduction in bene�it if
retire at age 62

Normal retirement age—full
bene�it received

Increase in bene�it if
retire at age 70

1924 20.00% 65 15.00%

1925-26 20.00% 65 17.50%

1927-28 20.00% 65 20.00%

1929-30 20.00% 65 22.50%

1931-32 20.00% 65 25.00%

1933-34 20.00% 65 27.50%

1935-36 20.00% 65 30.00%

1937 20.00% 65 32.50%

1938 20.83% 65, 2 mo. 31.42%

1939 21.67% 65, 4 mo. 32.67%

1940 22.50% 65, 6 mo. 31.50%

1941 23.33% 65, 8 mo. 32.50%

1942 24.17% 65, 10 mo. 31.25%

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Year of
birth
Reduction in bene�it if
retire at age 62
Normal retirement age—full
bene�it received
Increase in bene�it if
retire at age 70

1943-54 25.00% 66 32.00%

1955 25.83% 66, 2 mo. 30.67%

1956 26.67% 66, 4 mo. 29.33%

1957 27.50% 66, 6 mo. 28.00%

1958 28.33% 66, 8 mo. 26.67%

1959 29.17% 66, 10 mo. 25.33%

1960
and later

30.00% 67 24.00%

Note: Persons born on January 1 of any year should refer to the previous year of birth.

Source: Social Security Administration http://www.ssa.gov/OACT/ProgData/ar_drc.html (http://www.ssa.gov/OACT/ProgData/ar_drc.html)

The amount a dependent or spouse receives at an employee’s death or the amount an employee receives if
disabled varies by the level of the employee’s earnings, the length of time the employee has been paying
into the system, and other such factors. More information can be obtained from the Social Security
Administration (http://www.ssa.gov) , the agency responsible for administering Social Security.

Unemployment Compensation

Unemployment compensation provides workers who have lost their jobs through no fault of their own
with monetary payments for a given period of time or until they �ind a new job. The intent of the bene�it is
to help workers by partially contributing to necessities, such as food, clothing, and shelter, as a bridge until
the workers are able to �ind a new job. Unemployment compensation is paid and administered by the
individual states within the parameters set by the federal government. Therefore, the amount of
unemployment compensation and the amount of time out of work for which individuals may receive
compensation varies by state. In addition, there are some adjustments to the amounts the unemployed
may receive. For example, in Louisiana and Illinois, the amount of unemployment compensation received
will be adjusted downward if the worker also receives Social Security bene�its.

Unemployment compensation for U.S. workers is funded by the Federal Unemployment Tax Act (FUTA),
which is paid by the company, not the employee. The FUTA rate varies by company and is determined by
factors such as the size of the company and how many unemployment claims a company’s workers have
made. Once the speci�ied dollar limit is reached, no further taxes for FUTA are collected for that calendar
year.

Workers’ Compensation Law

Workers’ compensation law was devised to resolve disputes over workplace injuries. It was created to
handle workplace injuries outside the traditional tort law system that deals with personal injuries as a
compromise between both employer and employee rights and defenses traditionally available under tort
law. Workers’ compensation is largely a matter of state law, although a similar system exists for railroad
employees under the Federal Employer Liability Act (FELA), 45 U.S.C. §51.

http://www.ssa.gov/OACT/ProgData/ar_drc.html

http://www.ssa.gov/

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All employees are covered by workers’ compensation insurance, which compensates an employee for
lost time, medical expenses, and loss of life or dismemberment arising from a work-related injury, disease,
or death. Employees must immediately report any accident or injury to their supervisor and the human
resources department so that the necessary paperwork is completed.

Patient Protection and Affordable Care Act (PPACA) of 2010

The Patient Protection and Affordable Care Act (http://www.hhs.gov/healthcare/rights/) , often referred
to as the Affordable Care Act (ACA) or more colloquially as Obamacare, enacted major changes to health
care insurance practices in the United States. Until this act was signed into law, health insurance was
considered a discretionary bene�it driven by the employer’s need to be competitive in the marketplace in
attracting and retaining employees as well as in an effort to maintain a healthy and productive workforce.
Now, under the act, health insurance is required, but the impetus is on the individual to obtain the
insurance. Employers of a suf�icient size and scope to be covered under the law have the choice of offering
health insurance or of paying a tax penalty in lieu of offering insurance.

The act also reforms the health care system by expanding the availability of health insurance, regulating
health insurance coverage, and restructuring health care delivery, including the manner in which it is
funded. Some of the other features of the legislation include the following:

Health care exchanges. The law requires states to create and maintain health care “exchanges” in
which health insurance providers compete for customers on equal terms. The exchanges will be
open to anyone without employer-provided coverage who wants to purchase a health insurance
plan. If a state does not create an exchange, the federal government will create one for it.
Low-value plans.
No penalty for waiting periods.
Employer-provided free-choice vouchers.
Automatic enrollment procedure.
Incentives for wellness.
Tax on high-value plans. Beginning in 2018, there will be a 40% excise tax on insurance
companies and plan administrators for group health coverage that exceeds a threshold of $10,200
for single coverage and $27,500 for families, not counting stand-alone dental and vision plans. For
retirees above age 55 and for plans that cover employees in high-risk professions, the thresholds
are $11,850 for single coverage and $30,950 for families.
Work breaks for nursing mothers without �inancial penalties.

It is important to note that legal challenges, delays in enforcement, and lack of clarity have delayed the
implementation of many aspects of PPACA. This is very much a law that is in �lux, and its complete impact
on health care and employment in general remain to be seen as these issues work themselves out through
the courts and through future legislation.

Employee Retirement Income Security Act (ERISA) of 1974

The Employee Retirement Income Security Act of 1974 (http://www.dol.gov/general/topic/health-
plans/erisa) regulates retirement plans and other employee bene�it plans that are offered by private-sector
organizations. In common usage, ERISA also often refers to Internal Revenue Code regulations of bene�it
plans as well as the actual act. The plans covered under ERISA are voluntarily offered by the organization;
they are not required by ERISA. If offered, ERISA does dictate the minimum levels of bene�its that are

http://www.hhs.gov/healthcare/rights/

http://www.dol.gov/general/topic/health-plans/erisa

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required under a plan as well as the reporting and disclosure requirements. Examples of plans covered
under ERISA include pension plans, 401(k) plans, and health care savings accounts as well as the
establishment of disability bene�its, death bene�its, prepaid legal services, vacation bene�its, company-
sponsored day care centers, scholarship funds, and apprenticeship and training bene�its.

ERISA has been expanded to include new health laws—the Consolidated Omnibus Budget Reconciliation
Act of 1985 and the Health Insurance Portability and Accountability Act (HIPAA) of 1996—which are
discussed below.

Consolidated Omnibus Budget Reconciliation Act of 1985

Throughout their careers, workers will likely face multiple life events that may cause job changes or even
job losses. The Consolidated Omnibus Budget Reconciliation Act (http://www.dol.gov/dol/topic/health-
plans/cobra.htm) helps workers and their families keep their group health coverage during times such as
these. COBRA applies to plans in the private sector and those sponsored by state and local governments.

COBRA provides workers who lose their health bene�its the option to continue group health bene�its
provided by their current plan under certain circumstances. If the employer continues to offer a group
health plan, the employee and his or her family can retain their group health coverage for up to 18 months
by paying group rates. The COBRA premium may be higher (the full cost of the bene�it plus a 2%
administration charge) than what the individual was paying while employed. Historically, however, the
cost has typically been lower than for private, individual health insurance coverage. It is unclear, however,
how more recent legislation, such as the PPACA, will impact pricing and, therefore, the need for COBRA
coverage.

The American Recovery and Reinvestment Act (ARRA) of 2009 provided for premium reductions and
additional election opportunities for health bene�its under COBRA for a limited time for those workers
who lost their jobs between September 1, 2008, and May 31, 2010. The employee received a premium
reduction while the company received a tax credit for the remaining portion of the premium.

On June 26, 2013, the U.S. Supreme Court, in United States v. Windsor, found unconstitutional Section 3 of
the federal Defense of Marriage Act (DOMA), which had prohibited the federal government from
acknowledging marriages between same-sex couples. As a result, federal laws governing employee bene�it
plans require companies to treat employees’ same-sex and opposite-sex spouses equally for purposes of
bene�its that are extended to spouses, meaning �irms are required to offer COBRA continuation coverage
to same-sex spouses.

Health Insurance Portability and Accountability Act of 1996

The Health Insurance Portability and Accountability Act
(http://www.dol.gov/ebsa/newsroom/fshipaa.html) helps workers as they move to different jobs by
protecting workers’ ability to get and keep health insurance coverage. Key aspects of HIPAA are that it

protects workers and their families by limiting exclusions for preexisting medical conditions
(known as preexisting conditions);
provides credit against maximum preexisting condition exclusion periods for prior health
coverage and a process for providing certi�icates showing periods of prior coverage to a new
group health plan or health insurance issuer;

http://www.dol.gov/dol/topic/health-plans/cobra.htm

http://www.dol.gov/ebsa/newsroom/fshipaa.html

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provides new rights that allow individuals to enroll for health coverage when they lose other
health coverage, get married, or add a new dependent (versus having to wait for a company’s
annual enrollment period);
prohibits discrimination in enrollment and in premiums charged to employees and their
dependents based on health status–related factors;
guarantees availability of health insurance coverage for small employers and renewability of
health insurance coverage for both small and large employers; and
preserves the states’ role in regulating health insurance, including the states’ authority to provide
greater protections than those available under federal law.

Again, it is unclear how PPACA will impact the need for HIPAA, as it provides more extensive coverage
than that offered under HIPAA.

Case Study

A Moat for Your Castle Inc.: Growing Pains

Alex Lloyd and Rebecca Lee are lifelong friends who graduated from college and moved back home
to El Paso, Texas, 10 years ago to start a business—A Moat for Your Castle Inc.—building wood,
vinyl, and metal fences for residences. The business started small, with just the two of them
handling all aspects of the business except for the actual installation of the fences, which was done
with the assistance of day laborers. As business grew, they added support staff as well as
permanent installers to the company’s payroll. Three years ago, they expanded into the pool
business and began offering the installation of pools in addition to fences for residences. They have
been successful with this new venture and have now hired their 20th employee.

What laws covered in this chapter now apply to A Moat for Your Castle Inc. that did not
apply before it hired its 20th employee? What laws already applied? How many employees
must be hired before FMLA is applicable?
At this stage, should the company handle compliance in-house or outsource it? Why?

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Summary & Resources

Summary
In this chapter, we discussed federal laws that impact reward systems offered by organizations. Most of
the laws that in�luence compensation and bene�its systems today have their origins in the 1930s, when the
country suffered economic devastation due to the Great Depression. These are a few of the most impactful
laws generated from that period:

The National Labor Relations (Wagner) Act continued the mission of reforming and regulating
labor relations. Unions acquired fundamental rights and powers, including the right of collective
bargaining, de�initions of unfair labor practices, and established penalties for violating them.
The Social Security Act was created to establish bene�its for the elderly and the unemployed. It
also enabled states to provide for those who were blind, dependent and disabled children,
mothers and children, and public health.
The Fair Labor Standards Act established the concepts of a minimum wage, overtime pay, record
keeping, and child-labor standards.

It was not until 1963, when the Equal Pay Act was passed and signed into law, that gender-based
discrimination was prohibited and, within the same establishment, men and women were to be given
equal pay for equal work. Title VII of the Civil Rights Act of 1964 protects individuals against employment
discrimination on the basis of race, color, national origin, sex, or religion. The Age Discrimination in
Employment Act protects individuals who are 40 years of age or older from employment discrimination
based on age.

The Civil Rights Act of 1991 was enacted to strengthen and improve federal civil rights laws and to clarify
provisions regarding adverse impact actions. The Pregnancy Discrimination Act amended Title VII of the
Civil Rights Act of 1964 to preclude any form of discrimination toward pregnant women. The Americans
with Disabilities Act prohibits private employers, state and local governments, employment agencies, and
labor unions from discriminating against quali�ied individuals with disabilities.

Worker’s compensation law was devised to resolve disputes over workplace injuries outside the traditional
tort law system and represents a compromise between both employer and employee rights and defenses
traditionally available under tort law. Unemployment compensation represents insurance bene�its paid by
the state or federal government to individuals who are involuntarily out of work in order to provide them
with assistance while obtaining other employment by partially contributing to necessities, such as food,
clothing, and shelter.

More recently, the Patient Protection and Affordable Care Act reformed the health care system by
expanding the availability of health insurance, regulating health insurance coverage, and restructuring
health care delivery, including the manner in which it is funded. The future impact of the PPACA is still not
clear due to ongoing legal and legislative issues.

Key Terms

adverse impact
Occurs when an individual in a protected group is unintentionally discriminated against due to the way
employment practices are carried out.

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collective bargaining
Good-faith negotiations between an employer and a group of employees aimed at reaching agreements
related to employment issues, such as wages, hours, and working conditions.

disparate treatment
Occurs when an employer knowingly and willingly discriminates against people on the basis of religious
beliefs, race, or gender.

Great Depression
A severe worldwide economic depression in the decade preceding World War II.

mixed motive
Occurs when a protected characteristic, such as gender, and a legitimate reason, such as a lack of skill
sets, are commingled and thus contribute to a denial of hiring or promotion.

Social Security bene�its
Comprises payments made to workers after they have retired from work as well as payments made in
cases of disability where a worker can no longer work and payments made to a spouse and dependent
children in the case of a worker’s death.

unemployment compensation
Provides workers who have lost their jobs through no fault of their own with monetary payments for a
given period of time or until they �ind a new job.

unfair labor practices
Tactics used by employers to prevent employees from joining unions and to disrupt union activities in
the workplace. (The Taft-Hartley Act of 1947 amended the de�inition to also include tactics used by
labor unions, such as coercing employees to join a union and refusing to bargain with employers, to
disrupt company activities.)

workers’ compensation insurance
Compensates an employee for lost time, medical expenses, and loss of life or dismemberment arising
from a work-related injury, disease, or death.

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