Compensation Strategy: Select an organization with which you are familiar and describe the type of compensation strategy it uses. Your initial post should be at least 250 words in length. Support your claims with examples from required material and properly cite any references. Reference to chapter reading: Weathington, B. L. & Weathington, J. G. (2016). Compensation and benefits: Aligning rewards with strategy [Electronic version]. Retrieved from https://ashford.content.edu

1 An Overview of Compensation and Benefits iStock/Thinkstock 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. Define core compensation and list its components. abc82339_01_c01_001-026.indd 1 12/23/15 9:26 AM Introduction  Introduction Consider the following situations: A financial services firm 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 difficult 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 benefits 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 benefits, of that talent is a vital component of how a company operates. In this book, we will explore the need for aligning compensation and benefit strategy with business strategy. Specifically, we will address the contributions an effective compensation and benefits system makes to ensure successful achievement of the firm’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. abc82339_01_c01_001-026.indd 2 12/23/15 9:26 AM Section 1.1 A Brief History of Compensation 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 system hopes to accomplish and the types of compensation that can be utilized to design a cohesive compensation and benefits plan. 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 Toffler, 1970). The first 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, exemplified 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. Christie’s Images Ltd./Superstock Bartering arose as the first monetary system. 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 fields. People quickly figured out that this system was limiting and would not work well. As such, bartering, abc82339_01_c01_001-026.indd 3 12/23/15 9:26 AM A Brief History of Compensation Section 1.1 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. 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 benefits) 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, abc82339_01_c01_001-026.indd 4 12/23/15 9:26 AM A Brief History of Compensation Section 1.1 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 find 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 profit. Taylor’s Scientific 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 were also needed. This void was filled by Frederick Winslow Taylor, who has been called the father of “scientific management” due to his work aimed at improving industrial efficiency. 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 scientific management: 1. 2. 3. 4. Create work methods based on a scientific study of specific tasks. Scientifically select, train, and develop each employee. Provide detailed instructions for specific tasks. 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 influential 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 scientific 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. abc82339_01_c01_001-026.indd 5 12/23/15 9:26 AM Components of a Compensation System Section 1.2 Fayol’s Principles of Management Building on Taylor’s scientific management theory, Henri Fayol, a mining engineer in France, developed 14 principles of management (Fayol, 1949) (see Table 1.1), three of which have direct implications for the compensation and benefits 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 reflection of Taylor’s influence 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 influenced 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 field 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 extensively in future chapters. Remember, however, as we will repeat numerous times throughout this book, the hallmark of an effective compensation and benefits program is consistency. In order to attain consistency, we need to understand what compensation actually is. 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 dissatisfied 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 firm saw that Prevost had engineered an advertising campaign that helped her company make significant inroads into the German firm’s marketplace. The current head of marketing for the German firm, 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 abc82339_01_c01_001-026.indd 6 12/23/15 9:26 AM Components of a Compensation System Section 1.2 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 firm 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 firmly 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 finds important in a rewards program: compensation, benefits, work-life, recognition, and developmental and career opportunities. If this German firm 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 firm, 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 benefiting from her talents as well as the potential of a competitor benefiting 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 Critical Thinking potential hire. In the particular case of Anne Prevost, the firm must consider cost-of-livSelect an organization with which you ing differentials between the United States are familiar and describe the type of and Germany, effective cultural integration compensation strategy it uses. 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 efficiently and effectively make the personal and occupational transition. Fundamentally, the goal of 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 first place. In the case of Anne Prevost, the German hiring firm 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 firm, which would mean that the hunt for talent would need to begin all over again, costing the firm yet more time and more money. We will further examine issues like this in future chapters. For now, however, let’s look briefly at three factors that are integral to the creation of any compensation system. abc82339_01_c01_001-026.indd 7 12/23/15 9:26 AM Components of a Compensation System Section 1.2 WorldatWork (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 benefit. It impacts the overall business performance while also boosting employee engagement. Copyright © 2015 WorldatWork. All rights reserved. abc82339_01_c01_001-026.indd 8 12/23/15 9:26 AM Components of a Compensation System Section 1.2 The WorldatWork Total Rewards Model provides a way to conceptualize the way Critical Thinking employee rewards impact business performance. In the center of the model is the Discuss the WorldatWork model and employee. An employee’s performance is how it can be used to understand the dependent, in part, upon satisfaction with relationship between rewards and (and other attitudes such commitment to) performance. an organization and engagement with the organization’s purpose and mission. These interact to influence 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 influenced by the total rewards strategy, including compensation, benefits, 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. 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 definitions, 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 (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. abc82339_01_c01_001-026.indd 9 12/23/15 9:26 AM Section 1.2 Components of a Compensation System 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 defines 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 restrained, control self-gratification, 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. Germany in comparison with United States 91 83 67 35 66 62 68 65 46 40 40 26 Power Distance Individualism Masculinity Germany Uncertainty Avoidance Pragmatism Indulgence United States Source: The hofstede centre. www.geert-hofstede.com abc82339_01_c01_001-026.indd 10 12/23/15 9:26 AM Components of a Compensation System Section 1.2 In addition to broader national issues related to culture, organizations also take on characteristics that define 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 influence factors from employee selection and retention to compensation as well as corporate strategy (Giorgi, Lockwood, & Glynn, 2015). When designing a compensation and benefits 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 Benefits 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 flying among just three cities in Texas (Houston, Dallas, and San Antonio) as a way to minimize barriers to entry such as the thenrestrictive federal transportation laws. Beginning with a fleet of only three used Boeing 737s, Southwest Airlines parlayed its approach of a low-cost differentiation strategy into one of the most profitable 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. Since its beginnings, Southwest has maintained its low-cost differentiation strategy using only the Boeing 737, thus requiring its mechanics, flight, 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 flights 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. To deploy its low-cost differentiation strategy, Southwest needs to operate efficiently and effectively. This requires achieving significant operating efficiencies, such as • • • • a 15-minute gate turnaround time instead of the industry norm of 45 minutes, pilots who pitch in to handle baggage, flight crews who help clean the plane while on the ground, and a point-to-point flight travel pattern instead of the traditional hub-and-spoke approach. To achieve these operating efficiencies, employees need to want to help the company achieve its goals. This requires a compensation and benefits 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 first airline to offer employee stock ownership plans (ESOPs) and paying employees more than the industry average. abc82339_01_c01_001-026.indd 11 12/23/15 9:26 AM Section 1.2 Components of a Compensation System 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? In other words, a firm 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. 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 firm 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 specific 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 abc82339_01_c01_001-026.indd 12 12/23/15 9:26 AM Goals of Compensation Systems Section 1.3 create an environment where employees worked together to resolve issues, so it paid employees for time away from the manufacturing floor 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 qualified 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. 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 first 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 benefits 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 abc82339_01_c01_001-026.indd 13 12/23/15 9:26 AM Goals of Compensation Systems Section 1.3 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 benefits plan. Compensation and benefits professionals will utilize salary and benefits 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 firm’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 firms, 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 benefits surCritical Thinking veys, job descriptions, job analyses, and job evaluations. An attitude survey is a set of Why is it important that compensation written questions completed by employees systems are consistent? expressing their reactions to the employer’s policies, practices, management style, compensation, training, benefits, and other measures important to a given firm. 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 benefits 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 firm’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 fulfill? abc82339_01_c01_001-026.indd 14 12/23/15 9:26 AM Goals of Compensation Systems Section 1.3 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 defines what products and services will be delivered, to which customers, and how they will be delivered. A successful strategy 1. makes the firm different, 2. has value in customers’ eyes, and 3. is deliverable. Getty Images News/Thinkstock Knowledgeable, hard-working employees are essential in making a strategic plan a success. Once in place, the firm’s strategy becomes the benchmark upon which the compensation strategies are created. Motivation and Retention Once identified, recruited, and on board, talented employees who can contribute positively to the bottom line must be retained and motivated. A well-designed compensation and benefits plan can help with these goals. Motivation can be defined as that which energizes, directs, and sustains behavior. While motivating employees is a difficult 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 abc82339_01_c01_001-026.indd 15 12/23/15 9:26 AM Goals of Compensation Systems Section 1.3 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 benefits. A comprehensive, strategically planned compensation and benefits package can go a long way in motivating employees to be productive and efficient. 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. CompaCritical Thinking nies accomplish this through factors such as the compensation and benefits they offer, What motivates you to do your best the work involved, the promotion opporwork in a job? tunities 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 firms 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 benefit 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 influences 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, and utilize carefully crafted and flexible methods for recruiting potential new employees. Compensation and benefits 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 abc82339_01_c01_001-026.indd 16 12/23/15 9:26 AM Goals of Compensation Systems Section 1.3 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 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 benefits to attract and retain employees. Health, dental, and vision insurance programs are available even to part-time employees. Among many other types of benefits, the company provides dependent-care flexible spending accounts, domestic partner benefits, 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 benefits 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 benefits in organizations need to remain aware of current regulations and evaluate their plans based on this shifting legal landscape. abc82339_01_c01_001-026.indd 17 12/23/15 9:26 AM Section 1.4 Types of Rewards 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 benefits 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—finding it, motivating it, and keeping it.” The top five global priorities are iStock/Thinkstock • aligning total rewards with In addition to core compensation, indirect benefits business strategy by attractsuch as insurance, retirement options, and equitying, motivating, and retaining based or ownership options can be offered in a total employees, rewards model. • reducing the costs of providing health care and other noncash benefits to employees, • motivating staff when pay increases are flat or nonexistent, • demonstrating appropriate return on investment for reward expenditures, and • creating a rewards program that reflects the culture and goals of the organization. The findings from the above survey highlight the critical need for a company to create and implement an effective compensation and benefits program. As indicated by the total rewards model, there are a lot of components that make up a compensation and benefits program. Let’s go into detail about each of the components. Core Compensation The first 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 abc82339_01_c01_001-026.indd 18 12/23/15 9:26 AM Types of Rewards Section 1.4 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 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 beneficial 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 first glance, the first 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 final 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 quantifiable measure of the worth of their work to the firm, 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 Comparability Act of 1990 (FEPCA; 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 abc82339_01_c01_001-026.indd 19 12/23/15 9:26 AM Types of Rewards Section 1.4 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 firms specializing in the area or who have extensive experience in the field. 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 benefits 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 inflation 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 abc82339_01_c01_001-026.indd 20 12/23/15 9:26 AM Types of Rewards Section 1.4 notion that pay increases should be 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 chiefly 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 difficult yet obtainable and that are easy to communicate, understand, and measure. Some firms 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 shortterm (e.g., profit 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 Critical Thinking completing work. For example, a piecework plan involves paying a fixed amount for each In your opinion, what type of core unit produced. A Taylor differential piececompensation system will work best for work plan, based on Frederick Taylor’s prinyou: seniority, merit, or incentive? Why? ciples, 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. abc82339_01_c01_001-026.indd 21 12/23/15 9:26 AM Types of Rewards Section 1.4 Pay-for-knowledge plans have the potential to lower absenteeism and turnover, increase workforce flexibility, create opportunities for leaner staffing, and promote employee growth and development (Gupta, Schweizer, & Jenkins, 1987). Such plans can be used to reward any level of employee as long as consideration is given to the firm’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 specific 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 Benefits The next component that makes up a compensation and benefits program is employee benefits. Employee benefits deal with the indirect financial and nonfinancial 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 benefits (e.g., Social Security, unemployment insurance, workers’ compensation) and market-driven, discretionary benefits (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 benefits, among many possibilities, are employee assistance programs, elder care, flexible work schedules, and executive perks such as supplemental life insurance or a car allowance. Key factors that employers need to consider when designing benefits programs include whether retirees or “probationary” employees should be included, cost-containment procedures, how to finance the plans, employer tax incentives Critical Thinking as well as effective methods of communicating what the plans involve, eligibility requireWhy is market-driven competition ments, and why such benefits are valuable for employee talent important to to employees. Usually, discretionary benefits understand? are influenced 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 abc82339_01_c01_001-026.indd 22 12/23/15 9:26 AM Section 1.4 Types of Rewards 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 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. Essentials of an effective work-life program consider flexible working arrangements, paid and unpaid time off, community involvement and financial support, voluntary benefits such as long-term care, and organizational cultural initiatives such as teambuilding and women’s advancement programs. Performance and Recognition Another aspect of a compensation and benefits 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 Fuse/Thinkstock fairly measure performance. Chapter 4 covers this The desire to balance work and life topic in detail, but in general, measurement of perguides many decisions. formance 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. abc82339_01_c01_001-026.indd 23 12/23/15 9:26 AM Designing a Compensation Plan Section 1.5 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 recognition will vary based on the company’s culture and the impact and importance of the performance being recognized. Development and Career Opportunities The final component in a compensation and benefits program is offering development and career opportunities to employees. Development represents a set of learning experiences designed to produce more effective, efficient, and thus productive employees. Tuition reimbursements and discounts for additional education and licensing in particular fields 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. 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 benefits 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 benefits 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-file” 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 benefits 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 firm. 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 difficulties 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 benefits package that will meet both Anne’s needs and the company’s needs. abc82339_01_c01_001-026.indd 24 12/23/15 9:26 AM Summary & Resources The company needs to look beyond just offering a salary if it hopes to successfully Critical Thinking recruit and retain Anne while keeping with the company’s strategy and culture and Will compensation and a benefits not upsetting currently valued employees, package be your primary consideration most notably Jürgen. In addition to a comfor taking a job now? How about 10 petitive salary, the company could offer to years from now? How about 20 years pay for her sons’ educational expenses at from now? the German-American school as well as college tuition in the United States. Relocation expenses could be paid along with twiceyearly trips back to the United States. Stock options could be awarded, matching the offer from the competing firm 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 benefits plan is to take into account all the elements we’ve discussed and have a cohesive approach to offering compensation and benefits. 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 benefits 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 benefits. In examining organizational strategies and strategic planning, we reviewed the basic elements of strategy in any organization and briefly 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 briefly 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 benefits. abc82339_01_c01_001-026.indd 25 12/23/15 9:26 AM Summary & Resources 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 firm 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 benefits The nonwage, indirect financial and nonfinancial payments that employees receive for performing their jobs. employee retention 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. abc82339_01_c01_001-026.indd 26 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 specific niche within an industry segment. indirect compensation Refers to benefits 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. 12/23/15 9:26 AM

2 Compensation and the Law Stockbyte/Exactostock-1491/Superstock 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 benefits. 7. Cite and explain laws that guide nonwage benefit rewards today. abc82339_02_c02_027-048.indd 27 12/21/15 9:38 AM Section 2.1 Origins of Laws Impacting Reward Systems 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 benefits, 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 benefit programs. However, an overview of the broader business regulatory environment is needed to better understand the influence this environment has on compensation and benefits, 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 benefits. To be an effective compensation and benefits professional, you will need to have a solid understanding of the specific laws and regulations of the country in which your company operates. 2.1 Origins of Laws Impacting Reward Systems For the first 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 fighting 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 first 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 influenza 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 abc82339_02_c02_027-048.indd 28 12/21/15 9:38 AM Origins of Laws Impacting Reward Systems Section 2.1 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. 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 The Art Archive/Superstock federal laws in an attempt to boost the The Great Depression caused a large number of potential for economic recovery and people to lose their jobs. 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. 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 influence 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. abc82339_02_c02_027-048.indd 29 12/21/15 9:38 AM Section 2.2 Early Compensation Law 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 influence 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, employers, for the first time, were required to provide laborers and mechanics on covered federally financed 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 definition 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 benefits related to government contracts and even the private sector. Norris-LaGuardia Act of 1932 The Norris-LaGuardia Act 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 first federal labor laws supporting organized labor, and it marked a significant 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 (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). 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. abc82339_02_c02_027-048.indd 30 12/21/15 9:38 AM Early Compensation Law Section 2.2 The gain of power by labor unions has had a big impact on compensation issues, such as wages paid and benefits offered. The impact of labor unions has lessened in many industries in current times, although some industries, such as automobile manufacturing and law enforcement, continue to have a significant labor union influence. The Social Security Act of 1935 On August 14, 1935, President Franklin D. Roosevelt became the first president to advocate federal assistance for the elderly. As part of his Second New Deal, the Social Security Act of 1935 was signed into law to establish old-age benefits at the federal level. The benefits were to be paid in proportion to the previous earning of individuals, and a reserve fund to pay for the benefits would be created by a tax paid equally by employees and employers. Originally, only employees in industrial and commercial occupations were eligible for benefits, but numerous important amendments since then have expanded those covered under the act. Additionally, the act provided money and benefits 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. 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) was the first 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) 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 abc82339_02_c02_027-048.indd 31 12/21/15 9:38 AM Section 2.3 Basic Wage Standards 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.flsa .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). Critical Thinking Which federal law established during the Great Depression era do you believe has the most influence today? Why? 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. 2.3 Basic Wage Standards Numerous difficulties occurred early in the implementation and administration of the FLSA. It quickly became apparent that there were both logistical and tactical difficulties 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 significant because it resolved some issues as to what constitutes compensable hours worked (i.e., had to be paid) under FLSA, establishing that activities that benefited 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. abc82339_02_c02_027-048.indd 32 12/21/15 9:38 AM Section 2.4 Antidiscrimination Laws 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 specified 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 on page 34). 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 Critical Thinking supporters on both sides. Currently, the debate revolves around the issue of raising Review the regulations set forth in the the minimum wage in response to the risFair Labor Standards Act. Do you think ing cost of living. Numerous companies have the modern workplace would be the chosen to act on their own and pay their same had such legislation not been workers above the mandated minimum wage passed? If so, how? If not, why? 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 recently raised the minimum amount they pay their workers (Mathews & Francis, 2015). 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 benefits practices. abc82339_02_c02_027-048.indd 33 12/21/15 9:38 AM Section 2.4 Antidiscrimination Laws 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 CA - $9.00 MT - $7.90 ID PA WY - $5.15 MS AZ - $7.90 CO - $8.00 MO - $7.50 NJ - $8.25 IA IN CT - $8.70 NM - $7.50 DE - $7.75 NY - $8.00 MD OR - $9.10 ND DC - $9.50 NV - $8.25 FL - $7.93 OH - $7.95 MA - $8.00 RI - $8.00 IL - $8.25 ME - $7.50 MI - $8.15 VT - $8.73 OK SD KS TX KY UT NC WV 23 states + DC LA SC TN VA WI NE WA - $9.32 GA - $5.15 19 states 3 states * Where federal and state law have different minimum wage rates, the higher standard applies. 5 states 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 identified 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/ Equal Pay Act (EPA) of 1963 During World War II, with most men of working age fighting overseas, women had to fill 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 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. abc82339_02_c02_027-048.indd 34 12/21/15 9:38 AM Section 2.4 Antidiscrimination Laws It would take two decades before any federal legislation was passed to formally address this issue. In 1963, the Equal Pay Act 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. Specifically, 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 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 extends the statute of limitations for filing a lawsuit that asserts violation of equal-pay legislation. 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 pay mean that that EPA has failed in its mission? Explain your rationale. Title VII of the Civil Rights Act of 1964 Broad-sweeping legislation against discrimination was created with the Civil Rights Act of 1964. Specifically 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 abc82339_02_c02_027-048.indd 35 12/21/15 9:38 AM Antidiscrimination Laws Section 2.4 Caucasians, African-Americans, Asians, Latinos, Arabs, Native Americans, Native Hawaiians and Pacific 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 Jakob Helbig/Cultura/Getty Images may not be hired for a given set of jobs. Race, sex, and religion are equally protected against Evidence may also involve a mixed discrimination. 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. 2. 3. 4. The person is in a protected class, The applicant for a job was qualified, Rejection occurred in spite of qualifications, and The position remained open and recruiting continued in spite of having a qualified 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 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 Critical Thinking the company is going about this—looking at arrests rather than convictions—uninDescribe the differences between tentional discrimination can occur. Adverse disparate treatment and adverse impact impact focuses on the effect of the actions in compensation and benefits decisions. taken, rather than underlying motives or intentions. abc82339_02_c02_027-048.indd 36 12/21/15 9:38 AM Antidiscrimination Laws Section 2.4 Age Discrimination in Employment Act (ADEA) of 1967 (as Amended in 1978, 1986, and 1990) The Age Discrimination in Employment Act of 1967 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, firing, promotion, layoff, compensation, benefits, 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 filing 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 Benefit Protection Act (OWBPA) of 1990 As a result of the aging of the Baby Boom Generation, the 1990 Older Workers Benefit Protection Act was created as an amendment to the ADEA to provide additional support for older workers. The OWBPA prohibits employers from denying employee benefits 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 benefits, 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 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. 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 specific practice created adverse impact. The passage of the Civil Rights Act Critical Thinking of 1991 reversed this practice, shifting the burden of proof to employers such that they Do you think the Civil Rights Act of must show that the company practice being 1964 has been successful in making the challenged is a business necessity. The act workplace free from discrimination? In also expanded the geographical scope of prowhat ways do you feel it has succeeded? tection against job discrimination to include In what ways do you think it has failed? American employers and American-controlled companies operating abroad. abc82339_02_c02_027-048.indd 37 12/21/15 9:38 AM Section 2.5 Accommodating Disabilities Compensation and Benefits in the Real World: Walmart Stores Inc. For legal, financial, 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). 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.pdf). The ruling, however, did not rule on individual discrimination claims, so plaintiffs have narrowed the scope of the class and filed new suits (http://www.tennessean.com/story/news/2015/07/09/ruling-reopens -discrimination-claims-women-walmart/29935131/). Walmart continues to fight 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 benefits practices. 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 specific 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 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 benefits. 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. abc82339_02_c02_027-048.indd 38 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 benefits. 12/21/15 9:38 AM Accommodating Disabilities Section 2.5 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 pregnancyrelated conditions (i.e., the company cannot charge more for pregnancy-related medical expenses). Additionally, the same level of health benefits for spouses of either male or female employees must be provided. If an employer provides any benefits to workers on leave, the same benefits must be provided to those on leave for pregnancy-related conditions. Any benefits such as vacation accrual, temporary disability benefits, 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 prohibits discrimination against qualified individuals with disabilities in job application procedures, hiring, firing, 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. 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 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 specified 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 abc82339_02_c02_027-048.indd 39 12/21/15 9:38 AM Section 2.6 Nonwage Benefits 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 figured out how to manipulate the system. For example, the 12-month period was assumed to be a calendar or fiscal year. Therefore, employees would apply for the 12-week leave period at the end of the calendar (or fiscal) year and then reapply for another 12-week leave period at the start of the next calendar (or fiscal) year. Such actions allowed the employee to combine the two periods into a sixmonth 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 firms integrated their HR practices with the new law, most developed policies that required employees intending to use FMLA to first 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 notified of an impending call or order to active duty in support of a contingency operation. The NDAA also amended the 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. Critical Thinking Do you think employers generally do enough to accommodate disabilities? 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 specifies that the employee will still have a job when he or she returns after the leave. 2.6 Nonwage Benefits The change in the workforce during World War II (that is, the increase in working women due to the men fighting), along with wage and price controls, spurred a growth in nonmonetary benefits. Companies had to find other ways to attract, motivate, and retain employees since abc82339_02_c02_027-048.indd 40 12/21/15 9:38 AM Section 2.6 Nonwage Benefits 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 flow 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 benefits 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 benefits accounted for only about 3% of payroll costs—hence, the name “fringe” benefits, since they were on the edge of basic and common compensation practices—while today, nonwage benefits can account for over 50% of a company’s payroll costs, with payroll costs composing the largest operating expense for most companies. Some benefits—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 benefits are discretionary or not mandated by law. Examples of discretionary benefits 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 benefit of paying an employee when he or she is not working due to a short-term illness such as the flu.) An important aspect of discretionary benefits that must be kept in mind is that if a company offers that benefit, then it falls under any laws that regulate that type of benefit. 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 benefits, followed by a discussion of legislation impacting commonly given discretionary benefits. Federal Insurance Contributions Act (FICA) Everett Collection/Superstock President Franklin Roosevelt signs the Social Security Bill in 1935. abc82339_02_c02_027-048.indd 41 The Federal Insurance Contributions Act funds the federal system of oldage, survivors, disability, and hospital insurance (OASDI) as established under the Social Security Act of 1935. Social Security benefits 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 spouse and dependent children in the case of a worker’s death. This is the “old-age, 12/21/15 9:38 AM Section 2.6 Nonwage Benefits survivors, disability” portion of the act. The hospital insurance portion is financed 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 benefits 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. 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? Table 2.2 Social Security benefit The amount of Social Security benefits 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 benefits. Table 2.2 shows the change in an employee’s full retirement benefit that will be received if an employee retires and starts to draw Social Security either earlier or later than normal retirement age. Year of birth Reduction in benefit if retire at age 62 Normal retirement age— full benefit received Increase in benefit if retire at age 70 1924 20.00% 65 15.00% 1927-28 20.00% 65 20.00% 1925-26 1929-30 1931-32 1933-34 1935-36 1937 1938 1939 1940 abc82339_02_c02_027-048.indd 42 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 65 65 65 65 65 65 20.83% 65, 2 mo. 22.50% 65, 6 mo. 21.67% 65, 4 mo. 17.50% 22.50% 25.00% 27.50% 30.00% 32.50% 31.42% 32.67% 31.50% 12/21/15 9:38 AM Section 2.6 Nonwage Benefits Year of birth Reduction in benefit if retire at age 62 Normal retirement age— full benefit received Increase in benefit if retire at age 70 1941 23.33% 65, 8 mo. 32.50% 1943-54 25.00% 66 32.00% 1942 1955 1956 1957 1958 1959 1960 and later 24.17% 65, 10 mo. 25.83% 66, 2 mo. 27.50% 66, 6 mo. 26.67% 28.33% 29.17% 30.00% 66, 4 mo. 66, 8 mo. 66, 10 mo. 67 Note: Persons born on January 1 of any year should refer to the previous year of birth. 31.25% 30.67% 29.33% 28.00% 26.67% 25.33% 24.00% Source: Social Security Administration 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, 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 find a new job. The intent of the benefit is to help workers by partially contributing to necessities, such as food, clothing, and shelter, as a bridge until the workers are able to find 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 benefits. 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 specified dollar limit is reached, no further taxes for FUTA are collected for that calendar year. abc82339_02_c02_027-048.indd 43 12/21/15 9:38 AM Nonwage Benefits Section 2.6 Workers’ Compensation Law Worker’s 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. Worker’s 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. All employees are covered by worker’s 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, 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 benefit 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 sufficient 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 financial penalties. abc82339_02_c02_027-048.indd 44 12/21/15 9:38 AM Nonwage Benefits Section 2.6 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 flux, 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 regulates retirement plans and other employee benefit plans that are offered by private-sector organizations. In common usage, ERISA also often refers to Internal Revenue Code regulations of benefit 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 benefits that are 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 benefits, death benefits, prepaid legal services, vacation benefits, company-sponsored day care centers, scholarship funds, and apprenticeship and training benefits. 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 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 benefits the option to continue group health benefits 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 benefit 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 benefits 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 abc82339_02_c02_027-048.indd 45 12/21/15 9:38 AM Section 2.6 Nonwage Benefits government from acknowledging marriages between same-sex couples. As a result, federal laws governing employee benefit plans require companies to treat employees’ same-sex and opposite-sex spouses equally for purposes of benefits that are extended to spouses, meaning firms 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 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 certificates showing periods of prior coverage to a new group health plan or health insurance issuer; • 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. • • abc82339_02_c02_027-048.indd 46 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? 12/21/15 9:38 AM Summary & Resources Summary & Resources Summary In this chapter, we discussed federal laws that impact reward systems offered by organizations. Most of the laws that influence compensation and benefits 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, definitions of unfair labor practices, and established penalties for violating them. • The Social Security Act was created to establish benefits 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 genderbased 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 qualified 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 benefits 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. abc82339_02_c02_027-048.indd 47 12/21/15 9:38 AM Summary & Resources 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. 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 (for more detailed information. 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. abc82339_02_c02_027-048.indd 48 Social Security benefits 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 find 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 definition 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.) worker’s 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. 12/21/15 9:38 AM