Strategic Compensation: A Human Resource Management Approach 10th Ed Joseph

CHAPTER 1 Strategic Compensation: A Component of Human Resource Systems

Learning Objectives 1-1. 1-2. 1-3. 1-4. 1-5. 1-6. 1-7.

Define strategic compensation. Summarize the role of compensation as a strategic business partner. Explain strategic compensation decisions. Identify and discuss the building blocks and structural elements of strategic compensation systems. Describe the fit of the compensation function in organizations. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation professionals perform. Explore essential skills for developing your career in compensation or any other career path. Outline

I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII.

Overview Defining Strategic Compensation Compensation as a Strategic Business Partner Strategic Compensation Decisions Building Blocks and Structure of Strategic Compensation Systems Fitting the Compensation Function in an Organization’s Structure Stakeholders of the Compensation System Developing Skills for your Career Key Terms Discussion Questions and Suggested Answers Preparing for My Career: Compensation in Action End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XIII. Crunch the Numbers! Questions and Suggested Student Responses XIV. Working Together: Team Exercise with Suggested Student Responses XV. Assisted-Graded Questions XVI. Additional Case from the MyLab Management website; Instructor Notes and Questions and Suggested Student Responses

Lecture Outline I.

Overview A. Manpower planning 1. Predecessor to contemporary human resource management, focus was on effective deployment of employees 2. Goal was to achieve maximum productivity per employee B. Personnel management 1. Evolved due to government regulations concerning: a. Payroll taxes b. Minimum wage laws c. Antidiscrimination laws 2. Competitive advantage a. Since 1980’s recognition that employees can contribute to competitive advantage b. Competitive advantage describes a company’s success when the company acquires or develops capabilities that facilitate outperforming the competition c. HR becomes a strategic function

II.

Defining Strategic Compensation A. What Is Compensation? 1. Intrinsic and extrinsic rewards employees receive for performing their jobs a. Intrinsic compensation: Reflects employees’ psychological mindsets that result from performing their jobs b. Extrinsic compensation: Includes both monetary and nonmonetary rewards for: i. Obtaining certain job performance levels ii. Acquiring new skills and knowledge 2. Monetary compensation represents core compensation 3. Nonmonetary rewards (also known as employee benefits) include: a. Protection programs (e.g., medical insurance) b. Paid time off (e.g., vacations) c. Services (e.g., daycare assistance) 4. Both monetary and nonmonetary compensation represents costs to companies

B. What is Strategic Compensation? 1. Competitive business strategy refers to the planned use of company resources 2. Human resource strategies specify the use of multiple HR practices to reinforce competitive business strategy. 3. Strategic compensation refers to the design and implementation of compensation systems to reinforce the objectives of both HR strategies and competitive business strategies III. Compensation as a Strategic Business Partner A. HR and compensation professionals today need to think like the chief executive officer (CEO) to become a strategic partner in achieving organizational plans and results B. Compensation professionals can give the CEO and CFO an understanding of the roles employees play in the organizations to expand or shrink shareholder value C. How HR functions serve as strategic business partner 1. Capital refers to factors that enable companies to generate income, raise stock prices, bring economic value, strong brand identity, and reputation 2. Human capital, refers to sets of collective skills, knowledge, and abilities that employees can apply to create value for their employers D. Compensation professionals can leverage the value of human capital in a variety of ways such as a well-designed merit pay program to reinforce performance IV. Strategic Compensation Decisions A. Environmental scanning 1. Used for strategy formulation 2. Main focus is discerning threats and opportunities B. Competitive business strategy choices 1. Lowest-cost strategy or cost leadership focuses on gaining completive advantage by being the lowest-cost producer of a product or service within the marketplace 2. Differentiation strategies develop products or services that are unique from those of their competitors C. Compensation decisions that support the firm’s strategy 1. Compensation professionals use two broad elements to support strategic initiatives a. Basic building blocks b. Structural design elements

2. Employee roles associated with competitive strategies a. Compensation professionals must design and implement compensation practices that elicit strategy-consistent employee roles V. Building Blocks and Structure of Strategic Compensation Systems A. Building blocks: Core compensation and Employee Benefits 1. Core compensation a. Base pay includes hourly pay or wage or salary b. Is governed by Fair Labor Standards Act of 1938 c. Is set according to compensable factors such as level of skill, effort, and responsibility required to perform the job and the severity of the working conditions i. Compensable factors are used to determine if jobs are equal under the Equal Pay Act of 1963 d. Is adjusted periodically for cost-of-living increases, differences in an employee’s job performance, and increases in an employee’s skill level or job knowledge i. Cost-of-living adjustments (COLA’s) represent periodic base pay increases that are founded on changes in prices as recorded by the Consumer Price Index (CPI) e. Seniority pay systems reward employees with periodic additions to base pay according to employees’ length of service in performing their jobs i. Designed according to the human capital theory: Employees will become more productive as they refine existing skills and acquire new skills and knowledge through length of service f. Merit pay is permanent base pay increases granted because of job performance g. Incentive pay or variable pay rewards employees for partially or completely attaining a predetermined work objective h. Person-focused pay or competency-based pay rewards employee for specifically learning new curricula i. Pay-for-knowledge plans reward managerial, service, or professional workers for successfully learning specific curricula ii. Skill-based pay is used mostly for employees who perform physical work and increases as workers master new skills 2. Employee Benefits a. Represent nonmonetary rewards b. Discretionary benefits include three broad categories

i. Protection programs that provide family benefits, promote health, and guard against income loss caused by factors such as unemployment, disability, or serious illness ii. Paid time off such as vacation iii. Services provide such enhancements as tuition reimbursement and day care assistance c. Legally-required benefits are protection programs that attempt to promote worker safety and health and maintain family income streams i. Social Security Act of 1935 ii. Family and Medical Leave Act of 1993 iii. Patient Protection and Affordable Care Act of 2010 B. Fundamental Compensation System Design Elements 1. Internal consistency a. Internally consistent compensation systems clearly define the relative value of each job among all the jobs within a company b. Is based on the principle that employees working at jobs that require greater qualifications, more responsibilities, and/or more complex job duties should be paid more c. Is achieved using job analysis and job evaluation i. Job analysis is a systematic process for gathering, documenting, and analyzing information in order to describe jobs ii. Job evaluation is used to systematically recognize differences in the relative worth among a set of jobs 2. Market competitiveness a. Market-competitive pay systems are based on results of compensation surveys b. Compensation surveys collect and then analyze competitors’ compensation data 3. Recognizing Individual Contributions a. Pay structures recognize differences in employee contributions, such as credentials, job knowledge, and job performance b. Pay grades group jobs for pay policy application c. Pay ranges include minimum, maximum, and midpoint pay rates C. Alternative Pay Structure Configurations 1. Merit pay plans 2. Sales compensation plans 3. Broadband structures 4. Two-tier wage structures 5. Executive compensation 5 Copyright © 2020 Pearson Education, Inc.

6. Contingent worker compensation 7. Expatriate compensation 8. Compensation structures in countries other than the United States VI. Fitting the Compensation Function in an Organization’s Structure A. How HR Professionals Fit into the Corporate Hierarchy 1. Line employees are workers who are directly involved in producing a company’s goods or services 2. Staff employees are workers whose job it is to support the line functions human resource professionals are staff employees 3. HR practices include: a. Recruitment b. Selection c. Performance appraisal d. Training e. Career development f. Labor-management relations g. Employment termination h. Managing HR within the context of legislation B. The Compensation Profession 1. An executive is a top-level manager who reports directly to the corporation’s CEO or to the head of a major division 2. A generalist, who may be an executive, performs tasks in a variety of HR-related areas 3. A specialist may be an HR executive, manager, or non-manager who is typically concerned with only one of the areas of compensation practice 4. Opportunities for employment for compensation and benefits managers are projected to grow C. How the Compensation Function Fits into HR Departments 1. Compensation, recruitment, and selection a. Companies can spark interest by communicating the positive features of the core compensation and employee benefits programs b. Companies may offer inducements such as signing bonuses 2. Compensation and performance appraisal a. Is key to effective merit pay programs b. Employees must perceive a strong relationship between attaining performance standards and receiving pay increases

3. Compensation and training a. Successful pay-for-knowledge plans depend upon a company’s ability to develop and implement systematic training programs b. Companies implementing pay-for-knowledge plans typically increase the amount of classroom and on-the-job training 4. Compensation and career development a. Employees make lateral moves across a company’s hierarchy or vertical moves up the hierarchy b. Employees compensation changes reflect career development 5. Compensation and labor-management relations a. Companies grant COLAs b. Companies establish base pay on seniority pay 6. Compensation and employment termination a. Employment terminations are either involuntary or voluntary b. Some companies offer severance pay for involuntary terminations c. Companies sponsor pension programs in the case of retirement d. Companies sometimes use early retirement programs to reduce workforce size 7. Compensation and legislation a. Laws were enacted to establish acceptable employment practices and protect employees’ rights b. Are grouped on four main themes i. Income continuity, safety, and work hours ii. Pay discrimination iii. Accommodation of disabilities and family needs iv. Prevailing wage laws c. Relevant laws include: i. Fair Labor Standards Act of 1938 ii. Equal Pay Act of 1963 iii. Civil Rights Act of 1964 iv. Patient Protection and Affordable Care Act of 2010 v. Pregnancy Discrimination Act of 1978 vi. Americans with Disabilities Act of 1990 (amended in 2008) vii. Family and Medical Leave Act of 1993 viii. Davis–Bacon Act of 1931

VII. Stakeholders of the Compensation System A. The success of HR departments depends on how they will serve various stakeholders including: 1. Employees 2. Line managers 3. Executives 4. Unions 5. U.S. Government B. Employees 1. Must educate employees on training options and connections between training and their pay 2. Must determine which objectives of discretionary benefits are most important to their particular workforce C. Line managers 1. Use their knowledge of relevant laws to help them make sound compensation judgments 2. Advise them on establishing pay rates E. Executives 1. Develop and manage sound compensation systems F. Unions 1. Abide by their collective bargaining agreements G. U.S. Government 1. Keep updated and comply with all employment legislation 2. Demonstrate that alleged discriminatory pay practices are not discriminatory VIII. Developing Skills for Your Career A. This course and this text will give you the opportunity to develop and practice seven important skills: 1. Communication a. The effective use of oral, written, and nonverbal skills for multiple purposes 2. Critical Thinking a. Purposeful and goal-directed thinking used to define sand solve problems 3. Collaboration a. Individuals actively work together on a task, constructing meaning and knowledge as a group

4. Knowledge Application and Analysis a. The ability to learn a concept and then appropriately apply that knowledge in another setting 5. Business Ethics and Social Responsibility a. Business ethics are sets of guiding principles that influence the way individuals and organizations behave b. Social responsibility is the implied, enforced, or felt obligation of managers to protect the interests of others c. Corporate sustainability focuses on the possible future impact of an organization on society 6. Information Technology Application and Computing Skills a. The ability to select and use appropriate technology to accomplish a given task 7. Data Literacy a. Ability to access, assess, interpret, manipulate, summarize, and communicate data End of the Chapter IX. Key Terms Competitive advantage: Describes a company’s success when the company acquires or develops capabilities that facilitate outperforming the competition Compensation: Represents both the intrinsic and extrinsic rewards employees receive for performing their jobs and for their membership as employees Intrinsic compensation: Reflects employees’ psychological mind-sets that result from performing their jobs Extrinsic compensation: Includes both monetary and nonmonetary rewards Core compensation: Monetary compensation Employee benefits: Non-monetary compensation Competitive business strategy: The planned use of company resources—financial capital, equipment capital, and human capital— to promote and sustain competitive advantage Human resources strategies: Specify the use of multiple HR practices to reinforce competitive business strategy Strategic compensation: Refers to the design and implementation of compensation systems to reinforce the objectives of both HR strategies and competitive business strategies Capital: Refers to the factors that enable companies to generate income, higher company stock prices, economic value, strong positive brand identity, and reputation

Human capital: Refers to sets of collective skills, knowledge, and abilities that employees can apply to create value for their employers Cost leadership (lowest-cost strategy): Focuses on gaining competitive advantage by being the lowest-cost producer of a product or service within the marketplace, while selling the product or service at a price advantage relative to the industry average Differentiation strategies: Companies adopt this strategy when they develop products or services that are unique from those of their competitors Base pay: Recurring money employees receive for doing their jobs Hourly pay or wage: Base pay received for each hour worked Annual salary: Base pay received for performing a job, regardless of the actual number of hours worked Compensable factors: Skill, effort, responsibility, and working condition factors Cost-of-living adjustments: Represent periodic base pay increases that are founded on changes in prices as recorded by the Consumer Price Index (CPI) Seniority pay: A system to reward employees with periodic additions to base pay according to employees’ length of service in performing their jobs Human capital theory: Employees’ knowledge and skills (human capital) add value Merit pay: Program that assumes that employees’ compensation over time should be determined, at least in part, by differences in job performance as judged by supervisors or managers Incentive pay: Compensation (other than base wages or salaries) that fluctuates according to employees’ attainment of some standard based on a preestablished formula, individual or group goals, or company earnings Variable pay: Compensation (other than base wages or salaries) that fluctuates according to employees’ attainment of some standard based on a preestablished formula, individual or group goals, or company earnings Person-focused pay: Programs that reward employees for specifically learning new curricula Competency-based pay: Programs that reward employees for specifically learning new curricula Pay-for-knowledge: Programs that reward managerial, service, or professional workers for successfully learning specific curricula Skill-based pay: Programs that increase workers’ pay as they master new skills Discretionary benefits: Any variety of programs that provide paid time off, employee services, and protection programs that are offered on a discretionary basis Legally required benefits: Particular sets of benefits the U.S. government requires employers to offer to employees Protection programs: Legally required benefits that attempt to promote worker safety and health, maintain the influx of family income, and assist families in crisis Paid time off: Provides employees with pay for time when they are not working (e.g., vacation)

Services: Provide such enhancements as tuition reimbursement and day care assistance to employees and their families Internally consistent compensation systems: Clearly define the relative value of each job among all jobs within a company Job analysis: A systematic process for gathering, documenting, and analyzing information in order to describe jobs Job evaluation: A process to recognize differences in the relative worth among a set of jobs and to establish pay differentials accordingly Market-competitive pay systems: Compensation professionals build marketcompetitive compensation systems based on the results of compensation surveys Compensation surveys: Collect and then analyze competitors’ compensation data Pay structures: Represent pay rate differences for jobs of unequal worth and the framework for recognizing differences in employee contributions Pay grades: Group jobs for pay policy application Pay ranges: Include minimum, maximum, and midpoint pay rates Line employees: Employees that are directly involved in producing companies’ goods or delivering their services Staff employees: Employees that support the line functions Executive: A top-level manager who reports directly to the corporation’s CEO or to the head of a major division Generalist: A human resource professional that may be an executive that performs tasks in a variety of HR-related areas Specialist: An HR executive, manager, or non-manager who is typically concerned with only one of the areas of compensation practice Severance pay: Companies may choose to award and amount, usually the equivalent of several months’ pay following involuntary termination Pension programs: Provide income to individuals throughout their retirement Early retirement programs: Contain incentives designed to encourage highly paid employees with substantial seniority to retire earlier than they had planned X.

Discussion Questions and Suggested Answers

1-1.

What are the main building blocks of compensation systems? Briefly describe each one.

The main building blocks of a strategic compensation system are core compensation, which includes base pay and adjustments to base pay over time; and employee benefits which includes discretionary benefits and legally required benefits. Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems. AACSB: Application of knowledge 11 Copyright © 2020 Pearson Education, Inc.

1-2.

How can compensation professionals serve as strategic business partners?

To serve as strategic business partners, compensation professionals need to think like the chief executive officer (CEO). They can give the CEO and CFO an understanding of the role that employees play in the organization and the way it combines with business processes to expand or shrink shareholder value. Learning Objective: 1-2. Summarize the role of compensation as a strategic business partner. AACSB: Analytical thinking 1-3.

Are the three main elements of compensation systems—internal consistency, market competitiveness, and recognizing employee contributions—equally important, or do you believe that they differ in importance? Explain.

Student answers will vary. Importance of each element may vary based on the company, the industry, and other factors in the internal and external environments. Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems. AACSB: Analytical thinking 1-4.

The compensation profession is expected grow at a healthy pace through the year 2026. Based on your understanding of how the chapter material blends together, what might be some reasons for this anticipated growth? Explain.

Student responses may vary. Some reasons may include future government regulations, more competitive environments, and changing employee demographics or societal motivators. All of these factors may influence the need for compensation professionals as they work to meet the needs of the multiple stakeholders in organizations. Learning Objective: 1-6. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation functions perform. AACSB: Analytical thinking 1-5.

Stakeholder expectations pose challenges for compensation professionals. At times, there may be conflict among the expectations of different stakeholders. For two stakeholders, how do compensation professionals meet their expectations?

Employees: Educate about compensation programs and benefits. Line Managers: Provide advice about pay for different jobs. Executives: Developing and managing sounds compensation systems. Unions: Administering the pay and benefits policies specified in collective bargaining agreements. U.S. Government: Comply with employment legislation. 12 Copyright © 2020 Pearson Education, Inc.

Learning Objective: 1-6. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation functions perform. AACSB: Application of knowledge 1-6.

How are the seven employability skills relevant regardless of your career aspirations?

The skills you will develop and practice in this text are those that employers have identified as critical to success in the workplace. Therefore, you will benefit even if you do not pursue a career as a compensation professional. Learning Objective: 1-7. Explore essential skills for developing your career in compensation or any other career path. AACSB: Analytical thinking XI. Preparing for My Career: Compensation in Action Instructor Notes: This section outlines the role human resources professionals and line managers take in aligning compensation with strategy. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager. XII.

End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses

Case 1: Competitive Strategy at Sportsman Shoes Instructor Notes: The human resource planning process follows the company’s strategic planning process. In this case, the company is shifting from a low-cost strategy to a differentiation strategy. Under the low-cost strategy, human resource practices focused on controlling costs and working to hire and retain workers focused on efficiency and productivity. The differentiation strategy will require some employees with a different skill set. Certain functions will need high levels of creativity and innovation. Human resource practices must shift to support these needs by attracting the right talent, and motivating the right behaviors to produce shoes for the new niche markets.

Questions and Suggested Student Responses: 1-7.

Following Sportsman’s shift in competitive strategy, what are some considerations for the company’s human resource management practices?

Sportsman’s shift in competitive strategy will require the company to examine all of its’ human resources practices including recruiting, selection, performance appraisal, compensation, and training. Learning Objective: 1-3. Explain strategic compensation decisions. AACSB: Analytical thinking 1-8.

What kind of challenges will Sportsman face specifically in the area of compensation?

The new hires the company will need to make will create some compensation challenges. The company will need to make compensation competitive in the market place to make sure that they are able to attract the new talent needed. However, they must also keep compensation internally consistent at the same time. The company will need to examine its entire compensation strategy (including benefits and incentive pay) to make sure it is aligned with the company’s new goals. Learning Objective: 1-3. Explain strategic compensation decisions. AACSB: Analytical thinking Case 2: Ethics Dilemma: Profits at Any Cost Instructor Notes: Wells Fargo’s incentive pay plan that paid sales commissions based on opening new accounts led to more than 5,000 employees opening 2 million bank accounts for customers who did not request them. Many current and past employees claimed that the unethical behavior was the result of unrealistic sales goals made by the company. Questions and Suggested Student Responses: 1-9.

As a compensation professional, what would you do?

Students may have a variety of responses based on when the compensational professional learned about the concern. When designing the program, the compensation professional should take steps to assure the sales goals were reasonable. After some of the fraudulent activities were identified, it is important for the compensation professional to investigate the problem to assure the design of the incentive system did not encourage unethical behavior. Learning Objective: 1-6. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation professionals perform. AACSB: Ethical understanding and reasoning 14 Copyright © 2020 Pearson Education, Inc.

1-10. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? There are several factors that may have influenced the employees’ unethical behaviors. The high-pressure environment that was created and the threat of losing one’s job or sales commission likely influenced the employees the most. Learning Objective: 1-6. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation professionals perform. AACSB: Ethical understanding and reasoning XIII. Crunch the Numbers! Questions and Suggested Student Responses Calculating the Costs of Increasing the Total Compensation Budget at Butcher Enterprises 1-11. On an average hourly basis, how much does Butcher Enterprises spend on wages and benefits, respectively, in dollars? Butcher Enterprises spends an average of $19 per hour on wages and benefits. 70% of this amount or $13.30 is allocated for wages and 30% or $5.70 for benefits. Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems. AACSB: Analytical thinking 1-12. How much does the company spend on wages and benefits over the course of one year for 100 office workers? Assume that each worker provides 2,080 hours of service each year. The number of hours for 100 workers = 100 x 2080 = 208,000. The average hourly wage of $19 x 208,000 hours = $3,952,000 is how much the company spends on wages and benefits over the course of one year. Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems. AACSB: Analytical thinking

1-13. How much additional money does the company need to match the market rates for this group of 100 employees? You must first calculate the total for wages and benefits for market rate which is $23 x 208,000 hours = $4,784,000. The difference between $4,784,000 and $3,952,000 = $832,000. Therefore, Butcher Enterprises would need to spend an additional $832,000 per year to match the market rate for this group of employees. Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems. AACSB: Analytical thinking XIV. Working Together: Team Exercise with Suggested Student Responses Instructor Notes: Students should select two retailers who sell the same product or services. They should select one retailer that pursues a lowest cost strategy and another that pursues a differentiation strategy. The students should also conduct research to identify one threat or one opportunity for each company. Questions and Suggested Student Responses: 1-14. What is the rationale for the companies you chose? Explain. (Hint: Compare your choices with alternative retailers to help formulate your rationale). Responses will vary based on what retailers the students chose. However, students should be able to articulate the strategy each retailer has selected and why it is a lowest cost or a differentiation strategy. Learning Objective: 1-3. Explain strategic compensation decisions. AACSB: Analytical thinking 1-15. In what way is the opportunity or threat that you identified for each company likely to affect competitive advantage? Explain. Responses will vary based on the companies identified by the students. Learning Objective: 1-3. Explain strategic compensation decisions. AACSB: Analytical thinking

XV. Assisted-Graded Questions 1-16. Explain the similarities and differences between merit pay, incentive pay, and person-focused pay. Explain the role of performance appraisals in merit pay programs. Answer to this question can be found in the MyLab Management 1-17. Discuss how compensation professionals contribute to a firm’s competitive advantage. Answer to this question can be found in the MyLab Management 1-18. MyLab Management Only – comprehensive writing assignment for this chapter. XVI. Additional Case from the MyLab Management Website; Instructor Notes and Questions and Suggested Student Responses Case Name: Is It Time to Hire a Compensation Expert? Instructor Notes: Organizations are challenged to ensure the right number of staff positions relative to line positions. As a company grows, their need for additional human resources staff will likely grow as well. Depending on the company’s goals, different types of human resources expertise may help the organization operate more effectively in order to obtain those goals. Most organizations will hire a recruiter to help acquire new talent for the organization. But, with growth, the compensation-related issues the company faces also grows. Compensation expertise can benefit a growing company by creating a pay structure and competitive benefits that allows the company to attract and retain employees to support future company growth. Questions and Suggested Student Responses: 1-19. Do you think EasySpa would benefit from hiring a compensation professional? How? As the organization plans continued growth, there are many benefits that a compensation professional can provide. Having compensation expertise can help support other practices such as recruitment. By designing a compensation structure that is attractive to candidates, EasySpa may be able to better recruit talent. Further, the pay structure can help hiring managers more effectively set pay rates for new hires. A compensation professional can also help design a benefits package that is both attractive and cost efficient.

Learning Objective: 1-5. Describe the fit of the compensation function in organizations. AACSB: Analytical thinking 1-20. How can Jay convince the CEO to hire a compensation professional? A compensation professional can better structure the company’s compensation by ensuring pay levels are appropriate through ensuring internal consistency in pay while keeping pay levels competitive in the marketplace. Further, a compensation professional may be able to design incentive pay programs to motivate certain groups of employees. By doing so, the company can ensure that funds spent on labor are used effectively. Further, the company may be able to realize savings in benefit costs by using an expert to design the benefits package. Finally, as a key stakeholder in the success of the company, the CEO benefits from the expertise of a compensation professional because they can ensure the company is complying with relevant employment laws. Learning Objective: 1-5. Describe the fit of the compensation function in organizations. AACSB: Analytical thinking

CHAPTER 2 Contextual Influences on Compensation Practice Learning Objectives 2-1. 2-2. 2-3. 2-4. 2-5.

Discuss the reasons for interindustry wage differentials. Explain the factors that contribute to pay differentials based on occupational characteristics. Summarize the reasons for the occurrence of geographic pay differentials. Discuss the role of labor unions in setting compensation. Identify and discuss key employment laws pertinent to compensation practice.

Outline I. II. III. IV. V. VI. VII. VIII. IX. X.

Overview Interindustry Wage Differentials Pay Differentials Based on Occupational Characteristics Geographic Pay Differentials Labor Unions Employment Laws Pertinent To Compensation Practice Key Terms Discussion Questions and Suggested Answers Preparing for My Career: Compensation in Action End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XI. Crunch the Numbers! Questions and Suggested Student Responses XII. Working Together: Team Exercise with Suggested Student Responses XIII. Assisted-Graded Questions XIV. Additional Case from the MyLab Management Website; Instructor Notes and Questions and Suggested Student Responses

Lecture Outline I.

Overview A. Contextual influences on pay 1. Compensation professionals must understand patterns of pay differentials to make informed decisions about pay 2. Must also make decisions within scope of employment and labor laws 3. Global context also influences compensation

II.

Interindustry Wage Differentials A. The differences in wages and benefits across industries 1. Attributed to: a. The industry’s product market b. The degree of capital intensity c. The profitability of the industry d. Unionization B. Companies in Product Markets with Little Competition 1. Generally pay higher wages 2. Exhibit substantial profits 3. Exhibit limited new competition because of: a. Higher barriers to entry b. Insignificant influence of foreign competition 4. Government regulations and extremely expensive equipment represent entry barriers C. Capital Intensity 1. Defined as the extent to which companies’ operations are based on the use of large-scale equipment 2. The amount of average pay varies with the degree of capital intensity a. Generally manufacturing jobs are capital intensive, service jobs are not D. Profitability 1. Companies in more profitable industries tend to pay higher compensation E. Unionization 1. Unionized industries tend to pay higher 2. Power of collectively negotiating leads to higher wages than individually negotiating

III.

Pay Differentials Based on Occupational Characteristics A. Occupation 1. Group of jobs, found at one or more company, in which a common set of tasks are performed or are related in terms of similar objectives methodologies, materials, products, worker actions, or worker characteristics 2. Pay variations can occur within occupations, based on the complexity of the jobs B. Knowledge, skills and abilities 1. Role of job analysis 2. Jobs that require formal education or early experience are paid more C. Supply and demand 1. Companies demand for individuals relative to supply influences compensation

IV.

Geographic Pay Differentials A. Relative pay differentials 1. Occur between geographic areas B. Pay rate differentials 1. Expressed in dollars as hourly or annual pay 2. For occupations based on particular geographic regions 3. Cost of living differences

Labor Unions A. National Labor Relations Act of 1935 (NLRA) 1. Designed to remove barriers to free commerce and to restore equality of bargaining power between employees and employers 2. Collective bargaining agreement is a written document that describes the terms of employment approved by management and employees during negotiations B. Compensation Issues in Collective Bargaining 1. Union and management negotiations usually center on pay raises and employee benefits 2. Cost-of-living-adjustments (COLAs) a. Automatic pay increases based on changes in prices, as indexed by the consumer price index (CPI) b. Enables workers to maintain their standards of living by adjusting wages for inflation 3. Many nonunion companies offer higher compensation than they would if unions did not exist, this phenomenon is known as a spillover effect 4. Union influence has declined because: a. Legislation outlawed unions’ use of intimidation b. Anti-discrimination laws provided protections for women and minorities c. Globalization increasing competition d. Right-to-work laws that prohibit management and unions from entering into agreements requiring union membership as a condition of employment e. Higher rates of unionization in the public or government sector

VI.

Employment Laws Pertinent To Compensation Practice A. Legislative Actions 1. Four Amendments to the U.S. Constitution a. Article 1, Section 8 (“The Congress shall have the power…to regulate Commerce with foreign nations, and among the several States, and with the Indian Tribes…”)

b. First Amendment (“Congress shall make no laws respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”) c. Fifth Amendment (“No person shall...be deprived of life, liberty, or property without due process of law…”) d. Fourteenth Amendment, Section 1 (“No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States, nor shall any State deprive any person of life, liberty, or property without due process of law; nor deny any person within its jurisdiction the equal protection of the law.”) 2. Government has three levels in U.S. a. Federal government oversees the entire U.S. and territories b. State governments enact laws that pertain exclusively to respective regions c. Local governments enact laws that are pertinent to smaller geographic regions B. Income Continuity, Safety, and Work Hours Laws 1. Three main factors a. Great Depression i. Passage of the Social Security Act of 1935 (Title IX) ii. Passage of workers’ compensation programs b. Family businesses to large factories c. Division of labor 2. Fair Labor Standards Act of 1938 (FLSA) 1. Addresses three main issues of minimum wage, overtime pay, and child labor provisions a. Enforced by the U.S. Department of Labor 2. Minimum wage a. Designed to ensure wages for a minimally acceptable standard of living b. Originally set at $0.25 per hour c. Federal law supersedes state minimum wage law where the federal minimum wage is greater than the state 3. Overtime pay provisions a. Defined in FLSA b. Most employers must pay time and one-half for over 40 hours work in a period of 7 consecutive days c. Exempt jobs satisfy three tests used to determine whether an employer must pay overtime, most other jobs are nonexempt 22 Copyright © 2020 Pearson Education, Inc.

d. Fair Pay Rules in 2004 added additional complexity in determining what employees are exempt e. Portal-to-Portal Act of 1947 defines the term hours worked to include these compensable work activities: i. Waiting time ii. On-Call time iii. Rest and meal periods iv. Sleeping time and certain other activities v. Lectures, meetings, and training programs vi. Travel time f. Equal Pay Act of 1963, which prohibits sex discrimination in pay for employees performing equal work 4. Child labor provisions a. Intended to protect children from being overworked, working in potentially hazardous settings, and having their education jeopardized due to excessive work hours b. Children younger than age 14 usually cannot be employed c. Children ages 14 and 15 may work in safe occupations outside school hours with some limitations d. Children ages 16 and 17 do not have hourly restrictions but cannot work in hazardous jobs (e.g., running heavy industrial equipment, working around harmful substances) C. Pay Discrimination Legislation 1. Came out of the Civil Rights Movement of the 1960s 2. Equal Pay Act of 1963 a. Enforced by the Equal Employment Opportunity Commission (EEOC) b. Applies to jobs of equal worth according to the Department of Labor’s definition of compensable factors, such as: i. Levels of skill ii. Effort iii. Responsibility iv. Working conditions c. Jobs must have “similar”, not necessarily the “same” working conditions d. Pay differentials for equal work are not always illegal; are legal where such payments are made pursuant to: i. A seniority system ii. A merit system iii. A system which measures earnings by the quantity or quality of production iv. A differential based on any factor other than gender 23 Copyright © 2020 Pearson Education, Inc.

D. Civil Rights Act of 1964 1. Legislators designed Title VII of this Act to promote equal employment opportunities for underrepresented minorities 2. Disparate treatment discrimination a. Represents intentional discrimination, occurring whenever employers intentionally treat some workers less favorably than others because of: race, color, religion, sex, or national origin 3. Disparate impact discrimination a. Represents unintentional discrimination that occurs whenever an employer applies employment practices to all employees b. The practice leads to unequal treatment of protected employee groups 4. Title VII applies to: a. Companies with 15 or more employees b. Employment agencies c. Labor unions d. Labor management committees controlling apprenticeship and training 5. Lilly Ledbetter Fair Pay Act overturned the Ledbetter v. Goodyear Tire & Rubber Co. case removing allowing women to file a pay discrimination charge within 180 days of a discriminatory paycheck 6. The Paycheck Fairness Act strengthens the remedies available to put sexbased pay discrimination on par with race-based pay discrimination 7. Bennett Amendment (to Title VII) a. Allows female employees to charge employers with Title VII violations regarding pay only when the employer has violated the Equal Pay Act of 1963 8. Age Discrimination in Employment Act of 1967 (ADEA) a. Designed to protect workers age 40 and older (“baby boomers”) from age discrimination b. Older Workers Benefit Protection Act (OWBPA) places additional restrictions on employers’ benefits practices i. Employer may require older employees to pay more for health insurance or life insurance coverage if the cost is significantly greater than the cost for younger workers because these costs generally rise with age ii. Equal benefit or equal cost principle which specifies that employers do not have to provide equal benefits to older workers if it costs them more to do so 9. Civil Rights Act of 1991 a. Designed to overturn several Supreme Court rulings i. Atonio v. Ward Cove Packing Company shifted the burden of proof from the employee to the employer

ii. Lorance v. AT&T Technologies allows employees to file a discrimination claim when the system is implemented or whenever the system negatively affects them iii. Boureslan v. Aramco allows expatriates to file discrimination lawsuits E. Accommodating Disabilities and Family Needs 1. Pregnancy Discrimination Act of 1978 (PDA) a. An amendment to Title VII of the Civil Rights Act of 1964 that prohibits disparate impact discrimination against pregnant women for all employment practices b. Employers must not treat pregnancy less favorably than other medical conditions covered under employee benefits plans 2. Americans with Disabilities Act of 1990 (ADA) a. Prohibits discrimination against individuals with mental or physical disabilities within and outside employment settings b. Applies to employers with 15 or more employees c. Title I requires reasonable accommodations may include such efforts as making existing facilities readily accessible, restructuring jobs, and modifying work schedules 3. Family and Medical Leave Act of 1993 (FMLA) a. FMLA was designed to provide employees with job protection in cases of family or medical emergency b. Guarantees unpaid leave and the right to return to either the same position or a similar position with the same pay, conditions, and benefits F. Prevailing Wage Laws 1. Davis–Bacon Act of 1931 a. Established employment standards for construction contractors holding federal government contracts valued at more than $2,000, including: highway building, dredging, demolition, and cleaning, as well as painting and decorating public buildings 2. Walsh–Healey Contracts Act of 1936 a. Applies to contractors and manufacturers who sell supplies, material, and equipment to the federal government with contracts worth at least $10,000 b. Requires contractors to meet guidelines relating to wages and hours, child labor, convict labor, and hazardous working conditions c. Prohibits contractors from exposing workers to conditions that violate the Occupational Safety and Health Act of 1970

End of the Chapter

VII.

Key Terms

Interindustry wage differentials: Represent the pattern of pay and benefits associated with characteristics of industries Occupation: A group of jobs, found at more than one company, in which a common set of tasks are performed or are related in terms of similar objectives, methodologies, materials, products, worker actions, or worker characteristics National Labor Relations Act of 1935 (NLRA): The purpose of this act was to remove barriers to free commerce and to restore equality of bargaining power between employees and employers Collective bargaining agreement: A written document that describes the terms of employment approved by management and employees during negotiations Spillover effect: Occurs when management of nonunion firms generally offered somewhat higher wages and benefits to reduce the chance that employees would seek union representation Right-to-work-laws: Prohibit management and unions from entering into agreements requiring union membership as a condition of employment Federal constitution: Forms the basis for employment laws Federal government: Oversees the entire United States and its territories State governments: Enact and enforce laws that pertain exclusively to their respective regions Local governments: Enact and enforce laws that are most pertinent to smaller geographic regions Great Depression: Triggered legislation designed to stabilize the income of an individual who became unemployed because of poor business conditions or workplace injuries Social Security Act of 1935 (Title IX): Provided temporary income to workers who became unemployed through no fault of their own Workers’ compensation: Granted income to workers who were unable to work because of injuries sustained on the job Fair Labor Standards Act of 1938 (FLSA): Establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments Exempt: Employees not covered by the FLSA including generally executive, administrative, learned professional, creative professional, computer workers, and outside sales employees Nonexempt: Jobs that are subject to the FLSA overtime pay provision FairPay Rules: Revised FLSA guidelines by the Department of Labor Portal-to-Portal Act of 1947: Defines the term hours worked that appears in the FLSA Equal Pay Act of 1963: Prohibits sex discrimination in pay for employees performing equal work

Civil Rights Act of 1964: Key legislation designed to protect designated classes of employees and to uphold their rights individually against discriminatory employment decisions Compensable factors: Skill, effort, responsibility, and working conditions Title VII: Of the Civil Rights Act was designed to promote equal employment opportunities for underrepresented minorities. Disparate treatment: Represents intentional discrimination, occurring whenever employers intentionally treat some workers less favorably than others because of their race, color, sex, national origin, or religion Disparate impact: Represents unintentional discrimination Ledbetter v. Goodyear Tire & Rubber Co.: U.S. Supreme Court case that rendered a very strict interpretation as to when the statute of limitations period begins for women to sue their employers for discrimination in pay Lilly Ledbetter Fair Pay Act: Restores prior law providing that a pay discrimination charge must simply be filed within 180 days of a discriminatory paycheck Paycheck Fairness Act: Strengthens the Equal Pay Act of 1963 by strengthening the remedies available to put sex-based pay discrimination on par with race-based pay discrimination Bennett Amendment: Allows female employees to charge employers with Title VII violations regarding pay only when the employer has violated the Equal Pay Act of 1963 Age Discrimination in Employment Act of 1967 (ADEA): Protects workers age 40 and older from illegal discrimination Baby boom generation: Generation born roughly between 1946 and 1964 and represented a swell in the American population Older Workers Benefit Protection Act (OWBPA): The 1990 amendment to the ADEA—placed additional restrictions on employer benefits practices Civil Rights Act of 1991: Overturned several Supreme Court rulings Pregnancy Discrimination Act of 1978 (PDA): Prohibits disparate impact discrimination against pregnant women for all employment practices Americans with Disabilities Act of 1990 (ADA): Prohibits disparate impact discrimination against pregnant women for all employment practices. Title I: Of the ADA requires that employers provide reasonable accommodation Family and Medical Leave Act of 1993 (FMLA): Provides guaranteed leave and the right of the employee to return to either the position he or she left when the leave began or to an equivalent position with the same benefits, pay, and other terms and conditions of employment Davis–Bacon Act of 1931: Establishes employment standards for construction contractors holding federal government contracts valued at more than $2,000 Walsh–Healey Public Contracts Act of 1936: Mandates that contractors with federal contracts meet guidelines regarding wages and hours, child labor, convict labor, and hazardous working conditions Occupational Safety and Health Act of 1970: Ensures safe and healthful working conditions for working men and women by authorizing enforcement of the standards under the act

VIII. Discussion Questions and Suggested Answers 2-1.

Which contextual influence do you believe will pose the greatest challenge to companies’ competitiveness? Explain your rationale.

Student answers may vary but they may reference the contextual influences of patterns of pay differentials, pertinent employment and labor relations laws and the global context. Learning Objective: 2-1. Discuss the reasons for interindustry wage differentials AACSB: Analytical thinking

2-2.

Should the government raise the minimum wage? Explain your answer.

Answers can be pro or con. ‘Yes’ answers should discuss living or competitive wages among other things. ‘No’ answers should include impact on business and employment levels. Learning Objective: 2-5. Identify and discuss key employment laws pertinent to compensation practice. AACSB: Analytical thinking 2-3.

Do unions make it difficult for companies to attain competitive advantage? Explain your answer.

Student answers may vary. One might argue that the negotiation of pay and benefits in collectively bargaining agreements may make it difficult for an organization to attain a competitive advantage. However, spillover effects may negate this challenge as many nonunion companies offer higher compensation. Learning Objective: 2-4. Discuss the role of labor unions in setting compensation AACSB: Analytical thinking 2-4.

What are some of the pros and cons of adjusting pay based on cost-of-living differences from a company’s perspective and an employee’s perspective?

Student responses may vary. From the company’s perspective a cost-of-living adjustment may be a con if the company is not performing well and cannot afford the increase. However, cost-of-living adjustments may only represent modest pay increases. From the employee’s perspective, a cost-of-living adjustment may be a pro as it offers automatic pay increases. However, as these pay increases may be modest, employees may feel this is a con as another type of pay increase may be more for the employee. Learning Objective: 2-4. Discuss the role of labor unions in setting compensation AACSB: Analytical thinking

2-5.

Some people argue that there is too much government intervention, whereas others say there is not enough. Based on the presentation of laws in this chapter, do you think there is too little or too much government intervention? Explain your answer.

One could argue that the government doesn’t do enough to intervene based on the fact that although many laws, acts, and decrees protect employees and employers alike, it is difficult to focus attention on some matters. Increases in wages, for example, may be something that the government ought to look into more closely and with more severity. Wages are a great source of struggle and anguish for many people. If the government increases wages in line living costs, then all would be well, but this is not always the case. However, one could also argue that the government gets involved in such issues too readily, and that sometimes it’s best for the employees and employers to work out their differences on their own. Learning Objective: 2-5. Identify and discuss key employment laws pertinent to compensation practice. AACSB: Analytical thinking IX. Preparing for My Career: Compensation in Action Instructor Notes: This section outlines the role human resources professionals and line managers take in complying with employment legislation. While HR is ultimately responsible for the administration of compensation and benefits, line managers must have enough awareness to make informed decisions. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager. X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses Case 1: Take it or Leave it Instructor Notes: Companies with offices in different geographic locations may face challenges as employees transfer between offices. In this case, Martin LeBlanc has been offered a transfer from the company’s Atlanta office to the San Jose office. The new position is considered a lateral move and Martin’s boss Beth informed him that his salary would stay the same.

Questions and Suggested Student Responses: 2-6.

Why did Martin become disappointed?

While not stated in the case, through some online research students can determine that the cost-of-living is higher in San Jose than it is in Atlanta. Therefore, Martin likely expected a geographic pay differential based on the increased cost-of-living in San Jose. Learning Objective: 2-3. Summarize the reasons for the occurrence of geographic pay differentials AACSB: Analytical thinking

2-7.

Do you think that Beth’s decision was reasonable? Why or why not?

If you consider that Beth was following company policy regarding pay raises, her decision could be considered reasonable. However, she should compare Martin’s salary to the salary of other employees in the same role in the San Jose office to determine if she should offer him a pay increase. Learning Objective: 2-3. Summarize the reasons for the occurrence of geographic pay differentials AACSB: Analytical thinking

2-8.

What are some of the factors that Beth should consider when transferring employees from Atlanta to San Jose? From San Jose to Atlanta?

From a compensation perspective, Beth should consider the increase in the cost-of-living from Atlanta to San Jose. This could include the cost for groceries, housing, utilities, transportation, and healthcare. For employees moving from San Jose to Atlanta, the issue becomes more complex as companies do not typically lower an employee’s pay when they transfer. However, she should again keep in mind the geographic differences. Learning Objective: 2-3. Summarize the reasons for the occurrence of geographic pay differentials AACSB: Analytical thinking Case 2: Ethics Dilemma: Perpetuating the Gender Pay Gap at Safe Security Alarm Systems

Instructor Notes: Two candidates are offered two different jobs, but both jobs have the same required skills, knowledge, abilities, education, and relevant work experience. Sally, the hiring manager, believes she is being fair by offering each candidate a 10% increase over their last pay rate. However, this decision results in a significantly lower salary for the female candidate. Questions and Suggested Student Responses: 2-9.

As a compensation professional, what would you do?

As a compensation professional it is important to make the right decision ethically, but also from a legal perspective. It is important to treat employees equitably and in this case; the two jobs have all of the same compensable factors including the required skills, knowledge, abilities, education, and relevant work experience. While Sally’s approach may seem fair as both candidates are being treated the same, the outcome is significantly different for both candidates. Given that the roles are equal based on the compensable factors, offering Jill the lower salary could be considered pay discrimination. Learning Objective: 2-5. Identify and discuss key employment laws pertinent to compensation practice AACSB: Ethical understanding and reasoning 2-10. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? One’s belief about fairness might influence Sally to make a less-than-ethical decision in this case. Sally wants to offer both candidates a 10% salary increase so she believes the offers are fair. Further, Jill is excited about the offer as she wants to leave her current job. Her joy at receiving the job offer could also influence Sally’s decision. Learning Objective: 2-5. Identify and discuss key employment laws pertinent to compensation practice AACSB: Ethical understanding and reasoning

XI. Crunch the Numbers! Questions and Suggested Student Responses Comparison of Compensation and Benefits Cost in Union and Nonunion Settings 2-11. As a percent of total compensation costs for union settings, how much do these companies spend to provide (a) wages and salaries, and (b) total benefits? As a percent of total compensation costs in nonunion settings, how much do these companies spend to provide (c) wages and salaries and (d) total benefits?

a) Union settings, wages and salaries as a percent of total compensation = 28.94/50.21 = 57.6% b) Union settings, total benefits as a percent of total compensation = 21.27/50.21 = 42.4% c) Non-union settings, wages and salaries as a percent of total compensation = 26.09/38.04 = 68.6% d) Non-union settings, total benefits as a percent of total compensation = 11.95/38.04 = 31.4% Learning Objective: 2-4. Discuss the role of labor unions in setting compensation AACSB: Application of knowledge 2-12. By what percent are compensation costs in union settings higher than in nonunion settings for (a) wages and salaries and for (b) total benefits? If nonunion companies want to reduce the gap by 10 percent, how much will they pay to provide (c) paid leave, (d) supplemental pay, (e) insurance, and (f) retirement and savings benefits? a) Compensation costs in union settings are higher than in non-union settings for wages and salaries = 50.21 – 38.04 = 12.17 higher, or 24.2% (12.17/50.21) b) Compensation costs in union settings are higher than in non-union settings for benefits = 21.27 – 11.95 = 9.32 higher, or 43.8% (9.32/21.27) Nonunion companies may want to reduce the gap between benefit costs of union companies due to the spillover effect. To do so, they would need to increase their spending on benefits by 10%. c) Paid leave = 2.58 x 1.10 = 2.84 d) Supplemental pay = 1.42 x 1.10 = 1.56 e) Insurance = 3.08 x 1.10 = 3.39 f) Retirement and savings = 1.88 Learning Objective: 2-4. Discuss the role of labor unions in setting compensation AACSB: Application of knowledge 2-13. If costs were to increase by 5 percent in union settings, what would the new costs be for (a) wages and salaries and (b) total benefits? To maintain the 10 percent reduction (questions 2-12), how much would nonunion companies spend on (a) wages and salaries and for (b) total benefits? a) 5% increase in wages in union settings = 28.94 x 1.05 = 30.39 b) 5% increase in total benefits in union settings = 21.27 x 1.05 = 22.33 c) 10% reduction in gap wages in nonunion settings (increase by 10%) = 26.09 x 1.10 = 28.70 d) 10% reduction in gap total benefits in nonunion settings (increase by 10%) = 11.95 x 1.10 = 13.15

Learning Objective: 2-4. Discuss the role of labor unions in setting compensation AACSB: Application of knowledge XII. Working Together: Team Exercise with Suggested Student Responses Instructor Notes: Students are asked to conduct research online related to the topics discussed in this chapter. Questions and Suggested Student Responses: 2-14.

What information in your research did you find most surprising? Explain.

Student responses will vary depending upon the topics the students choose to research. Learning Objective: Could apply to any learning objectives depending upon the topics the students choose to research. AACSB: Reflective thinking 2-15. What information in your research did you find least surprising? Explain. Student responses will vary depending upon the topics the students choose to research. Learning Objective: Could apply to any learning objectives depending upon the topics the students choose to research. AACSB: Reflective thinking

XIII.

Assisted-Graded Questions

2-16. How would the compensation system change if the minimum wage provision of the Fair Labor Standards Act of 1938 were repealed? Answer to this question can be found in MyLab Management 2-17. Suggest ways that companies in low-paying industries can increase their ability to attract and retain highly qualified individuals. Answer to this question can be found in MyLab Management 2-18. MyLab Management Only – comprehensive writing assignment for this chapter.

XIV. Additional Case from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Preparing for Growth at Waxman Candles Instructor Notes: In determining a company’s compensation strategy, a company must analyze both external and internal factors that may impact the strategy. Such an analysis can help support a company’s compensation tactics and ensure effective practices are in place to attract and retain the right talent. This is especially important for companies that are in the growth stage as they can ensure that compensation decisions are made deliberately and the company is positioned well for future growth.

Questions and Suggested Student Responses: 2-19. What are some competitive forces that human resource management consultant will consider in conducting a strategic analysis to determine compensation practices? The consultant should examine the external market environment. In searching for some experienced staff, such as marketing professionals, it is important to understand how to position the company to compete for talent. The consultant should also make an assessment of the labor market. As many of the positions require little skill, understanding the available labor pool and typical earnings ranges will help determine the compensation strategy. Internally, the consultant should examine the necessary capabilities for the different functional areas. For example, because the customization of the product is what differentiates the product from competitors, the customer service function is crucial to business success. Further, the financial condition of the company will help set the parameters of the compensation strategy. AACSB: Analytical thinking 2-20. How will being in the growth stage impact the company’s compensation practices? Even though the company appears to be financial stable, as a company in the growth stage they must still be aware of cash flow concerns as they determine compensation tactics. Further, they will likely limit discretionary benefits as they have a high cost. The company may choose to emphasize incentive pay, which ties pay to the company’s profitability as they grow. AACSB: Analytical thinking

CHAPTER 3 Traditional Bases for Pay: Seniority and Merit Learning Objectives 3-1. 3-2. 3-3. 3-4. 3-5.

Describe seniority and longevity pay practices. Explain the merit pay approach to compensation. Explore a variety of performance appraisal methods. Discuss how compensation professionals can strengthen the pay-for-performance link. Summarize the possible limitations of merit pay programs. Outline

I. Seniority and Longevity Pay II. Merit Pay III. Performance Appraisal IV. Strengthening the Pay-for-Performance Link V. Possible Limitations of Merit Pay Programs VI. Key Terms VII. Discussion Questions and Suggested Answers VIII. Preparing for My Career: Compensation in Action IX. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses X. Crunch the Numbers! Questions and Suggested Student Responses XI. Working Together: Team Exercise with Suggested Student Responses XII. Assisted-Graded Questions XIII. Additional Case from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline I.

Seniority and Longevity Pay A. Overview 1. Reward employees with periodic additions to base pay according to length of service 2. Rationale based on the human capital theory 3. Human capital theory based on belief that employees’ knowledge and skills generate productive capital and that they can be developed through formal education and training

B. Historical Overview 1. National Labor Relations Act of 1935 (NLRA) a. President Franklin D. Roosevelt’s response to: i. Economic disaster caused by the Great Depression of 1929 ii. Desire for balance of power between labor and management b. Established the collective bargaining system 2. Collective Bargaining a. Led to job control unionism in which collective bargaining units negotiate formal contracts with employees and provide quasi-judicial grievance procedures 3. Seniority pay systems a. Essentially provide automatic pay increases b. Performance assessments tend to be subjective c. The automatic pay adjustments were used to protect public sector employees from political quirks C. Who Participates? 1. Most unionized private and public sector organizations a. Union rank-and-file and clerical workers 2. In public sector, most administrative, professional, and even managerial employees receive automatic pay raises. D. Effectiveness of Seniority Pay Systems 1. Virtually no systematic research demonstrating seniority pay system plans’ effectiveness or prevalence in the private sector 2. Will probably disappear from for-profit companies in the future due to: a. Increased global competition b. Rapid technological advances c. Skill deficits of new and current workers 3. Federal government has considered moving beyond seniority-based pay E. Design of Seniority Pay and Longevity Pay Plans 1. Seniority pay a. Object is to reward job tenure through permanent increases to base salary b. Employees start at set base pay then receive time-designated pay increases c. Employees can reach a maximum pay level for a position, but are expected to be promoted and qualify for a new, higher pay structure 2. Longevity pay a. Rewards employees who have reached pay grade maximums and who are not likely to move into higher grades

II.

b. Federal employees are subject to longevity pay via the General Schedule (GS) system i. Classifies federal government jobs into 15 steps (GS 1 through GS 15) ii. Is based on such factors as skill, education, and experience levels iii. Jobs that require high levels of specialized education, have significant influence on public policy, or require executive decision making are classified separately (e.g., Senior Level, Scientific and Professional, Senior Executive Service) iv. Employees are eligible for 10 within-grade step pay increases v. Waiting periods within each step are: Steps 1–3 = 1 year per step; Steps 4–6 = 2 years per step; Steps 7–9 = 3 years per step F. Advantages of Seniority Pay Plans 1. Employees may perceive that they are treated fairly because they earn pay increases by an objective standard instead of supervisory judgment 2. Set pay increases facilitate the administration of pay programs for employers 3. Avoids the perception, by employees, of favoritism G. Fitting Seniority Pay with Competitive Strategies 1. Seniority pay does not fit well with the imperatives of competitive strategies because employees can count on receiving the same pay raises regardless of performance or if companies meet their competitive objectives Merit Pay A. Overview 1. Pay programs that assume that employees’ compensation over time should be determined, at least in part, by differences in job performance 2. Permanent increases are based on performance B. Who Participates? 1. Merit pay is one of the most common compensation methods in the U.S. 2. Occur most often in the private for-profit sector of economy C. Exploring the Elements of Merit Pay 1. Based on objective and subjective indicators of an employee’s job performance 2. Employees must perceive a strong relationship between attaining performance standards and pay increases 3. Adequate funds should be available to fulfill promises to compensate employees 4. Adjustments to base pay should be made according to changes in the cost of living or inflation before awarding merit pay raises 5. Just-meaningful pay increase refers to the minimum pay increase that employees will see as making a meaningful change in compensation 37 Copyright © 2020 Pearson Education, Inc.

III.

6. Must set explicit performance standards that specify the procedures or outcomes against which employees’ job performance can be clearly evaluated Performance Appraisal A. Types of Performance Appraisal Plans 1. Trait systems 2. Comparison systems 3. Behavioral systems 4. Goal-oriented systems B. Trait Systems 1. Are based on having raters evaluate each employee’s traits or characteristics 2. Appraisals are typically scored using descriptors ranging from unsatisfactory to outstanding 3. They are easy to construct, use, and apply to a wide range of jobs 4. They are easy to quantify 5. They are common in companies that rely on customer service 6. Drawbacks a. Can be highly subjective b. These systems rate individuals on subjective personality factors rather than objective job performance data C. Comparison Systems 1. Evaluate a given employee’s performance against that of other employees 2. Forced distribution is an alternate approach that assigns employees to groups that represent an entire range of performance (such as best, moderate, and poor performers) a. Not popular with managers because it fosters cutthroat competition b. Can distort ratings because employee performance may not fall into predetermined distributions 3. Paired comparisons a. Each employee is compared to all others b. Each employee is ranked according to the number of times they are identified as being the better performer c. This method is best suited for small groups of employees who perform the same or similar jobs D. Behavioral Systems 1. Rate employees on the extent to which they display successful job performance behaviors 2. These objective job behavioral methods, when developed and applied correctly, provide results that are relatively free of rater errors and biases

3. Critical incident technique (CIT) a. Requires job incumbents and their supervisors to identify performance incidents that distinguish successful performance from unsuccessful ones b. Supervisors then observe employees and record their performance on these critical job aspects 4. Behaviorally anchored rating scale (BARS) a. Similar to CIT, except the incidents are written as expectations instead of achieved behaviors b. Advantages i. Most highly defensible in court because it is based on actual observable job behaviors ii. Encourages all raters to make evaluations in similar ways c. Disadvantages i. Difficult to maintain the volume of data ii. Each job must have distinct appraisal documents iii. As jobs change, so must documentation E. Goal-Oriented Systems 1. Management by objectives (MBO) perhaps is the most effective performance appraisal technique because: a. Supervisors and employees determine objectives for employees to meet b. Employees rate themselves on how well they think they met the objectives 2. Evaluates employees’ progress toward strategic planning objectives 3. Drawbacks a. Companies generally do not fully describe the scope of managerial positions b. Time consuming c. Requires a constant flow of information between supervisor and employee d. Focuses on specific goals at the exclusion of other vital outcomes, which is referred to as a “results at any cost” mentality

Exploring the Performance Appraisal Process 1. Purposes a. Represents a company’s way of telling employees the company’s expectations of them b. Informs employees how well they are meeting those goals 2. Merit pay increases based on factors other than job performance can lead to charges of illegal pay discrimination (violation of the Equal Pay Act of 1963) 3. In Brito v. Zia Company, the court found that the Zia Company violated Title VII when a disproportionate number of protected class individuals were laid off on the basis of low performance appraisal scores 4. Four activities to promote nondiscriminatory performance appraisal practices a. Conduct job analyses to ascertain characteristics necessary for a content valid performance appraisal system b. Incorporate these characteristics into a rating instrument c. Train supervisors to use the rating instrument properly d. Set up formal appeal mechanisms and have upper-level personnel review the ratings to insure accuracy and effectiveness 5. Sources of performance appraisal information a. Five main sources are the employee’s: i. Self ii. Supervisor iii. Coworkers iv. Subordinates (if applicable) v. Customers or clients (if applicable) b. 360-degree performance appraisals are performance appraisal systems that rely on many appropriate sources of performance related information 6. Errors in the performance appraisal process a. Rating errors reflect differences between human judgment processes versus objective, accurate assessments uncolored by bias, prejudice, or other subjective, extraneous influences b. Bias errors i. Happen when rater evaluates employees based on a negative or positive opinion of the employee rather than on the employee’s actual performance ii. First-impression effect—a manager would have a tendency to make an initial judgment about an employee, and allows that to affect their appraisal iii. Halo effects—rater generalizes behavior on one aspect of the job to all aspects of the job 40 Copyright © 2020 Pearson Education, Inc.

IV.

iv. Similar-to-me effect—tendency on the part of raters to favorably judge employees whom they perceive as similar to themselves v. Illegal discriminatory bias occurs when supervisors allow an employee’s race, gender, nationality, or religion influence their performance ratings e. Contrast errors take place when the rater compares the employee to other employees rather than to specific performance standards f. Errors of central tendency occur when a supervisor rates all employees as average or close to average g. Errors of leniency or strictness i. Reflect the tendency to rate every employee at the high end or low end of the scale, regardless of actual performance ii. With a leniency error, managers rate employees’ performances more highly than they would rate them using objective criteria iii. The opposite occurs with errors of strictness G. Are Traditional Performance Appraisal Methods Becoming Irrelevant? 1. Many companies have scrutinized the traditional performance appraisal process 2. Some companies have set aside more formal processes in favor of frequent informal check-ins 3. Informal performance appraisals have advantages and limitations Strengthening the Pay-for-Performance Link A. Link Performance Appraisals to Business Goals 1. Employee performance should be linked to the company’s competitive strategy B. Analyze Jobs 1. Job analysis is important for establishing internally consistent compensation systems 2. Supervisors should match the employees’ performance to the job description C. Communicate 1. Employees must clearly understand the link between performance and what their increase may be D. Establish Effective Appraisals 1. Should be tied to employee’s future performance goals and career plans 2. Deficiencies in performance should include methods to remedy 3. Performance standards should be used for establishing performance targets E. Empower Employees 1. Encourage employee self-appraisals between formal sessions

F. Differentiate Among Performers 1. Merit increases should consist of meaningful increments 2. Merit increases should clearly reflect differences in actual job performance Possible Limitations of Merit Pay Programs A. Failure to Differentiate among Performers 1. Poor performers may receive merit increases even though they’re not warranted B. Poor Performance Measures 1. May be too subjective 2. Developing performance measures for every job is difficult and expensive C. Supervisors’ Biased Ratings of Employee Job Performance 1. Supervisors are subject to a number of errors when they make subjective assessments D. Lack of Open Communication between Management and Employees 1. Lack of good communication can lead employees to mistrust the performance appraisal process E. Undesirable Social Structures 1. Pay grades can reflect status differentials 2. Permanent merit increases may rigidify the relative pay status of employees over time F. Mounting Costs 1. Merit pay presents an escalating cost burden to companies G. Factors Other Than Merit 1. Supervisors may subconsciously use age or seniority instead of merit 2. Supervisors may let personal feeling determine pay increases 3. Company politics that puts focus on supervisors’ agendas or goals instead of work goals H. Undesirable Competition 1. Between individual employees for limited funds 2. Between individuals in team settings, which may hinder teamwork I. Little Motivational Value 1. When employers and employees disagree on what is a “large enough” increase 2. When the yearly increase seems negligible on each paycheck

End of the Chapter VI.

Key Terms

Seniority pay: System that rewards employees with periodic additions to base pay according to employees’ length of service in performing their jobs Longevity pay: Systems that rewards employees with periodic additions to base pay according to employees’ length of service in performing their jobs Human capital theory: States that employees’ knowledge and skills generate productive capital known as human capital Job control unionism: Collective bargaining units negotiate formal contracts with employees and provide quasi-judicial grievance procedures to adjudicate disputes between union members and employers General Schedule (GS): Classifies federal government jobs into 15 classifications (GS1 through GS-15) based on such factors as skill, education, and experience levels Merit pay programs: Assume that employees’ compensation over time should be determined, at least in part, by differences in job performance Just-meaningful pay increase: Minimum pay increase that employees will see as making a meaningful change in compensation Trait systems: Ask raters to evaluate each employee’s traits or characteristics Comparison systems: Evaluate a given employee’s performance against that of other employees Forced distribution: Assigns employees to groups that represent the entire range of performance Paired comparisons: Supervisors compare each employee to every other employee, identifying the better performer in each pair Behavioral systems: Rate employees on the extent to which they display successful job performance behaviors Critical incident technique (CIT): Requires job incumbents and their supervisors to identify performance incidents (e.g., on-the-job behaviors and behavioral outcomes) that distinguish successful performance from unsuccessful ones Behaviorally anchored rating scales (BARS): Performance assessment tool where incidents are written as expectations to emphasize the fact that the employee does not have to demonstrate the exact behavior that is used as an anchor in order to be rated at that level Management by objectives (MBO): Supervisors and employees determine objectives for employees to meet during the rating period and employees appraise how well they have achieved their objectives Brito v. Zia Company: The court found that the Zia Company violated Title VII when a disproportionate number of protected class individuals were laid off on the basis of low performance appraisal scores 360-degree performance appraisal methods: Performance appraisal systems that rely on many appropriate sources of information Rating errors: Reflect differences between human judgment processes versus objective, accurate assessments uncolored by bias, prejudice, or other subjective, extraneous influences 43 Copyright © 2020 Pearson Education, Inc.

Bias errors: When the rater evaluates the employee based on a personal negative or positive opinion of the employee rather than on the employee’s actual performance First-impression effect: When a rater makes an initial favorable or unfavorable judgment about an employee and then ignores or distorts the employee’s actual performance based on this impression Positive halo effect: When a rater generalizes an employee’s good behavior on one aspect of the job to all aspects of the job Negative halo effect: When a rater generalizes an employee’s bad behavior on one aspect of the job to all aspects of the job Similar-to-me effect: Refers to the tendency on the part of raters to judge favorably employees whom they perceive as similar to themselves Illegal discriminatory bias: When a supervisor rates members of his or her race, sex, nationality, or religion more favorably than members of other classes Contrast errors: When the rater compares an employee with other employees rather than to specific, explicit performance standards Errors of central tendency: When supervisors rate all employees as average or close to average Leniency error: When a rater appraises employees’ performance more highly than they really rate compared with objective criteria Strictness errors: When a supervisor rates an employee’s performance lower than it would be if compared against objective criteria Internally consistent compensation systems: Job analysis is vital in establishing these systems in order to clarify the standards against which employees’ performance is judged

VII. Discussion Questions and Suggested Answers 3-1.

Human capital theory has been advanced as a rationale underlying seniority pay. Identify two individuals you know who have performed the same job for at least 2 years. Ask them to describe the changes in knowledge and skills they experienced from the time they assumed their jobs to the present. What did you find most interesting in your discussion? Explain.

Student responses will vary. Students should note that the individuals they spoke to developed knowledge and skills over time to build their understanding of human capital theory. Learning Objective: 3-1. Describe seniority and longevity pay practices AACSB: Analytical thinking

3-2.

Subjective performance evaluations are subject to several rater errors, which makes objective measures seem a better alternative. Are there instances where subjective performance evaluations might be better (or more feasible) than objective ratings? Explain.

Subjective performance evaluations might be better or more feasible if an employee works in a job where it is challenging to measure performance. This might be the case for management positions where successful performance depends on subjective measures such as employee perceptions of the manager. Learning Objective: 3-3. Explore a variety of performance appraisal methods. AACSB: Analytical thinking 3-3.

Consider a job that you have held. Write a brief job description. Then, develop a behaviorally anchored rating scale (BARS). What are some of the strengths and weaknesses associated with BARS?

Student responses will vary based on the job description they provide. Some strengths associated with BARS include that it is the most defensible in court because it is based on actual observable job behaviors and it encourages raters to make evaluations in the same way. A weakness of BARS is that it is difficult to develop and maintain the volume of data necessary to make it effective. Learning Objective: 3-3. Explore a variety of performance appraisal methods. AACSB: Application of knowledge 3-4.

Merit pay plans appear to be the most common form of compensation in the United States. Although widely used, these systems are not suitable for all kinds of jobs. Based on your knowledge of merit pay systems, identify one job for which merit pay may be appropriate and another for which it may be inappropriate. What is the rationale for your choices?

Student responses will vary. Merit pay may be appropriate for a wide range of jobs where there are long term opportunities to measure performance. Some examples include a project manager or an accountant. One example of a job for which merit pay may be inappropriate is the job of a temporary worker. Temporary workers do jobs that are not well suited for merit pay because there is no long-term opportunity to measure performance. Certain sales jobs may not be suitable for merit pay if employees are paid based mostly on commissions. Learning Objective: 3-2. Explain the merit pay approach to compensation. AACSB: Application of knowledge

3-5.

Should companies abandon traditional performance appraisal methods in favor of frequent conversations about employee performance? Explain.

Some companies are abandoning traditional performance appraisals as they may be concerned that they reduce annual employee performance to a numeric rating. Talking about performance more often can be valuable to employees. However, using the information from check-ins to make fair and consistent pay raise decisions may be problematic. Learning Objective: 3-3. Explore a variety of performance appraisal methods. AACSB: Analytical thinking VIII. Preparing for My Career: Compensation in Action Instructor Notes: This section outlines the role human resources professionals and line managers take in in rewarding employees on measurable accomplishments. HR must take the lead in designing performance appraisal plans and training managers. Line managers must support the performance management process through determining performance criteria and using appraisals to accurately compensate employees. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager.

IX. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses Case 1: The Dreaded Performance Appraisal Instructor Notes: Rajiv Chaudhry just finished completing performance appraisal forms for his 12 road maintenance employees. He had to complete the appraisals at a time when the crew had a heavy workload. Rajiv made several errors in the rating process by rating all of the employees highly, and allowing recent events to influence his review of two employees. Rajiv does not have a positive view of performance appraisals and it seems that is because he has not received proper training in doing the appraisals. Questions and Suggested Student Responses: 3-6.

What weaknesses do you see in Rajiv’s performance appraisals?

Rajiv made some rating errors in the performance appraisals. He focused only on recent job performance and rated most employees high, which is an error of leniency. This was especially impactful for Roger as he did not perform as well as others. Further, Rajiv’s review was biased against Joe Blum. Finally, he did not provide any written comments to support his review of the employees. 46 Copyright © 2020 Pearson Education, Inc.

Learning Objective: 3-3. Explore a variety of performance appraisal methods. AACSB: Analytical thinking

3-7.

Should HR have the ability to insist that the forms be “completed right away”? Discuss.

It is important for HR to help ensure performance appraisals are completed in a timely manner in order provide employees feedback that is recent. On-time reviews are particularly important if merit pay calculations must be made. However, it is more important to conduct effective and complete performance appraisals. Therefore, HR should understand business needs and potential barriers to timely completion when setting deadlines. Learning Objective: 3-3. Explore a variety of performance appraisal methods. AACSB: Analytical thinking 3-8.

Many managers would agree with Rajiv’s beliefs that performance appraisals are a nuisance and unnecessary. What are the disadvantages in doing away with performance appraisals?

Performance appraisals represent a company’s way of telling employees what is expected of them and how well they are meeting expectations. Without the performance appraisals, supervisors may not communicate effectively with employees. Further, doing away with performance appraisals could make it difficult to make fair and consistent pay decisions. Learning Objective: 3-3. Explore a variety of performance appraisal methods. AACSB: Analytical thinking Case 2: Ethics Dilemma: Pay for Performance Disconnect Instructor Notes: As a new vice president of HR in a high-pressure environment where there is a mandate to deliver results, you have a 52 year old employee who is not meeting performance expectations. However, no one has ever informed this employee that he was not performing well and he has been receiving good evaluations and pay raises annually. You feel you should fire him in order to demonstrate that you are willing to make tough decisions.

Questions and Suggested Student Responses: 3-9.

What would you do?

While an HR manager must make tough decisions and be willing to do so in difficult financial times for an organization, it is important to also make fair and consistent decisions. In this case, the employee may not be performing well, however, he has not been given an opportunity to improve his performance. To be fair to both the company and the employee, it is time to have an honest discussion with him and provide him with feedback on his performance. If he does not show improvement after some time, then firing could be appropriate. Learning Objective: 3-3. Explore a variety of performance appraisal methods. AACSB: Ethical understanding and reasoning 3-10. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? In this case, the company’s overall performance created a high-pressure environment where ethical behaviors become more challenging. Further, when you are in a new role, you might also feel some pressure to make difficult, and potentially unethical decisions. Learning Objective: 3-3. Explore a variety of performance appraisal methods. AACSB: Ethical understanding and reasoning

Crunch the Numbers! Questions and Suggested Student Responses

Determining Pay Increases in Job Classification Plans 3-11. Using the General Schedule, calculate the number of years it would take an employee to advance from the starting position in Grade 11 (Step 1) to Step 10 if she is demonstrating acceptable performance. The employee must wait 1 year in each step for steps 1, 2, and 3 = 3 years total The employee must wait 2 years in each step for steps 4, 5, and 6 = 6 years The employee must wait three years in each step for steps 7, 8, and 9 = 9 years Therefore it would take the employee 3 + 6 + 9 = 18 years to move from Step 1 to Step 10. Learning Objective: 3-1. Describe seniority and longevity pay practices. AACSB: Application of knowledge

3-12. Another employee asked what his salary would likely be after completing two additional yeas of service. This employee just entered his first year in Grade 4 (Step 5). If he was to demonstrate acceptable performance, calculate the expected salary after completing two years of service. At step 5, the employee can move ahead one step after two years of service. Therefore, the employee could advance to step 6 in Grade 4 where the salary is $30,181. Learning Objective: 3-1. Describe seniority and longevity pay practices. AACSB: Application of knowledge

3-13. All pay rates typically increase each year based on changes in the Consumer Price Index. Calculate the Grade 7 WGI amount based on an overall 3 percent increase. The current WGI amount in Grade 7 is $1,195. A 3% increase = 1,195 x 1.03 = $1,230.85. Learning Objective: 3-1. Describe seniority and longevity pay practices. AACSB: Application of knowledge

XI. Working Together: Team Exercise with Suggested Student Responses Instructor Notes: Students should explore http://www.careeronestop.org and identify and compare two or more jobs. Questions and Suggested Student Responses: 3-14. What are some of the tools available to users of Careeronestop? Which (one or two) resources(s) do you feel will be most helpful as you think about finding full-time employment after earning your degree? Explain. Students may find a wide variety of tools on the Careeronestop website. Some examples include career exploration tools, training resources, job search tools, as well as local resources. Responses on the most helpful tools will vary. Learning Objective: 3-4. Discuss how compensation professionals can strengthen the pay-for-performance link. AACSB: Reflective thinking

3-15. Job descriptions for jobs with the same titles will vary somewhat because companies customize them to fit the situation. What are some similarities and differences that you found? Based on those differences, how likely are you to recommend different pay rates? Explain. The similarities and differences will vary based on the jobs. Recommending different pay rates will vary depending on the significance of the differences between jobs. Learning Objective: 3-4. Discuss how compensation professionals can strengthen the pay-for-performance link. AACSB: Analytical thinking XII.

Assisted-Graded Questions

3-16. A company of 15 employees has recently decided to overhaul its performance appraisal system. Which plan would be most appropriate for the company to adopt? Why? Answer to this question can be found in the MyLab Management 3-17. Using the principles of seniority pay and merit pay, explain whether you believe it makes sense to apply both programs simultaneously. Answer to this question can be found in the MyLab Mangement 3-18. MyLab Management Only – comprehensive writing assignment for this chapter.

XIII. Additional Case from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Pay Overtime or Hire More Staff? Instructor Notes: Under the Fair Labor Standards Act (FLSA), employers are required to pay overtime pay to non-exempt workers for hours worked in excess of 40 hours in one workweek. Part of the original intent of the FLSA was to encourage employment by creating an incentive for employers to hire additional workers by requiring overtime pay. Often, it is more cost efficient to hire additional workers instead of consistently paying overtime pay to current workers. However, it is important to consider all of the costs associated with hiring a new employee when evaluating the need for additional staff.

Questions and Suggested Student Responses: 3-19. What are some factors that Heidi should consider as she determines whether or not she should hire an additional worker? Heidi needs to understand the company’s long-term workload expectations. Sometimes paying overtime is more cost efficient than hiring additional workers. Students may actually do some calculations in determining the response to this question. They may want to consider the number of employees, the average amount of overtime and the costs of paying overtime. As they consider the cost of overtime, they should consider the cost of producing a product. At $20 per hour, 40 hours of work costs $800, but $800 provides only about 26 hours of overtime work. Therefore, overtime pay adds to the overall cost of producing a product. Students should also consider the other fixed costs of hiring a new employee including benefits. AACSB: Application of knowledge 3-20. Based on the information provided, do you think Heidi should hire an additional worker? If each of the twenty-five workers works just 8 hours of overtime each month, the company is paying nearly $6,000 per month in overtime pay. Hiring one additional worker would only cost about $3,200 per month. After considering the added productivity that another worker could add, even with relatively high benefit costs, it would seem logical to hire at least one additional staff member. However, Heidi should first examine demand forecasts to determine if current demand levels will be maintained over time.

AACSB: Application of knowledge

CHAPTER 4 Incentive Pay Learning Objectives 4-1. 4-2. 4-3. 4-4. 4-5. 4-6.

Explore the incentive pay approach. Describe the differences between incentive pay methods and traditional pay methods. Explain the practice of individual incentive pay plans. Summarize the practice of group incentive plans. Describe the practice of company-wide incentive plans. Summarize considerations when designing incentive pay programs. Outline

I. II. III. IV. V. VI. VII. VIII. IX. X.

Exploring Incentive Pay Contrasting Incentive Pay with Traditional Pay Individual Incentives Group Incentives Company-Wide Incentives Designing Incentive Pay Programs Key Terms Discussion Questions and Suggested Answers Preparing for My Career: Compensation in Action End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XI. Crunch the Numbers! Questions and Suggested Student Responses XII. Working Together: Team Exercise with Suggested Student Responses XIII. Assisted-Graded Questions XIV. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline I.

Exploring Incentive Pay A. Compensation, other than base wages or salaries, which fluctuates according to employees’ attainment of some standard such as a preestablished formula, individual or group goals or company earnings 1. Effectiveness based on three assumptions a. Individual employees and work teams differ in how much they contribute to the company, and in how well they do it b. The company’s overall performance depends on the performance of its employees c. How well it attracts, retains, and motivates high performers 52 Copyright © 2020 Pearson Education, Inc.

2 Adds to base pay as a one-time payment 3. Designed to control payroll costs or to motivate employee productivity II.

Contrasting Incentive Pay with Traditional Pay A. Traditional pay plans based on: 1. Fixed hourly wage or annual salary 2. Raises based on length of service or supervisor’s subjective ratings B. Incentive pay programs are designed to reward employees, teams of employees, or whole companies for performance 1. Classified into three categories a. Individual incentive plans b. Group incentive plans c. Company-wide incentive plans

III.

Individual Incentives A. Individual incentives are appropriate when 1. Performance can be measured objectively 2. Employees have sufficient control over work outcomes 3. The incentives do not create a level of unhealthy competition among workers B. Defining Individual Incentives 1. Individual incentive plans reward employees for meeting such workrelated performance standards as quality, productivity, customer satisfaction, safety, or attendance 2. Managers should choose factors that are within the individual employee’s control when they create individual performance standards C. Types of Individual Incentive Plans 1. Piecework Plans a. Two types: i. Rewards based on individual production against an objective standard ii. Rewards based on individual performance standards that include both objective and subjective criteria b. Two advantages to companies using piecework plans in manufacturing settings: i. Incentive effect refers to a worker’s willingness to work diligently to produce more quality output ii. Sorting effect refers to an employee’s choice to stay versus leave for another job, probably one without an incentive pay contingency

IV.

2. Management incentive plans award bonuses to managers when they meet or exceed objectives based on sales, profits, production or other measures 3. Behavioral encouragement plans award employees for specific behavioral accomplishments such as good attendance or safety records 4. Referral plans award employees for referring new customers or recruiting successful job applicants 5. Spot bonuses are relatively small monetary gifts provided to employees for outstanding work or effort during a reasonably short period of time 6. Signing bonuses are monetary awards given to promote recruitment and job offer acceptance C. Advantages of Individual Incentive Plans 1. Can promote the relationship between pay and performance 2. Can promote an equitable distribution of compensation within companies 3. Can instill an ownership mentality for employees who participate 4. These plans are compatible with the individualistic cultures D. Disadvantages of Individual Incentive Plans 1. Have the potential to promote inflexibility 2. Supervisors set performance standards 3. May encourage undesirable workplace behaviors Group Incentives A. Defining Group Incentives 1. Group incentive programs reward employees for their collective performance 2. Well-designed group incentive plans reinforce teamwork, cultivate loyalty to the company, and increase productivity B. Types of Group Incentive Plans 1. Team-based or Small Group Incentive Plans a. Each team member receives a financial reward upon completion of the group goal b. Work (process) teams are organizational units that perform the work of the organization on an ongoing basis c. Project teams are of people assigned to complete a one-time project d. Parallel teams or task forces include employees assigned to work on a specific task in addition to normal work duties e. Rewards allocated three ways i. Equal incentive payments to all team members ii. Differential payments to team members based on their contributions to the goal iii. Differential payments determined by a ratio of each team members’ base pay to the total base pay of the group

2. Gain Sharing Plans a. Defined as group incentive systems that provide employees an incentive based on improved company performance b. Three main components i. Leadership philosophy, which refers to a cooperative organizational climate that promotes high levels of trust, open communication, and participation ii. Employee involvement systems, drives organizational productivity and includes improvement suggestions and problem-solving ideas iii. Bonuses, which are awarded when actual productivity exceeds targeted productivity levels 3. Scanlon Plan a. Developed by Joseph Scanlon in 1935 and emphasized employee involvement b. Includes three main components: i. Emphasis on teamwork to reduce costs, assisted by managementsupplied information on production concerns ii. Suggestion systems that route cost-saving ideas from the workforce through a labor–management committee that evaluates and acts on accepted suggestions. iii. A monetary reward based on productivity improvements to encourage employee involvement c. Gainsharing formulas are based on the ratio between labor costs and sales value of production which, is the sum of sales revenue plus the value of goods in inventory 4. Rucker Plan a. Developed by Allan W. Rucker in 1933 b. Emphasizes employee involvement and provides monetary incentives c. Uses a value-added formula to measure productivity, which is the difference between the value of the sales price and the value of materials used to make the product d. Larger Rucker ratio indicates that the value added is greater than the total employment costs e. Rucker Ratio = Value added/Total employment costs 5. Improshare a. Invented by Mitchell Fein in 1973 b. Defined as “Improved Productivity through Sharing” it measures productivity physically rather than in terms of dollar savings c. Aims to produce more products with fewer labor hours d. Based on labor hour ratio formula which is standard based on analyzing the historic relationship between the number of labor hours needed to complete a product is determined 55 Copyright © 2020 Pearson Education, Inc.

D. Advantages of Group-Incentive Plans 1. Companies can more easily develop performance measures for group plans than individual plans as there are fewer groups and individuals 2. Greater group cohesion E. Disadvantages of Group-Incentive Plans 1. May lead to higher employee turnover because of the free-rider effect where some employees make fewer contributions a. The most productive employees may leave when equal rewards are given for unequal contributions 2. Group members may feel uncomfortable with the fact that other members’ performance influences their compensation level V.

Company-Wide Incentives A. Defining Companywide Incentives 1. Instituted in the 19th century as a way for companies to ease workers’: a. Dissatisfaction with low pay b. Belief that company management paid them substandard wages while earning substantial profits 2. Defined as systems that reward employees when the company exceeds minimally acceptable performance standards 3. Advocates believe that well-designed programs make workers’ and owners’ goals more compatible as workers strive toward increasing company profits or value B. Types of Companywide Incentive Plans 1. Profit sharing plans pay a portion of company profits to employees a. Current profit sharing plans award cash to employees typically on a quarterly or annual basis as part of their core compensation b. Deferred profit sharing plans place cash awards in trust accounts for employees for retirement 2. Calculating Profit Sharing Awards a. Fixed first-dollar-of-profits formula uses a specific percentage of annual profits, contingent upon the successful attainment of a company goal. b. Graduated first-dollar-of-profits formula is based on percentages of pre- or post-tax profits and motivates employees to strive for extraordinary profit targets by sharing even more of the incremental gain with them c. Profitability threshold formulas fund profit sharing pools when profits fall within predetermined minimum and maximum levels d. Companies distribute the profit sharing pool in one of two ways i. Equal payments to all employees reflect a belief that all employees should share equally in the company’s gain ii. Proportional payments to employees based on annual base earnings 56 Copyright © 2020 Pearson Education, Inc.

3. Advantages of Profit Sharing Plans a. Enables employees to share in companies’ profits b. Allows companies greater financial flexibility 4. Disadvantages of Profit Sharing Plans a. Can undermine the economic security of employees, particularly if it represents a sizable portion of direct compensation b. May fail to motivate employees because they do not see a direct link between their efforts and corporate profits. 5. Employee Stock Option Plans a. Represent a long-term company-wide incentive plan that provides employees with stock options b. Company stock represents total equity of a company c. Company stock shares represent equity segments of equal value d. Stock options describe an employee’s right to purchase company stock VI.

Designing Incentive Pay Programs A. Five Key Considerations 1. Should the plan be based on group or individual employee performance 2. What level of risk will the employees be willing to accept in their overall compensation package 3. Should the incentive pay replace or complement traditional pay 4. What criteria should be used to judge performance 5. Which time horizon for meeting goals would be most effective a. Long-term b. Short-term c. Some combination B. Group versus Individual Incentives 1. Group incentives are most suitable where the nature of work is interdependent and the contributions of individual employees are difficult to measure 2. Individual incentives are most suitable for employees whose work is independent not interdependent, such as meeting production goals or sales quotas C. Level of Risk 1. Increases as incentive pay represents a greater proportion of total core compensation 2. Should be dependent on the extent to which an employee controls the attainment of the desired goal

D. Complementing or Replacing Base Pay 1. When complementing base pay, the company awards incentive pay in addition to base pay and fringe benefits 2. Companies may reduce base pay by placing the reduced portion at risk in an incentive plan 3. Companies in cyclical industries such as retail could benefit as compensation expenditure would vary with levels of business activity profitability of the company E. Performance Criteria 1. Measures used to appraise performance should be quantifiable and accessible 2. Measures should relate to the company’s competitive strategy 3. If more than one measure is relevant, each should be weighed to reflect its relative importance to the company’s competitive strategy F. Time Horizon: Short-Term versus Long-Term 1. “Rule-of-thumb” is that short-term is five years or fewer 2. Incentives for professionals and executives are generally long-term End of the Chapter VII.

Key Terms

Incentive pay: Rewards employees for partially or completely attaining a predetermined work objective Variable pay: Rewards employees for partially or completely attaining a predetermined work objective Piecework plans: Rewards employees based on their individual hourly production against an objective output standard and are determined by the pace at which manufacturing equipment operates Incentive effect: Refers to a worker’s willingness to work diligently to produce more quality output than simply attending work without putting in the effort Sorting effect: Addresses an employee’s choice to stay versus leave his or her employer for another job, presumably one without an incentive pay contingency Management incentive plans: Award bonuses to managers when they meet or exceed objectives based on sales, profit, production, or other measures for their division, department, or unit Behavioral encouragement plans: Employees receive payments for specific behavioral accomplishments Referral plans: Employees receive monetary bonuses under for referring new customers or recruiting successful job applicants Spot bonuses: Relatively small monetary gifts provided to employees for outstanding work or effort during a reasonably short period of time Signing bonuses: Monetary awards given to promote recruitment and job offer acceptance 58 Copyright © 2020 Pearson Education, Inc.

Group incentive programs: Reward employees for their collective performance, rather than for each employee’s individual performance Team-based incentives: When each group member receives a financial reward for the attainment of a group goal Gainsharing: Group incentive systems that provide participating employees with an incentive payment based on improved company performance for increased productivity, increased customer satisfaction, lower costs, or better safety records Scanlon plan: Include monetary rewards to employees for productivity improvements Sales value of production (SVOP): The sum of sales revenue plus the value of goods in inventory Rucker plan: Incentive plan that emphasizes employee involvement and provides monetary incentives to encourage employee participation using a value-added formula to measure productivity Value-added formula: Value added is the difference between the value of the sales price of a product and the value of materials purchased to make the product Improshare: Improved Productivity through Sharing—measures productivity physically rather than in terms of dollar savings like those used in the Scanlon and Rucker plans Labor hour ratio formula: A standard is determined by analyzing historical accounting data to find the number of labor hours needed to complete a product Free-rider effect: When some employees make fewer contributions to the group goals because they possess lower ability, skills, or experience than other group members Profit sharing plans: Pay a portion of company profits to employees, separate from base pay, cost-of-living adjustments, or permanent merit pay increases Current profit sharing: Award cash to employees, typically on a quarterly or annual basis Deferred profit sharing: Place cash awards in trust accounts for employees Employee stock option plans: Present a long-term company-wide incentive plan that provide employees with stock options Company stock: Represents total equity of a company Company stock shares: Represent equity segments of equal value Stock options: Describe an employee’s right to purchase company stock VIII. Discussion Questions and Suggested Answers 4-1.

Do you agree with the following statement? Individual incentive plans are less preferable than group incentives and company-wide incentives. Explain your answer.

From the company’s perspective, individual incentive plans may be less preferable because they may promote inflexibility among workers who are focused on only the expected performance of the reward criteria, they create challenges for supervisors in developing and maintain performance measures, and they may encourage undesirable workplace behaviors. In particular this is a concern if teamwork is needed. It is easier to develop group incentives and they also encourage teamwork. Learning Objective: 4-1. Explore the incentive pay approach AACSB: Analytical thinking 59 Copyright © 2020 Pearson Education, Inc.

4-2.

There is currently a tendency among business professionals to endorse the use of incentive pay plans. Identify an occupation for which individual incentive pay is appropriate and an occupation for which individual incentive pay is inappropriate. What is the rational for your choices?

Occupations in which individual incentive pay is appropriate include those that have to do with production or sales, such as a salesman or an ice cream factory worker. Occupations such as these would benefit most from individual incentive pay because the performance of the individual would be based on how hard they worked and it is easy to determine someone’s effort by how many sales or products they produce. Examples of occupations in which individual incentive pay would be inappropriate are concert violinist or firefighter. A violinist is a member of a team and individual performance cannot be measured. A firefighter needs to perform at the same high level no matter what and individual performance should not be measured. Learning Objective: 4-3. Explain the practice of individual incentive pay plans. AACSB: Analytical thinking 4-3.

Critics of profit sharing plans maintain that these plans do not motivate employees to perform at higher levels. Under what conditions are profit sharing plans not likely to motivate employees?

Employees may not be motivated to perform at higher levels when under a profit sharing plan if they are concerned about their economic security. Varying company profits from year to year making it difficult for employees to predict their earnings. Therefore, under conditions where there are significant variability in a company’s earnings, a profit sharing plan is not likely to motivate employees. Learning Objective: 4-5. Describe the practice of company-wide incentive plans. AACSB: Analytical thinking 4-4.

Unlike individual incentive programs, group and company-wide incentive programs reward individuals based on the group (e.g., cost savings in a department) and company-wide (e.g., profits) performance standards, respectively. Under group and company-wide incentive programs, it is possible for poor performers to benefit without making substantial contributions to group or company goals. What can companies do to ensure that poor performers do not benefit?

Companies can do several things to ensure that poor performers do not benefit from group plans. One is to have effective appraisal methods, so as to make sure that if someone is performing well they are recognized, but if someone is not, they are noted and do not receive benefits. Other methods include manager involvement with individual employee performance throughout the working process, with special emphasis on making sure that everyone is performing well.

Learning Objective: 4-6. Summarize considerations when designing incentive pay programs. AACSB: Application of knowledge 4-5.

Opponents of incentive pay programs argue that these programs manipulate employees more than seniority and merit pay programs. Do you agree with this statement? Explain.

Answers will vary greatly based on the student’s position and point of view. Opponents of incentive pay may discuss the relative size of incentive payments compared to merit or seniority adjustments or the fact that any form of behavior modification or behavior encouragement is manipulation. Supporters of incentive pay may discuss the motivational value of incentive pay and the fact that employees know what they are signing on for with an incentive plan. Learning Objective: 4-2. Describe the differences between incentive pay methods and traditional pay methods. AACSB: Analytical thinking

IX. Preparing for My Career: Compensation in Action Instructor Notes: This section outlines the role human resources professionals and line managers take in in establishing an incentive pay program. HR brings the expertise in designing a program, whereas line supervisors provide insights on the work that is important in program design. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager. X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses Case 1: Individual or Team Reward? Instructor Notes: Companies often consider incentive pay plans to reward employees for their performance. A well-designed incentive pay plan can help a company achieve objectives through improved productivity, quality, and customer service. In order to accomplish this, the incentive pay plan must be appropriate for the particular objective. At Metropolitan Furniture, there is a need for high individual productivity and also a level of teamwork that allows the company to meet delivery dates for furniture sets that involve the effort of multiple workers. These differing needs create a challenge for management to determine the right approach in designing an incentive pay plan.

Questions and Suggested Student Responses: 4-6.

What are some advantages of offering an individual piece-rate pay plan to the furniture builders at Metropolitan Furniture?

An individual piece-rate pay plan would reward employees for meeting individual production goals. Given that most of the workers build furniture pieces independently, a piece-rate pay plan would provide an incentive for employees to work harder to produce more furniture pieces on a daily basis. Learning Objective: 4-6. Summarize considerations when designing incentive pay programs. AACSB: Analytical thinking

4-7.

What are some advantages of offering a team-based incentive pay plan?

The team-based incentive may eliminate concerns that an individual incentive program could bring such as one worker refusing to help out another worker in order to boost his or her own pay by working on his or her own pieces. Further, as on-time delivery is essential to the success of the company, a team-based plan rewards an important behavior within the organization. A team-based incentive program would also be easier to administer as rewards would be based on a few teams instead of several individuals. Learning Objective: 4-6. Summarize considerations when designing incentive pay programs. AACSB: Analytical thinking 4-8.

What do you think Sally should do?

Student responses will vary. Those in support of an individual incentive program should emphasize higher individual productivity and improved retention of top performing workers. Those in support of a team-based incentive should emphasize an increased emphasis on customer satisfaction with on-time delivery and the frequency of employees working together. Learning Objective: 4-6. Summarize considerations when designing incentive pay programs. AACSB: Application of knowledge

Case 2: Ethics Dilemma: Incentive Pay Gone Wrong Instructor Notes: Often incentive pay plans can encourage undesirable workplace behaviors. The U.S. Veteran Administration incentive plan for managers to improve efficiency of hospital operations. To reduce time in the waiting room, they started limiting the daily number of appointments. This action resulted in increased wait times to get an appointment which led to patients waiting up to 20 weeks for an appointment and resulted in dozens dying from their illnesses while waiting for an appointment. In this case managers either did not know how to reduce waiting room times, or believed that limiting daily appointments was the easiest strategy. The incentive plan likely did not have enough specific requirements related to maintaining quality of care. Questions and Suggested Student Responses: 4-9.

As a compensation professional, what would you do?

The incentive plan for managers needs to be more thoroughly reviewed. If the organization wants to continue the plan, they must make sure that appropriate standards are in place to assure the quality of patient care. The managers also need to be given the appropriate training and support to understand appropriate strategies to improve operations including how to reduce wait times. Learning Objective: 4-3. Explain the practice of individual incentive pay plans. AACSB: Ethical understanding and reasoning 4-10. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? The managers in this case may not have had the appropriate training or knowledge in order to improve patient wait times. Further, the number of veterans seeking medical care likely made it otherwise impossible to reduce wait times. Learning Objective: 4-3. Explain the practice of individual incentive pay plans. AACSB: Ethical understanding and reasoning

XI.

Crunch the Numbers! Questions and Suggested Student Responses

Calculating Profit Sharing Pay Awards 4-11. Calculate the total profit sharing pool for the following scenarios: (a) firstdollar of profits, (b) graduated first-dollar of profits, and (c) profitability threshold formula. a) 2% of all profits up to 12 million. The company’s profits were 35 million, so the first-dollar of profits = .02 x 12,000,000 = $240,000 b) As the company profited more than the threshold of 15 million, the profit sharing reached the second level of 5% of up to 40 million. However, total profits were only 35 million. .05 x 35,000,000 = $1,750,000. c) 3% of profits above 10 million, up to 17 million. The threshold of 10 million was met, and total profits were above 17 million. .03 x 17,000,000 = $510,000 Learning Objective: 4-3. Summarize five types of individual incentive pay plans. AACSB: Application of knowledge 4-12. Calculate the average profit-sharing award per employee based on the equal payments formula based on the profit-sharing pools calculated in question 411: (a) first-dollar of profits, (b) graduated first-dollar-of-profits, and (c) profitability threshold formula. a) $240,000/250 employees = $960 per employee b) 1,750,000/250 employees = $7,000 per employee c) $510,000/250 employees = $2,040 per employee Learning Objective: 4-3. Summarize five types of individual incentive pay plans. AACSB: Application of knowledge 4-13. For each profit-sharing pool calculated in question 4-11, determine the annual profit-sharing awards based on proportional payments for (a) Jim, whose annual base pay equals $55,000, (b) Margaret, whose annual base pay is $125,000, and (c) Ella, whose annual base pay is $210,000. Calculating the proportional awards: Jim’s pay is .00262 percent of total annual base pay ($55,000/$21,000,000). Margaret’s pay is .00595 percent of total annual base pay ($125,000/$21,000,000). Ella’s pay is .01 percent of total annual base pay ($210,000/$21,000,000). a) Jim i. First-dollar of profits: .00262 x $240,000 = $628.80 ii. Graduated first-dollar-of-profits: .00262 x $1,750,000 = $4,585 iii. Profitability threshold formula: .00262 x $510,000 = $1,336.20 64 Copyright © 2020 Pearson Education, Inc.

b) Margaret i. First-dollar of profits: .00595 x $240,000 = $1,428 ii. Graduated first-dollar-of-profits: .00595 x $1,750,000 = $10,412.50 iii. Profitability threshold formula: .00595 x $510,000 = $3,034.50 c) Ella i. First-dollar of profits: .01 x $240,000 = $2,400 ii. Graduated first-dollar-of-profits: .01 x $1,750,000 = $17,500 iii. Profitability threshold formula: .01 x $510,000 = $5,100

Learning Objective: 4-3. Summarize five types of individual incentive pay plans. AACSB: Application of knowledge XII.

Working Together: Team Exercise with Suggested Student Responses

Instructor Notes: Students should consider group projects they have worked on where the grade was an incentive. Questions and Suggested Student Responses: 4-14. How did you handle free riders? Explain. Student responses will vary depending on their experiences. Learning Objective: 4-4. Summarize the practice of group incentive plans. AACSB: Reflective thinking

4-15. In situations where you experienced free riders, could the evaluation of student performance have been structured differently? Explain. Some members of a group may deliberately choose to put forth less effort when each group member receives the same incentive regardless of individual contributions. Therefore, the structure of the evaluation of student performance should include some evaluation of the individual contribution in order to avoid the free-rider effect. Learning Objective: 4-4. Summarize the practice of group incentive plans. AACSB: Analytical thinking XIII.

Assisted-Graded Questions

4-16. How can incentive pay systems, when properly applied, contribute to companies meeting the goals of lowest cost and differentiation strategies? Answer to this question can be found in the MyLab Management 65 Copyright © 2020 Pearson Education, Inc.

4-17. Considering our discussion of employee roles in strategic compensation (Chapter 1), how can companies explain employees’ contributions to company profits? How would the conversation go with administrative staff members compared to sales professionals? Answer to this question can be found in the MyLab Management 4-18. MyLab Management Only – comprehensive writing assignment for this chapter XIV. Additional Case from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Merit Increases at Diverse Prints Instructor Notes: A well-designed merit pay program should recognize employee performance and adjust employee pay accordingly. If a company has an effective performance appraisal process in place, they should be able to accomplish this goal. But, if they are unable to give merit pay increases that differentiate between different levels of performance, employees may question their own efforts to achieve superior performance. This case is unique in the fact that historically the company has used their merit pay increases effectively. With an uncertain future and limited funds, the decision on how to handle pay increases is a challenging one. Questions and Suggested Student Responses: 4-19. Do you think the company should offer merit pay increases? Why or why not? Students may argue for or against the merit increase. Those arguing for the merit increases may suggest that while the program may not have its desired effect this year, it may be more appropriate to continue with merit pay increases as they will likely return to appropriate levels next year. It may be easier to explain to employees and they will still see some differences in pay raises for superior performers and average performers. In fact, those with superior performance may feel it is better to recognize their performance with an increase slightly more than others as opposed to everyone receiving the same increase, regardless of performance. On the other hand, the differences may be so small that they are indeed insignificant. Therefore, suggesting that no merit pay increases this year may be the better approach. AACSB: Analytical thinking

4-20. If the company chooses not to offer the merit pay increases, how should they approach explaining the decision to the employees? It is important for the company to clearly explain why the company is not offering the merit pay increases. The employees should be aware of the company’s downturn, and the temporary elimination of the merit pay increases should be emphasized as a cost-saving measure that will help the organization continue to operate. Further, the company should emphasize the value of the performance appraisals, even without the subsequent merit pay increases. While the performance appraisals do serve as a basis for merit pay decisions, they are also a tool to provide employees feedback on their performance and guidance in improving their performance. The company may also want to consider alternate awards for those with superior performance such as additional vacation days.

AACSB: Application of knowledge

CHAPTER 5 Person-Focused Pay Learning Objectives 5-1. 5-2. 5-3. 5-4. 5-5. 5-6.

Define person-focused pay. Describe the usage of person-focused pay. Name and explain the reasons companies adopt person-focused pay programs. Summarize the varieties of person-focused pay programs. Contrast person-focused pay with job-based pay. Explain the advantages and disadvantages of person-focused pay plans. Outline

Defining Person-Focused Pay: Competency-Based, Pay-for-Knowledge, and Skill-Based II. Usage of Person-Focused Pay Programs III. Reasons to Adopt Person-Focused Pay Programs IV. Varieties of Person-Focused Pay Programs V. Contrasting Person-Focused Pay with Job-Based Pay VI. Advantages and Disadvantages of Person-Focused Pay Programs VII. Key Terms VIII. Discussion Questions and Suggested Answers IX. Preparing for My Career: Compensation in Action X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XI. Working Together: Team Exercise with Suggested Student Responses XII. Crunch the Numbers! Questions and Suggested Student Responses XIII. Assisted-Graded Questions XIV. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline I.

Defining Person-Focused Pay: Pay-for-Knowledge, Skill-Based Pay, and Competency-Based Pay A. Person-Focused Pay Plans 1. Rewards employees for acquiring job related, knowledge, skills, or competencies rather than for demonstrating successful job performance 2. Not compensated for demonstrating successful job performance

II.

III.

B. Knowledge-Based Pay and Skill-Based Pay 1. Pay-for-knowledge plans rewards management, service, or professional employees for increasing and applying job related knowledge C. Skill-Based Pay 1. Mainly for employees who do physical work 2. Pay increase based on mastery and use of new job skills D. Types of skills 1. Horizontal skills or horizontal knowledge refer to similar skills or knowledge 2. Vertical skills or vertical knowledge are those skills traditionally considered supervisory 3. Depth of skills or depth of knowledge refers to the level of specialization or expertise an employee brings to a particular job E. Competency-Based Pay and the Competency Model Clearinghouse 1. A competency is an individual’s capability to orchestrate and apply combinations of knowledge and skills consistently over time to perform work successfully in the required work situations 2. A competency model specifies and defines all the competencies necessary for success in a group of jobs that are set within an industry context 3. Foundational competencies represent the competencies that provide the foundation for success in school and in the world of work 4. Industry-related competencies are specific to an industry or industry sector 5. Occupational competences are developed to define performance in a workplace, to design competency-based curriculum, or to articulate the requirements for an occupational credential Usage of Person-Focused Pay Programs A. Reported use of person-focused pay 1. Evidence suggests that companies with between 150 and 2000 employees use person-focused pay, mostly in manufacturing industry 2. One study found that a skilled-based pay plan in a manufacturing setting increased plant productivity by 58 percent 3. Mostly found in continuous process settings, like manufacturing, in which one employee’s job depends on the work of at least one other worker Reasons to Adopt Person-Focused Pay Programs A. Overview 1. Remove the view of pay as an entitlement 2. Establish the view of pay as a reward for acquiring and implementing jobrelevant knowledge and skills

IV.

B. Technological Innovation 1. Making some jobs obsolete and requiring new and different worker skills 2. Fosters increased autonomy and team-oriented work places which demand different job-related skills 3. Changes have influenced the way companies hire and train employees to understand and work with artificial intelligence applications C. Increased Global Competition 1. U.S. companies must become more productive in response to increased global competition 2. Foreign workers are better skilled in two ways a. European Common Market and Pacific Rim economies emphasize learning, therefore their employees are better skilled and more productive b. Cultures emphasize and provide better learning and workplace instruction for non-college-bound students 3. HR managers must tailor compensation programs to the particular skills they wish to foster Varieties of Person-Focused Pay Programs A. Stairstep Model 1. Each step represents jobs from a particular job family that differ in terms of complexity 2. Each position differs according to the number of skills needed to perform the job 3. Each “step-up” requires more skills than the position “below” it 4. Training can be conducted either: a. In-house by the company’s own training department b. Outsourced to such organizations as: community colleges, vocational schools, four-year universities, training consulting firms, or suppliers’ client training programs B. Skill Blocks Model 1. Applies to jobs within one job family per model 2. Employees progress to increasingly complex jobs 3. Skills do not necessarily build on each other 4. Emphasizes the development of both horizontal and vertical knowledge and/or skill depth C. Job-Point Accrual Model 1. Encourages employees to develop skills and learn to perform jobs from different job families a. The number of jobs they can be trained to do is limited by the company b. Companies want to avoid “jack of all trades” employees

VI.

2. The more points an employee accrues, the higher that employee’s compensation level will be D. Cross-Departmental Models 1. Promote staffing flexibility by training employees in one department with some of the critical skills they would need to perform effectively in other departments 2. Can help production companies meet seasonal fluctuations in demands for products or services 3. Similar to the job-point accrual model, except for their intent a. Job-point accrual models encourage employees to learn skills and acquire knowledge that bears directly on the competitive advantages of companies b. Cross-departmental models promote staffing flexibility by training employees in one department with critical skills they would need to perform effectively in other departments Contrasting Person-Focused Pay with Job-Based Pay A. Job-Based Pay 1. Compensates employees for jobs they currently perform 2. Includes seniority pay, merit pay, and incentive pay a. Seniority pay increases employees pay automatically over time b. Merit pay awards a permanent addition to base pay, based on performance c. Incentive pay provides pay raise amounts based on the attainment of predefined work goals B. Person-Focused Pay 1. Compensates employees for developing the flexibility and skills to perform a number of jobs effectively 2. Rewards employees on their potential to make positive contributions to the workplace, based on the successful acquisition of work-related skills or knowledge 3. Person-focused pay plans apply in limited contexts, because not all jobs can be assessed based on skill or knowledge Advantages and Disadvantages of Person-Focused Pay Programs A. Advantages 1. Provide job enrichment and job security a. Job enrichment refers to a job design approach that creates more intrinsically motivating and interesting work environments b. Leads to increased employee commitment, enhanced work motivation, and improved employee satisfaction c. Job security is enhanced because workers are more flexible

2. Employers like because programs can lead to enhanced job performance a. Better quality and quantity of work b. Can rely on leaner staffing because multiskilled employees are better able to cover for unexpected absenteeism, family or medical leave, and training sessions that take employees away from work c. Provide companies with greater flexibility in meeting staffing demands at any particular time B. Disadvantages 1. Hourly labor costs, training costs, and overhead costs can all increase 2. May not mesh well with existing incentive pay programs a. Employees may not want to learn new skills if increase for new skills is less than incentive award earned for existing skills 3. Depend in large part on well-designed training programs which may be costly 4. Companies struggle with determining the monetary value of skill and knowledge sets End of the Chapter VII. Key Terms Person-focused pay plans: Reward employees for acquiring job-related, knowledge, skills, or competencies rather than for demonstrating successful job performance Pay-for-knowledge: Plans that reward managerial, service, or professional workers for success fully learning specific curricula Skill-based pay: Increases the workers’ pay as they master new skills Horizontal skills: Similar skills or knowledge Horizontal knowledge: Similar skills or knowledge Vertical skills: Skills that are traditionally considered supervisory (e.g., scheduling, coordinating, training, and leading others) Vertical knowledge: Skills that are traditionally considered supervisory (e.g., scheduling, coordinating, training, and leading others) Depth of skills: Skills that are traditionally considered supervisory (e.g., scheduling, coordinating, training, and leading others) Depth of knowledge: Skills that are traditionally considered supervisory (e.g., scheduling, coordinating, training, and leading others) Competency: An individual’s capability to orchestrate and apply combinations of knowledge and skills consistently over time to perform work successfully in the required work situations Stairstep model: Pay structure that resembles a flight of stairs where the steps represent jobs from a particular job family that differ in terms of complexity Skill blocks model: Pay structure that resembles the stair-step model, however, the skills do not necessarily build on each other, instead emphasizing both horizontal and vertical skills

Job-point accrual model: Pay structure that encourages employees to develop skills and learn to perform jobs from different job families Cross-departmental models: Pay structure that promotes staffing flexibility by training employees in one department with critical skills they would need to perform effectively in other departments Job-based pay: Compensates employees for jobs they currently perform, which include seniority pay, merit pay, and incentive pay VIII. Discussion Questions and Suggested Answers 5-1.

Person-focused pay plans are least preferable compared with individual incentive pay programs. Do you agree or disagree with this statement? Detail your arguments to support your position.

Individual incentive pay programs may be more preferable than pay-for-knowledge in the fact that they pay employees based upon performance and completion or obtainment of certain goals. Individual incentive plans promote an equitable distribution of compensation within companies, promote the relationship between pay and performance, and are compatible with the individualistic culture in the United States. However, payfor-knowledge plans may be better used when a company is in a skill-based industry. Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans. AACSB: Analytical thinking

5-2.

Person-focused pay is becoming more prevalent in companies; however, person-focused pay programs are not always an appropriate basis for compensation. Do you agree with this statement? Explain.

Person-focused pay programs have many advantages, however, they also have four possible limitations. First, hourly labor costs, training costs, and overhead costs can all increase. Second, they may not mesh well with existing incentive pay systems. Third, effective person-focused pay programs depend on well-designed training programs. And fourth, companies struggle with determining the monetary value of skill and knowledge sets. Due to these potential disadvantages, person-focused pay may not be appropriate in all companies. Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans. AACSB: Analytical thinking

5-3.

The use of drones has been proposed by retailers like Amazon.com as a method for package delivery. If drones eventually become a widely adopted technology for this purpose, some workers who are employed by delivery services or warehouses might become displaced. If the displaced workers were to become drone operators, explain some of the key knowledge and skill sets they could ascertain in a person-focused pay program.

A person-focused pay program requires employers to define specific knowledge and skills of workers. Some examples of knowledge and skills drone operators would need that could provide the basis for a person-focused pay program include: • Knowledge about laws related to drone operations, company policies and practices about using drones for delivery, and safety rules related to drone operation. • Skills needed would primarily include technical skills related to drone operation. Learning Objective: 5-4. Summarize the varieties of person-focused pay programs. AACSB: Application of knowledge 5-4.

Do you agree with the following statement? Companies should not provide training to employees because it is the responsibility of individuals to possess the necessary knowledge and skills prior to becoming employed. Explain.

One of the challenges of person-focused pay is the need for well-designed training programs. These programs can be costly including the cost of pay and benefits while employees attend training during regular work hours. Given this cost, some may argue that individuals should possess the necessary knowledge and skills prior to becoming employed. However, others may argue that in some cases, employers need company specific knowledge and skills and therefore it should be the company’s obligation to provide the training. Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans. AACSB: Analytical thinking 5-5.

Person-focused pay programs are not suitable for all kinds of jobs. Based on your understanding, identify at least one job for which person-focused pay is inappropriate. Explain.

Person-focused pay programs are not suitable for jobs such as store cashier, dock worker, mover, and so on, because they are occupations that are better suited for incentive pay programs of working harder, not necessarily knowing more. Learning Objective: 5-2. Describe the usage of person-focused pay. AACSB: Analytical thinking 74 Copyright © 2020 Pearson Education, Inc.

IX.

Preparing for My Career: Compensation in Action

Instructor Notes: This section outlines the role human resources professionals and line managers take in in establishing or maintaining a person-focused pay program. HR takes the lead in ensuring the program is measurable, communicating about the program, and exploring partnerships to deliver training. Line supervisors must educate HR on competencies and cross-training opportunities. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager.

End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses

Case 1: Person-focused Pay at Mitron Computers Instructor Notes: A well-designed person-focused pay system has the potential to increase employee commitment, enhance motivation and improve employee satisfaction because they promote skill variety and autonomy. In this case, there is no incentive for the technicians to further their skill development, which creates problems when a limited number of technicians are able to complete the more complex steps in the computer building process. A person-focused pay system would create an incentive for the technicians to attend training to develop their skills. However, the system is in conflict with their current team incentives and this issue would need to be addressed. Questions and Suggested Student Responses: 5-6.

What are some advantages of a person-focused pay system at Mitron?

Such a system could create an incentive to broaden the technician’s skills and as a result, they will have more variety in their work, which could lead to higher levels of motivation and job satisfaction. Employees will also have more job security because of the flexibility of skills. Mitron also benefits from the flexibility that a better-trained staff provides. This will most likely solve the problem of delayed shipments. Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans. AACSB: Analytical thinking

5-7.

What are some disadvantages?

The system could cause an increase in labor costs for Mitron. As more technicians raise their pay rates, their labor costs will rise. The company’s training costs will also increase as more Technicians attend the training. The company must ensure that the increased efficiency and quality they gain from the system would outweigh this increased cost. The system is also in conflict with the team-based incentive pay plan. The technicians miss out on some team-based incentive pay when they leave work to attend the training. Holly would need to resolve the conflict before implementing the new system. Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans. AACSB: Analytical thinking

5-8.

What approach would you recommend for Holly to take in designing a person-focused pay system?

Holly would first need to determine the most appropriate person-focused pay model to implement. It would seem that based on the need to develop skills that do not build on each other, the skill blocks model would be the most appropriate. Once Holly developed the program, she would need to also make sure the organization had the appropriate training in place to support the development of the needed skills. Learning Objective: 5-6. Summarize the varieties of person-focused pay programs. AACSB: Application of knowledge

Case 2: Ethics Dilemma: Limiting Access to Training Instructor Notes: If a company moves to a skill-based pay system, the company must be ready to invest in training. In this case, the company the training costs were significantly higher than expected and they decided to limit participation in the training. In order to get the most return, the company decided to allow those with less than 15 years of service participate, resulting in the exclusion of those with substantially more years of service.

Questions and Suggested Student Responses: 5-9.

What would you do? (Hint Review the material in Chapter 2, Learning Objective 2-5.)

The decision to exclude those workers with more years of service could result in a violation of the Age Discrimination in Employment Act as it is likely workers that are 40 years old or older that are excluded from the training. As such, the company should rethink their decision on who can participate in the training. Alternatively, the company should reconsider the skill-based pay plan if they are not able to invest in the training. Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans. AACSB: Ethical understanding and reasoning

5-10. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? The company made the decision to limit participation in the training because they had limited financial resources to offer the training. Given the limited financial resources, the company wanted to identify the workers that would be with the company the longest to invest in. Learning Objective: 5-6. Explain the advantages and disadvantages of person-focused pay plans. AACSB: Ethical understanding and reasoning

XI.

Crunch the Numbers! Questions and Suggested Student Responses

Hiring a Mix of Entry-Level Workers and Skilled Candidates under a Skill-Based Pay Program 5-11. What is the hourly pay rate for (a) highly skilled workers and (b) workers who are building skills through training? a) Highly skilled workers are offered an hourly pay rate of $23 b) Workers building skills are 20% (.20 x $23 = $4.60) below with an hourly rate of $18.40 Learning Objective: 5-2. Describe the usage of person-focused pay. AACSB: Application of knowledge

5-12. Based on 160 monthly work hours, what is the total cost of monthly wages for current (a) highly skilled workers and (b) workers who are building skills through training? 40% of 500 workers are highly skilled = .40 x 500 = 200 60% of 500 are workers building skills = .60 x 500 = 300 a) Highly skilled workers: 160 x $23 = $3,680 for each worker. Total = 200 x $3,680 = $736,000 b) Workers building skills: 160 x $18.40 = $2,944 for each worker. Total = 300 x $2,944 = $883,200 Learning Objective: 5-2. Describe the usage of person-focused pay. AACSB: Application of knowledge 5-13. Based on 160 monthly work hours, what will the total cost of monthly wages be for the newly hired workers (expected to be hired over the next year) who (a) are highly skilled and (b) will be building skills through training? The company expects to hire 70 new workers, 20% highly skilled, and 80% workers building skills. Highly skilled = .20 x 70 = 14 Workers building skills = .80 x 70 = 56 a) 14 x $3,680 = $51,520 b) 56 x $2,944 = $164,864 Learning Objective: 5-2. Describe the usage of person-focused pay. AACSB: Application of knowledge

XII. Working Together: Team Exercise with Suggested Student Responses Instructor Notes: Students should select a competency model from two industries on www.careeronestop.org. Questions and Suggested Student Responses:

5-14. Summarize the information available on your chosen models. What are some of the similarities? Student responses will vary based on the models they choose. They should explore competencies in each of the 9 tiers that fall in the general three categories of foundational competencies, industry-related competencies, and occupation-related competencies. Learning Objective: 5-1. Define person-focused pay. AACSB: Analytical thinking 5-15. What are some of the differences in occupation-and industry-competencies between your chosen models? Student responses will vary based on the models they choose. Learning Objective: 5-1. Define person-focused pay. AACSB: Analytical thinking

XIII.

Assisted-Graded Questions

5-16. As manufacturing companies continue to use even more advanced robotics that have human-like traits, what are some of the skills that employees will have to learn? Answer to this question can be found in the MyLab Management

5-17. Compare and contrast person-focused pay and job-based pay. Discuss the advantages of person-focused pay to employers. Answer to this question can be found in the MyLab Management

5-18. MyLab Management Only – comprehensive writing assignment for this chapter

XIV. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Case: Gain Sharing at CircleWorks Instructor Notes: Gain sharing plans reward employees with an incentive payment that is passed on factors such as improved performance, productivity, lower costs or better safety. However, gain sharing plans must have a supportive leadership philosophy and an opportunity for employee involvement in order to be successful. If a supportive organizational culture does not exist, an alternative group incentive plan may be more appropriate such as team bonuses.

Questions and Suggested Student Responses: 5-19. What are some factors that will influence the success of a gain sharing plan in improving employee involvement and productivity? Gain sharing plans work in a cooperative organizational environment characterized by open communication, trust and employee participation. Employees must have the opportunity to provide input into production processes so that they can have an impact on productivity. In environments that require frequent changes in production methods or where production methods are rigid in nature, employees may not have enough opportunity to impact productivity to make a gain sharing plan effective. Further, open communication is needed so that employees feel encouraged to make suggestions. AACSB: Analytical thinking 5-20. Do you think a gain sharing plan would be successful at CircleWorks? At this time it seems that the organizational culture at CircleWorks does not align with a gain-sharing plan. The management philosophy does not seem open to employee input and this would make a gain-sharing plan a challenge. Further, the nature of the production process appears to be very structured, relying upon engineers for changes in the production process. As a result, employees do not have the opportunity to provide input to impact productivity. In this case Sheila may want to recommend a team-based bonus that has a more simple structure to start with if CircleWorks is interested in introducing incentive pay. AACSB: Analytical thinking

CHAPTER 6 Building Internally Consistent Compensation Systems Learning Objectives 6-1. 6-2. 6-3. 6-4. 6-5.

Explain the concept of internal consistency. Summarize the practice of job analysis. Describe the practice of job evaluation. Summarize various job evaluation techniques. Explain how internally consistent compensation systems and competitive strategy relate to each other. Outline

I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII.

Internal Consistency Job Analysis Job Evaluation Job Evaluation Techniques Internally Consistent Compensation Systems and Competitive Strategy Key Terms Discussion Questions and Suggested Answers Preparing for My Career: Compensation in Action End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses Crunch the Numbers! Questions and Suggested Student Responses Working Together: Team Exercise with Suggested Student Responses Assisted-Graded Questions Additional Case from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses

Lecture Outline I.

Internal Consistency A. Internally consistent compensation systems 1. Clearly define the relative value of each job among all jobs within a company to represent the job structure or hierarchy 2. Based on a fundamental principle that states jobs that require greater qualifications, more responsibilities, and more complex job duties should offer more pay than those jobs that require less 3. Job structures formally recognize differences in job characteristics that enable compensation managers to set pay accordingly 4. Job structures set through two processes 81 Copyright © 2020 Pearson Education, Inc.

II.

a. Job analysis i. Mostly a descriptive procedure ii. Identifies job content which describes job duties and tasks as well as factors needed to perform job adequately b. Job evaluation i. Is used to establish pay differentials among employees within a company Job Analysis A. Definition 1. A systematic process for gathering, documenting, and analyzing information in order to describe jobs 2. Identifies and defines job content a. Actual activities that employees must perform b. Worker requirements are minimum qualifications and the knowledge, skills and abilities (KSAs) that people must have to perform a job c. Working conditions are social context or physical environment within which work will be performed B. Steps in the Job Analysis Process 1. Five main activities a. Determine a job analysis program b. Select and train analysts c. Job analyst orientation d. Conduct the study: Data collection methods and sources of data e. Summarize the results: Writing job descriptions 2. Determine a job analysis program a. Decide between using an established system or developing its own b. Typical methods include questionnaires, interviews, observation, and participation 3. Select and train analysts a. Job analysts must be able to collect job-related information through various methods, relate to a wide variety of employees, analyze the information and write clearly and succinctly b. Ideally, a task force of representatives from throughout the company conducts the analysis, while HR staff members coordinate it c. Training should be provided on the basic assumptions of the model and the procedures d. Must be familiar with the structure of pertinent job data 4. Direct job analysts orientation a. Before starting job analysis techniques the analyst must analyze the context in which employees perform their work b. Analysts should obtain and review internal information 82 Copyright © 2020 Pearson Education, Inc.

5. Conduct the study: Data collection methods and sources of data a. Analysts should carefully choose the method of data collection and the sources of data b. The most common methods of data collection are questionnaires and observation c. Most common sources of data are job incumbents, supervisors, and the job analysts d. A reliable job analysis method yields consistent results under similar conditions e. A valid job analysis method accurately assesses each job’s duties f. To increase the likelihood of reliable and valid job analysis, should collect data from more than one source 6. Summarize the results: Writing job descriptions a. Should summarize the job’s purpose and list its tasks, duties, responsibilities, as well as the KSA’s necessary to perform the job at a minimum level c. Should contain: i. Job title to indicate the name of each job ii. Job summary with two to four concise, descriptive statements iii. Job duties to describe the major work activities and supervisory responsibilities iv. Worker specification to list the education, skills, abilities, knowledge, and other qualifications needed to perform the job d. The Equal Employment Opportunity Commission guidelines distinguish among the terms skill, ability, and knowledge i. Skill refers to an observable competence to perform a learned psychomotor act ii. Ability refers to a present competence to perform an observable behavior or a behavior that results in an observable product iii. Knowledge refers to a body of information applied directly to the performance of a function C. Legal Considerations for Job Analysis 1. Job analyses are not required by the government, but can increase the chance that employment decisions are based on pertinent job requirements 2. The Equal Pay Act requires that companies justify pay differences between men and women who perform equal work 3. Can be used to determine if a job is exempt or nonexempt under the Fair Labor Standards Act 4. Can be used to ensure compliance with the Americans with Disabilities Act D. Job Analysis Techniques 1. Can use established or custom designed techniques 2. Choosing depends on applicability and cost 83 Copyright © 2020 Pearson Education, Inc.

E. Occupational Information Network (O*NET) 1. O*NET was developed by the U.S. Department of Labor’s Employment and Training Administration for two reasons a. To describe jobs in the relatively new service sector of the economy b. More accurately describes jobs that evolved as the result of technological advances 2. Content Model lists six categories of job and worker information a. Experience and training i. Experience and training describes specific preparation required for entry into a job ii. Licensing describes license, certificate, or registration required b. Occupational requirements i. Generalized work activities describes general types of job behaviors on multiple jobs ii. Organizational context indicates the characteristics of the organization that influence how people do their work iii. Work context describes physical and social factors that influence the nature of work c. Occupation-specific information requirements i. Detail a comprehensive set of elements that apply to a single occupation or narrowly defined job family d. Workforce characteristics i. Variables that define and describe the general characteristics of occupations ii. Include labor market information and occupational outlook iii. Wages e. Worker characteristics i. Abilities the enduring attributes of an individual that influence performance ii. Interests describe preferences for work environments and outcomes iii. Work styles personal characteristics that describe important interpersonal and work style requirements in jobs and occupations f. Worker requirements i. Basic skills describe developed capacities that facilitate learning or the more rapid acquisition of knowledge ii. Cross-functional skills indicates developed capacities that facilitate performance of activities that occur across jobs iii. Knowledge describes organized sets of principles and facts applying in general domains iv. Education details prior educational experience required to perform the job

III.

Job Evaluation A. Definition 1. It is a technique used to systematically recognize differences in the relative worth among a set of jobs, and establish differentials accordingly B. Compensable Factors 1. Defined as salient job characteristics by which companies establish relative pay rates 2. Universal compensable factors are skill, effort, responsibility, and working conditions 3. Two considerations when selecting which factors to use when evaluating a job a. Factors must be job related b. Factors should further the company’s strategies C. The Job Evaluation Process 1. Six steps a. Determining single versus multiple job evaluation techniques b. Choosing the job evaluation committee c. Training employees to conduct job evaluation d. Documenting the job evaluation plan e. Communicating with employees f. Setting up the appeals process 2. Determining single versus multiple job evaluation techniques a. Determine how many techniques are sufficiently broad to assess a diverse set of jobs b. It is not reasonable to expect that a single job evaluation technique based on a single set of compensable factors can adequately assess diverse sets of jobs 3. Choosing the job evaluation committee a. Usually chosen by the HR professional b. Consists of rank and file employees, supervisors, managers, and union representatives, each with their own motivations d. Helps ensure commitment from employees and provides a check and balance system 4. Training employees to conduct job evaluations, by ensuring that they: a. Understand the process objectives, know company objectives, and practice using criteria 5. Documenting the job evaluation plan a. Important for legal and training purposes b. Allows employees to understand how their jobs were evaluated

IV.

6. Communicating with employees a. Should be done formally and personally throughout the process b. Employees should have a chance to respond positively and negatively 7. Setting up the appeals process a. Appeals procedures should allow reviews on a case-by-case basis to provide a check on the process through reexamination and such appeals may reduce charges of illegal discrimination Job Evaluation Techniques A. Two general types 1. Market-based evaluation a. Use market data to determine differences in job worth b. Allow companies to assign pay rates that are neither too low nor too high relative to the market c. Compensation professionals use compensation surveys to determine the prevailing pay rates in the relevant job markets 2. Job-content evaluation a. Emphasize the company’s internal value system to establish a hierarchy of internal job worth based on each job’s role in the company strategy b. Compensation professionals must judge the adequacy of pay differentials by comparing market rates with in-house rates 3. Must balance external market considerations with internal consistency objectives B. The Point Method 1. A quantitative method that assigns numerical values to compensable factors which are summed to indicate the overall value of the job 2. The relative worth of the job is established by the magnitude of its overall numeric value 4. Evaluates jobs by comparing compensable factors a. Each factor is defined and assigned a range of points based on the factor’s relative value to the company b. Compensable factors are weighted to represent the relative importance of each factor to the job 5. The seven-step process a. Select benchmark jobs b. Choose compensable factors based on benchmark jobs c. Define factor degrees d. Determine the weight of each factor e. Determine point values for each compensable factor f. Verify factor degrees and point values g. Evaluate all jobs 86 Copyright © 2020 Pearson Education, Inc.

6. Step 1: Select benchmark jobs a. Used to develop factors and their definitions to select jobs to represent the entire range of jobs in the company b. Benchmark jobs found outside the company, provide reference points against which jobs within the company are judged 7. Step 2: Choose compensable factors based on benchmark jobs a. Managers must define compensable factors that adequately represent the scope of jobs slated for evaluation b. Each benchmark job should be described by these factors that help distinguish it from the value of all other jobs 8. Step 3: Define factor degrees a. Evaluators must divide each factor into a sufficient number of degrees to identify the level of a factor present in each job b. The number of degrees will vary depending on the comprehensiveness of the plan 9. Step 4: Determine the weight of each factor a. Represents the importance of the factor to the overall value of the job b. Weighting often done by management or by a job evaluation committee 10. Step 5: Determine point values for each compensable factor a. Establish the maximum possible point values b. Determine point value by multiplying point total by percentage c. Distribute these points across degree statements within each compensable factor for use in a regression analysis 11. Step 6: Verify factor degrees and point values a. Committee members should review the point totals for each job b. Determine whether the hierarchy of jobs makes sense in the context of the company’s strategy plan as well as the inherent content of the jobs 12. Step 7: Evaluate all jobs a. Once the evaluation system has been tested and refined b. By totaling the points for each job, which are then ranked according to their point values 13. Balancing internal and market considerations using the point method a. By converting point values into the market value of jobs through regression analysis i. Regression analyses enable compensation professionals to set base pay rates in line with market rates for benchmark or representative jobs ii. Companies get market pay rates through compensation surveys iii. A company’s value structure for jobs based on the point method will probably differ from the market rates

C. Alternative Job-Content Evaluation Approaches 1. Simple ranking plan a. This plan orders all jobs from lowest to highest according to a single criterion, such as job complexity 2. Paired comparison and alternation ranking a. Paired comparison i. Useful when there are many (20 or more) jobs to rate ii. Every job is paired with every other job iii. After all pairs are rated, the jobs are ranked by total points received b. Alternation ranking i. Orders jobs by extremes i. The relative value of each job is judged by a single criterion iii. Ranking begins by determining which job is the most then least valuable 3. Classification plans a. Place jobs into categories based on compensable factors b. Public sector organizations, such as the civil service systems, use this plan c. The federal government uses the General Schedule (GS) classification plan D. Alternatives to Job Evaluation 1. Market pay rate 2. Pay incentives 3. Individual rates 4. Collective bargaining Internally Consistent Compensation Systems and Competitive Strategy A. Internally consistent compensation systems are important 1. Tightly specified job descriptions are appropriate for companies that pursue a lowest cost strategy 2. Some limitations a. Reduce a company’s flexibility to respond to changes in competitor’s pay practices b. Establishing job hierarchies tends to create narrowly defined jobs, which leads to increased bureacracy

End of the Chapter VI.

Key Terms

Internally consistent compensation systems: Clearly define the relative value of each job among all jobs within a company Job structures: Formally recognize differences in job characteristics that enable compensation managers to set pay accordingly Job analysis: A descriptive procedure that identifies and defines job content Job content: Describes job duties and tasks as well as such pertinent factors as the skill and effort (i.e., compensable factors) needed to perform the job adequately Job evaluation: Is key for casting internally consistent compensation systems as strategic tools Worker requirements: Represent the minimum qualifications and the knowledge, skills, and abilities (KSAs) that people must have to perform a particular job Working conditions: The social context or physical environment where work will be performed Reliable job analysis method: Yields consistent results under similar conditions Valid job analysis method: Accurately assesses each job’s duties or content Job descriptions: Summarize a job’s purpose and lists its tasks, duties, and responsibilities, as well as the KSAs necessary to perform the job at a minimum level Job titles: Indicate the name of each job within a company’s job structure Job summary: Precisely summarizes the job with two to four descriptive statements Job duties: Describe the major work activities and, if pertinent, supervisory responsibilities Worker specifications: Lists the education, KSAs, and other qualifications individuals must possess to perform the job adequately Education: Refers to formal training Equal Employment Opportunity Commission (EEOC): Guidelines distinguish among the terms skill, ability, and knowledge Skill: An observable competence to perform a learned psychomotor ac Ability: A present competence to perform an observable behavior or a behavior that results in an observable product Knowledge: A body of information applied directly to the performance of a function Occupational Information Network (O*NET): Comprehensive database that incorporates information about both jobs and workers Content Model: Lists six categories of job and worker information Experience and training: Describes specific preparation required for entry into a job plus past work experience contributing to qualifications for an occupation Licensing: Information describes licenses, certificates, or registrations that are used to identify levels of skill that are required for entry and advancement in an occupation Occupational requirements: Include generalized work activities, organizational context, and work context Generalized work activities: Describes general types of job behaviors occurring on multiple jobs Organizational context: Information that indicates the characteristics of the 89 Copyright © 2020 Pearson Education, Inc.

organization that influence how people do their work Work context: Information that describes physical and social factors that influence the nature of work Occupation-specific information requirements: A detailed comprehensive set of elements that apply to a single occupation or a narrowly defined job family Workforce characteristics: Variables that define and describe the general characteristics of occupations that may influence occupational requirements Worker characteristics: Information that includes abilities, interests, and work styles Abilities: Enduring attributes of the individual that influence performance Interests: Describe preferences for work environments and outcomes Work styles: Personal characteristics that describe important interpersonal and work style requirements in jobs and occupations Basic skills: Describes developed capacities that facilitate learning or the more rapid acquisition of knowledge Cross-functional skills: Developed capacities that facilitate performance of activities that occur across jobs Knowledge: Organized sets of principles and facts applying in general domains Education: Prior educational experience required to perform in a job O*NET User’s Guide: How human resource professionals can access O*Net information O*NET database: How human resource professionals can access O*Net information Compensable factors: The salient job characteristics by which companies establish relative pay rate Universal compensable factors: Skill, effort, responsibility, and working conditions Market-based evaluation: A plan that uses market data to determine differences in job worth Job-content evaluation: Plans that emphasize the company’s internal value system by establishing a hierarchy of internal job worth based on each job’s function in company strategy Point method: A job-content valuation technique that uses quantitative methodology Benchmark jobs: Used in the point method job to develop factors and their definitions to select jobs to represent the entire range of jobs in the company Simple ranking plans: Order all jobs from lowest to highest according to a single criterion (e.g., job complexity or the centrality of the job to the company’s competitive strategy) Paired comparison: A variation of the ranking plan technique that is useful if there are many jobs to rate, usually more than 20 Alternation ranking: Orders jobs by extremes Classification plans: Place jobs into categories based on compensable factors

VII.

Discussion Questions and Suggested Answers

6-1.

What are some differences between job analysis and job evaluation. How do these practices help establish internally consistent job structures?

Job analysis identifies and defines job content which describes job duties and tasks as well as factors such as skill and effort. Job evaluation is used to establish pay differentials among employees within a company. Job analysis is a descriptive procedure, while job evaluation reflects value judgements. Both are needed to help establish internally consistent job structures as they assist compensation professionals in their pay-setting decisions by quantifying the key similarities and differences between jobs. Learning Objective: 6-1. Explain the concept of internal consistency. AACSB: Application of knowledge

6-2.

Write a draft job description (no longer than one page) for a job that you have had according to the principles described in this chapter. Which tasks and responsibilities were most challenging to express in writing? Explain.

The student response to this question will depend on the job selected. The job description should summarize the job’s purpose and list its tasks, duties, responsibilities, as well as the KSA’s necessary to perform the job at a minimum level. The description should include: • Job title to indicate the job designation • Job duties to describe the major work activities and supervisory responsibilities • Job summary with two to four concise, descriptive statements • Worker specification to list the education, skills, abilities, knowledge, and other qualifications needed to perform the job Learning Objective: 6-2. Summarize the practice of job analysis. AACSB: Application of knowledge 6-3.

This chapter provides rationale for conducting job analysis, and it indicates some of the limitations. Do you support the use of job analysis? Provide convincing arguments for your position.

The general purpose of job analysis is to record the requirements of a job and the work performed. Job analysis is performed as a preliminary to subsequent actions, including organizational analysis, development of a job description, creation of performance appraisals, the selection and promotion of an employee, training needs assessment, and last but certainly not least, compensation. Job analysis does have its many limitations, but all in all it is a useful and highly productive way to accurately outline the expectations and requirements of a given job. 91 Copyright © 2020 Pearson Education, Inc.

Learning Objective: 6-2. Summarize the practice of job analysis. AACSB: Analytical thinking 6-4.

Many business leaders maintain that creating and maintaining an internally consistent job structure is burdensome to companies. Do you agree or disagree? Explain.

Some may argue that it is time consuming and burdensome to maintain an internally consistent job structure. These systems may limit a company’s flexibility to respond to changes in competitor’s pay practices and also may result in bureaucracy. However, an internally consistent job structure can help an organization effectively structure their compensation practices. Learning Objective: 6-5. Explain how internally consistent compensation systems and competitive strategy relate to each other. AACSB: Analytical thinking 6-5.

Do you consider job evaluation to be an art or a science? Please explain.

Job evaluation is more of a science than an art, for the evaluation process consists of basic formulas and guidelines that are in essence quite rigid. In order to accurately evaluate a job, it is necessary to evaluate by the rules of job evaluation. For example, various job evaluation techniques require certain formulas and numbers. In order to determine point values for each compensable factor, for instance, one must use certain number parameters in order to get an accurate evaluation: “The maximum possible total points for skills equal 600 points (60% x 1,000 points).” Learning Objective: 6-3. Describe the practice of job evaluation. AACSB: Analytical thinking VIII. Preparing for My Career: Compensation in Action Instructor Notes: This section outlines the role human resources professionals and line managers take in building an equitable and competitive compensation system. HR takes the lead in the job analysis process and determining compensable factors. Line supervisors work with job incumbents to understand their job content and participate in the process. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager.

IX.

End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses Case 1: Job Evaluation at Smith Upholstery Instructor Notes: After a shift in his business model to move to a more automated workplace, Robert Smith hired a human resource professional to craft job descriptions and conduct job evaluation to help set pay rates. After an analysis of options, newly hired Marco suggested using the point method to conduct the job evaluation. Robert suggested a less time consuming approach of the simple ranking method conducted by Marco alone instead of involving others. Questions and Suggested Student Responses: 6-6.

What are some of the advantages and disadvantages of the simple ranking, alternate ranking, and point method job evaluation techniques?

Simple ranking advantages: A more simple approach using a qualitative approach. Disadvantages: Relies on subjective data, more difficult to defend legally because they do not use job analysis or job descriptions, and does not incorporate objective scales to determine how different in value one job is from another. Alternate ranking advantages: A more simple approach that orders jobs by extremes. Disadvantages: The same as the simple ranking method. Point method advantages: Uses a quantitative approach that allows comparison to the external market. Disadvantages: Can be time consuming to complete and requires involvement of many employees in the organization. Learning Objective: 6-4. Summarize various job evaluation techniques. AACSB: Analytical thinking 6-7.

What problems may occur by following Robert’s approach?

Using Robert’s approach may create problems as Marco will not have quantitative data on jobs to use to compare to the external market. Further, it may be difficult to compare and rank the jobs internally, especially if Marco is doing it on his own as he is new to the company. Learning Objective: 6-4. Summarize various job evaluation techniques. AACSB: Analytical thinking

6-8.

What do you recommend Marco do first? Why?

Marco should present his analysis of the pros and cons of each approach so that Robert can see some of the shortcomings of his recommendations. Then, Marco should explain to Robert why the investment of time into using the point method will benefit the organization in the long run as they try to stay competitive in the market. Learning Objective: 6-4. Summarize various job evaluation techniques. AACSB: Application of knowledge Case 2: Ethics Dilemma: Stop Complaining or Else Instructor Notes: Sweet Indulgence Confectionary grew to 1,000 employees without a formal compensation structure. Most salaries were negotiated upon hire and as a result, many workers that have been with the company a long time are paid less than newer workers. The company owners note that the company has been recognized as a great place to work and have told those that are complaining that they should stop complaining or risk being fired. Questions and Suggested Student Responses: 6-9.

As a compensation professional, what would you do?

As a compensation professional, it is important to make sure the owners of this business understand the implications of a compensation structure that lacks internal consistency. Not only is the morale of workers impacted, but there also may be legal implications under the Age Discrimination in Employment Act. Learning Objective: 6-1. Explain the concept of internal consistency. AACSB: Ethical understanding and reasoning 6-10. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? In this case, the external recognition of the company being a great place to work has given the owners a false sense of workplace morale. Further, as they have been able to successfully staff the organization, the owners are not aware of the problems their decisions about compensation have caused. Learning Objective: 6-1. Explain the concept of internal consistency. AACSB: Ethical understanding and reasoning

Crunch the Numbers! Questions and Suggested Student Responses

Modifying a Job Evaluation Worksheet 6-11. What should the typical pay rate be for the following jobs: (a) management trainee, (b) assistant manager, (c) manager, and (d) senior manager? (Hint: Calculate the dollar value per job evaluation point to start based on the associate manager job and salary.) Dollar value per job evaluation point: Associate manager is 450 points and the market pay rate is $50,000. $50,000/450 = $111.11 per point a) Management trainee = 200 points x $111.11 = $22,222 b) Assistant manager = 310 x points x $111.11 = $34,444.10 c) Manager = 525 x points x $111.11 = $58,332.75 d) Senior manager = 700 x points x $111.11 = $77,777 6-12. What would the pay rates be for the remaining jobs if the associate manager job pay rate was increased by $10,000? (a) management trainee, (b) assistant manager, (c) manager, and (d) senior manager. Dollar value per job evaluation point: Associate manager is 450 points and the market pay rate is $60,000. $60,000/450 = $133.33 per point a) Management trainee = 200 points x $133.33 = $26,666 b) Assistant manager = 310 x points x $$133.33 = $41,332.30 c) Manager = 525 x points x $133.33 = $69,998.25 d) Senior manager = 700 x points x $133.33 = $93,331 6-13. Assume that the associate manager job is valued at $50,000 (with a point total of 450 points), and we add 50 points to the total of the remaining jobs. What should the pay rates be for the (a) management trainee, (b) assistant manager, (c) manager, and (d) senior manager? a) Management trainee = 250 points x $111.11 = $27,777.50 b) Assistant manager = 360 x points x $111.11 = $39,999.60 c) Manager = 575 x points x $111.11 = $3,888.25 d) Senior manager = 750 x points x $111.11 = $83,332.50

XI.

Working Together: Team Exercise with Suggested Student Responses

Instructor Notes: Teams should use O*NET to select a job to study at www.onetonline.org/find/.

Questions and Suggested Student Responses:

6-14. What are three categories (e.g. one category is the job summary) contained in the detailed report? Explain. Student responses will vary depending on the category they select. Categories include: Tasks, Technology Skills, Tools Used, Knowledge, Skills, Abilities, Work Activities, Work Context, Job Zone, Education, Credentials, Interests, Work Styles, Related Occupations, Wages and Employment Trends, Job Openings on the Web, and Sources of Additional Information. Learning Objective: 6-2. Summarize the practice of job analysis AACSB: Application of knowledge 6-15. What are some of the knowledge, skill, and ability factors listed in the report that you believe are most crucial for distinguishing this job from a job in another job family? Explain. Student responses will vary depending on the job selected. Learning Objective: 6-2. Summarize the practice of job analysis AACSB: Application of knowledge XII.

Assisted-Graded Questions

6-12. Why must a job analysis be reliable and valid? What can compensation professional do to ensure that a job analysis is reliable and valid? Answer to this question can be found in the MyLab Management

6-13. After completing the job analysis, your boss has asked you to conduct a job evaluation of the various positions in the company. Detail the steps you would take in accomplishing this task. Answer to this question can be found in the MyLab Management

6-14. MyLab Management Only – comprehensive writing assignment for this chapter XIII. Additional Case from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Shifting Incentives at TechEx Repair Instructor Notes: Companies should design pay systems to direct employees to behave in a way that benefits the company. In this case, the technicians’ inability to perform multiple types of repairs affects the company’s overall productivity. While the current bonus system encourages hard work, if some technicians are idle while work is waiting, the company is not reaching optimum productivity levels. In order for a pay-for-knowledge program to be effective, it must be carefully designed and the company must be willing and able to put the right resources in place to provide the necessary training and support. Questions and Suggested Student Responses: 6-15. What are advantages of shifting to a pay-for-knowledge program at TechEx Repair? Employees may find their jobs more satisfying as they will expand the type of work they do. Performing different types of repairs will lead to task variety for the technicians. The company benefits by having a better-trained workforce that is more flexible in work assignments. As a result, the employees will also benefit as well as they will have more security in their jobs and in their pay. AACSB: Analytical thinking 6-16. What are advantages of keeping the company’s current bonus plan? A pay-for-knowledge program can increase overall training and labor costs, without the immediate tie to productivity that the current bonus plan likely provides. Employees will most likely favor the current bonus plan because they see the immediate benefits of the plan. Finally, the current bonus plan allows employees to be successful without the additional cost and effort of training. If the right resources are not in place to support training when a pay-for-knowledge program is initiated, employees may become frustrated. AACSB: Analytical thinking 6-17. What do you think TechEx should do? Student answers may vary here, but they should provide support for their opinion. Some students may recommend implementing the pay-for-knowledge program to set more appropriate base pay, but also leave some form of a productivity incentive bonus plan in place. However, doing so would be a challenge. It would be important to take steps to ensure employees understood the long-term rewards of taking time to learn new repairs. AACSB: Application of knowledge 97 Copyright © 2020 Pearson Education, Inc.

CHAPTER 7 Building Market-Competitive Compensation Systems Learning Objectives 7-1. 7-2. 7-3. 7-4.

Explain the concept of market-competitive compensation systems and summarize the four activities compensation professionals engage in to create these systems. Discuss compensation survey practices. Describe how compensation professionals integrate internal job structures with external market pay rates. Explain the basic concepts of compensation policies and strategic mandates: pay level and pay mix.

Outline I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII.

Market-Competitive Pay Systems: The Basic Building Blocks Compensation Surveys Integrating Internal Job Structures with External Market Pay Rates Compensation Policies and Strategic Mandates Key Terms Discussion Questions and Suggested Answers Preparing for My Career: Compensation in Action End of Chapter Cases: Instructor Notes, and Questions and Suggested Student Responses Crunch the Numbers! Questions and Suggested Student Responses Working Together: Team Exercise with Suggested Student Responses Assisted-Graded Questions Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline

Market-Competitive Pay Systems: The Basic Building Blocks A. Definition 1. Market-competitive pay systems represent companies’ compensation policies that fit the imperatives of their competitive advantage 2. These systems play a significant role in attracting and retaining the most qualified employees

II.

3. Based on four activities a. Conducting strategic analyses which entails an examination of a company’s external market factors b. Assessments of competitors’ pay practices with compensation surveys c. Integrating the internal job structure with external market pay rates d. Determining compensation policies Compensation Surveys A. Preliminary Considerations 1. Main considerations a. What companies hope to gain from compensation surveys b. Which type of survey to use 2. What companies hope to gain from compensation surveys a. Competitors’ compensation practices b. Employee’s preferences for alternative forms of compensation due to economic changes 3. Custom development versus use of an existing compensation survey a. Custom surveys preferable because the questions can be tailored specifically for each company b. Most companies choose not to develop own survey for three reasons: i. Not always practical because of the specialized knowledge and skills needed to develop effective ones ii. Not always effective because businesses are reluctant to give information directly to competitors iii. The staffing and design costs can be prohibitive B. Using Published Compensation Survey Data 1. Two important considerations a. Survey focus: Core compensation or employee benefits b. Sources of published compensation surveys 2. Survey focus: Core Compensation or Employee Benefits a. Must decide on obtaining information about base pay, employee benefits, or both b. Because benefit costs are now high, employers more likely to obtain information about both 3. Sources of published surveys a. Professional associations that survey members b. Industry associations c. Consulting firms who provide data from recently completed surveys or create surveys from scratch for clients d. Federal government through the Bureau of Labor Statistics

i. Employment cost trends: Program publishes quarterly statistics that measure change in labor costs ii. National compensation data: National Compensations Survey (NCS) provides comprehensive measures of occupational earnings; compensation cost trends, benefit incidence, and detailed plan provisions iii. Wages by area and occupation: Available for the nation, regions, states, and many metropolitan areas iv. Earnings by demographics: Available for characteristics such as age, sex, race, and Hispanic or Latino ethnicity v. Earnings by industry: Current Employment Statistics survey is monthly and provides estimates of average weekly hours and average hourly earnings for the private sector for all employees and for production and nonsupervisory employees vi. County wages (quarterly census of employment and wages): Annual and quarterly wage data are available vii. Employee benefits national compensation survey: Provides information on the share of workers who participate in specified benefits C. Compensation Surveys: Strategic Considerations 1. Two essential strategic considerations a. Defining the relevant labor market b. Choosing benchmark jobs 2. Defining the relevant labor market a. Relevant labor markets represent the fields of potentially qualified candidates for particular jobs b. Defined on the basis of occupational classification, geography, and product or service market competitors c. Occupational classification refers to a group of two or more jobs that are based on similar work characteristics and responsibilities d. Companies search a wider geographic area for candidates for jobs that require specialized skills or skills that are low in supply e. Companies use product or service market competitors to define the relevant labor market when industry specific knowledge is key and competition for market share is keen

3. Choosing benchmark jobs a. Used as reference points for setting pay levels b. Four characteristics i. The contents are well-known, relatively stable over time, and agreed upon by the employees involved ii. The jobs are common across a number of different employers iii. The jobs represent the entire range of jobs that are being evaluated within a company iv. The jobs are generally accepted in the labor market for the purposes of setting pay levels c. Necessary because matches between a company’s position to a position in a survey is not always possible since: i. Large companies may have hundreds of unique jobs ii. Companies adapt job duties and scope to fit their specific needs d. Companies use job leveling to make corrections for differences between their jobs and external benchmark jobs i. Point factor leveling is a job leveling approach where participants rate a job based on a standard set of compensable factors that have point values associated with each level of the factor D. Compensation Survey Data 1. Three compensation survey data characteristics a. Contains immense amounts of information i. May be a wide variety of pay rates across companies, making it hard to build market-competitive pay systems ii. Statistics needed to describe large sets of data b. The data is generally outdated because of the lag time between data collection and use c. Statistical analysis should be used to integrate internal job structures (based on job evaluation points) with the external market (based on the survey data) 2. Data analysis 1. Begins with basic tabulation of survey data which helps organize data, promotes decision makers’ familiarization with the data and reveals outliers 3. Using the appropriate statistics to summarize survey data a. Central tendency represents the fact that a set of data cluster (or center) around a central point

III.

b. Two central tendency measures i. Arithmetic mean which is calculated by adding all the salaries together and dividing by the sum of number of salaries added ii. Median is the middle value in an ordered sequence of numerical data c. Variation represents the amount of spread or dispersion in a set of data d. Standard deviation refers to the mean distance of each salary from the mean i. Used as a reference point to judge whether employees’ compensation is below or above the market ii. Indicates the range for the majority of salaries, so it can be used to judge how a company’s salary range compares to the market e. Quartile i. Describe dispersion by indicating the percentage of figures that fall below certain points ii. Allows compensation professionals to describe the distribution of data based on four points • Quartile 1 at 25% • Quartile 2 at 50% • Quartile 3 at 75% • Quartile 4 at 100% d. Percentiles ii. Describe dispersion by indicating the percentage of figures that fall below certain points ii. Based on 100 points 5. Updating the survey data a. Necessary because of the lag-time between data collection and data use b. Failure to adjust could lead to real compensation (purchasing power of dollar) falling below nominal compensation (face value of dollar) c. Consumer Price Index (CPI) which is the most commonly used method to track cost changes can be used to update salary survey data Integrating Internal Job Structures with External Market Pay Rates A. Overview 1. Differences in the internal value of jobs should correspond to pay differences based on compensation survey data

2. Regression analysis a. Uses market pay rates as reference points for determining internal pay structures b. Enables compensation professionals to predict the values of one variable from another c. Finds the best fitting line (market pay line) between two variables i. Job evaluation points of benchmark jobs ii. Salary survey data for the benchmark jobs d. Equation i. Y = a + bX ii. Y = predicted salary iii. X = job evaluation points iv. a = the Y intercept: The Y value at which X = 0 v. b = the slope • Represents the change in Y for every change in the job evaluation points • Represents the dollar value of each job evaluation point 2 e. R i. Tells how well the variation of jobs based on job evaluation points explains the variation in market pay rates from the survey ii. Ranges from 0 to 1 iii. Represents the percentage variation in Y values that can be explained by the X values • Y = market pay rates • X = job evaluation points iv. Values • R2 = 0 means that none of the variation in market pay rates can be explained by the company’s job structure • R2 = 1 means that all the variation in market pay rates can be explained by the company’s job structure • R2 between 0 and .30 represents a small amount of variation • R2 between .31 and .70 represents a medium amount of variation • R2 above .71 represents a large amount of variation IV.

Compensation Policies and Strategic Mandates A. Pay level policies 1. Companies can choose from three pay level policies a. Market lead b. Market lag c. Market match 103 Copyright © 2020 Pearson Education, Inc.

2. Market lead policy distinguishes companies from the competition by compensating employees more highly than most competitors 3. Market lag policy distinguishes from competition by compensating less than most competitors 4. Market match policy most closely follows the typical market pay rates because companies pay according to the market pay line B. Pay mix policies 1. Pay mix policies refer to the combination of core compensation and employee benefits components that make up an employee’s total compensation package 2. Pay mix may policies may be expressed in dollars (or other currency as relevant) or as a percentage of total dollars allocated for an employee’s total compensation 3. What is an appropriate pay mix? a. For policy purposes, it makes sense to consider guidelines for jobs within a particular structure (for example, managerial, administrative, or sales) because of the common job content and worker requirements of jobs within a particular structure End of Chapter V.

Key Terms

Market-competitive pay systems: Represent companies’ compensation policies that fit the imperatives of competitive advantage Strategic analysis: Entails an examination of a company’s external market context and internal factors Compensation surveys: Involve the collection and subsequent analysis of competitors’ compensation data Compensation plans: Represent the selection and implementation of pay level and pay mix policies over a specified time period, usually on year Relevant labor markets: Represent the fields of potentially qualified candidates for particular jobs Job leveling: Process of making corrections for differences between their jobs and external benchmark jobs Point factor leveling: Job leveling approach where participants rate a job based on a standard set of compensable factors that have point values associated with each level of the factor Central tendency: Represents the fact that a set of data clusters or centers around a central point Mean: Average of salaries used as a reference point to judge whether employees’ compensation is below or above the market Median: Is the middle value in an ordered sequence of numerical data. If there is an odd number of data points Variation: Represents the amount of spread or dispersion in a set of data 104 Copyright © 2020 Pearson Education, Inc.

Standard deviation: Refers to the mean distance of each salary figure from the mean Quartiles: Allow compensation professionals to describe the distribution of data based on four groupings Percentiles: There are one hundred percentiles ranging from the first percentile to the 100th percentile Real compensation: Measures the purchasing power of a dollar Nominal compensation: Is the face value of a dollar Consumer Price Index (CPI): The most commonly used method for tracking cost changes, or consumer inflation, throughout the United States Regression analysis: A statistical analysis technique that enables compensation professionals to establish pay rates for a set of jobs that are consistent with typical pay rates for jobs in the external market Market pay line: Representative of typical market pay rates, expressed as a mean or median, relative to a company’s job structure Market lead policy: Distinguishes a company from the competition by compensating employees more highly than most competitors Market lag policy: Appears to fit well with lowest-cost strategies because companies realize cost savings by paying lower than the market pay line Market match policy: Represents a safe approach for companies because they generally are spending no more or less on compensation (per employee) than competitors

VI.

Discussion Questions and Suggested Answers

7-1.

You are a compensation analyst for a pharmaceuticals company, which is located in Los Angeles, California. What is the scope of the relevant labor markets for chemists and for data entry clerks? Describe the rationale for your definitions.

Relevant labor markets represent the fields of potentially qualified candidates for particular jobs. Companies collect compensation survey data from the appropriate relevant labor markets. Relevant labor markets are defined on the basis of occupational classification, geography, and product or service market competitors. The relevant labor market for chemists might be the entire state of California and other pharmaceutical companies employing chemists as these jobs are specialized. The relevant labor market for data entry clerks might be just the city of Los Angeles and any company employing data entry clerks. Learning Objective: 7-3. Describe how compensation professionals integrate internal job structures with external market pay rates. AACSB: Application of knowledge

7-2.

Can companies easily develop compensation systems that are both internally consistent and market competitive? What are some of the challenges to this goal? Explain.

Yes, it is important for companies to develop compensation systems that are both internally consistent and market competitive. The internal valuation differences in jobs within an organization should correspond to pay differences based on compensation survey data. If companies are unable to do this, they may create a competitive disadvantage by paying well above or below the typical market rate for a job. One challenge to this process is that internal jobs may not align with the jobs available in compensation surveys. It can also be challenging to determine if they are going to lead, lag, or match the market. Learning Objective: 7-3. Describe how compensation professionals integrate internal job structures with external market pay rates. AACSB: Analytical thinking 7-3.

Which do you believe is most important for a company’s competitive advantage: Internal consistency or market competitiveness? Explain.

Market competitiveness is important to meet the growing demands of the market and stay ahead of the competition in order to make the most profit for the company. Learning Objective: 7-1. Explain the concept of market-competitive compensation systems and summarize the four activities compensation professionals engage in to create these systems. AACSB: Analytical thinking 7-4.

Refer to the regression equation presented earlier in this chapter. When b = 0, the market pay line is parallel to the x-axis (i.e. job evaluation point scale). What does this result indicate?

If b = 0, the market pay line is parallel to the x-axis. This means that the market pays the same annual salary, regardless of the job evaluation points. To illustrate with the example in the chapter, it means that an Accountant I, II, or III has the same market value annual salary. Learning Objective: 7-3. Describe how compensation professionals integrate internal job structures with external market pay rates. AACSB: Analytical thinking

7-5.

Refer to Table 7-3. Cross out salaries for Company F and Company G. What is the mean and median for the set of Companies A through E?

Mean: 37,840 Median: 36,000

Learning Objective: 7-2. Discuss compensation survey practices. AACSB: Application of knowledge VII. Preparing for My Career: Compensation in Action Instructor Notes: This section outlines the role human resources professionals and line managers take in staying current with the external market and attracting the right employees through offering competitive pay. HR professionals work with compensation specialists to access external pay and benefit data and analyze that data to make pay decisions. Line managers must identify the resources needed to carry out a company’s strategy, including those to offer compensation to attract workers. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager. VIII. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses Case 1: Nutriment’s New Hires Instructor Notes: Nutriment is pursuing a differentiation strategy in order to create product that is not offered by their competitors. In order to successfully attract the right staff to ensure Nutriment has a competitive advantage, the company must ensure that their pay structure is competitive in the local market while also managing costs. Nutriment has different job categories that may require different pay strategies. The administrative positions only require Nutriment to match the compensation of their competitors. However, the scientists will be more difficult to attract. As such, it is likely that they will need to take a pay lead strategy for their scientist. Nutriment may also have some concerns with internal consistency of compensation as the market will likely drive them to offer the scientists pay that is significantly more than that of the administrative staff members. Questions and Suggested Student Responses: 7-6.

What are some strategic considerations in establishing a pay structure at Nutriment?

In considering a pay structure that is competitive in the market place, Nutriment should consider their industry, competitors and other external market factors. They must also consider their financial resources. Nutriment’s business strategy is a differentiation strategy as they are looking to develop a unique product. As such, recruiting and retaining talented staff members, particularly the scientists, will be essential in order for the business to succeed. They currently have an edge in the market place because of their scientific discoveries; however, it is a competitive market place for talent. 107 Copyright © 2020 Pearson Education, Inc.

Learning Objective: 7-1. Explain the concept of market-competitive compensation systems and summarize the four activities compensation professionals engage in to create these systems. AACSB: Analytical thinking 7-7.

Should Jack suggest a pay policy to lead, lag or match the market? Explain your recommendation.

Jack should suggest two different strategies for Nutriment. For the administrative staff, a match strategy is appropriate. Because it is not necessary to pay higher salaries in order to attract the administrative staff, pursuing a match strategy can offer some cost savings. However, the company should most likely take a lead strategy in order to create a compensation package that is attractive to scientists. There are few qualified scientists available and their skills are in demand. Learning Objective: 7-4. Explain the basic concepts of compensation policies and strategic mandates: pay level and pay mix. AACSB: Analytical thinking Case 2: Ethics Dilemma: A Slanted Wage Proposal Instructor Notes: Mandy, the Director of Labor Relations, has asked Roberta, the lead compensation analyst, for a market wage analysis to take to the bargaining table to negotiate with the union. The analysis includes both the market mean and median wages. Due to some outliers, as well as some employers illegally paying workers lower than minimum wage, the mean wages are lower than the median wages. Mandy decides only to share the lower mean wage data with the union. Questions and Suggested Student Responses: 7-8.

As a compensation professional, what would you do?

It is important for the compensation professional to make sure the Director of Labor Relations has accurate information. In this case, Roberta could recalculate the mean wage rates after removing the outliers. She should communicate to Mandy that she is trying to assure that Mandy approaches the negotiation in the best position possible by having accurate information. She should note that the union could access market data as well and that presenting misleading wage data could hurt the company’s position in negotiations. Learning Objective: 7-2 Discuss compensation survey practices. AACSB: Ethical understanding and reasoning

7-9.

What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision?

Previous union negotiations might influence Mandy’s approach. If the company had not been successful in previous negotiations, Mandy might feel pressure to improve the company’s position in the negotiations. Learning Objective: 7-2 Discuss compensation survey practices. AACSB: Ethical understanding and reasoning IX.

Crunch the Numbers! Questions and Suggested Student Responses

Updating Salary Survey Data 7-10. By what percent did the cost of goods and services change between December 2016 and June 2017? December 2016 = 242.78 June 2017 = 244.03 % Change = (244.03-242.78) / 242.78 = .0515% increase Learning Objective: 7-2. Discuss compensation survey practices. AACSB: Application of knowledge 7-11. (a) By what percent might you expect the average cost of goods and services to change over the second 6-month period of 2017? Hint: First, calculate the percentage cost change for the period July through December for each of the previous years: 2012 through 2016. Second, take the average of these five figures. This calculation gives us the average percent cost change. Estimates based on multiple years give us a more stable picture of percent cost changes. (b) What is the estimated average salary for December 31, 2017? Hint: [(initial average salary  average percent cost change) + initial average salary] a) July through December change: 2012 = (231.22 – 228.59) / 228.59 = 1.15% 2013 = (234.71 – 232.90) / 232.90 = .78% 2014 = (236.27 – 237.48) / 237.48 = –.51% 2015 = (237.82 – 237.99) / 237.99 = –.071% 2016 = (242.78 – 240.05) / 240.05 = 1.14% Average % change = .498% b) ($50,000 x .0498) + $50,000 = $52,490 Learning Objective: 7-2. Discuss compensation survey practices. 109 Copyright © 2020 Pearson Education, Inc.

AACSB: Application of knowledge 7-12. (a) By what percent might you expect the average cost of goods and services to change between January 1, 2018 and December 31, 2018? Hint: First, calculate the percent cost change for the period January through December for each of the previous years: 2012 through 2016. Second, take the average of these five figures to calculate the average percent cost change. (b) What is the estimated average salary for December 31, 2018? Hint: [(December 2017 average salary  average percentage cost change) + December 2017 average salary]. a) 2012 = (231.22 – 227.84) / 227.84 = 1.48% 2013 = (234.71– 231.67) / 231.67 = 1.31% 2014 = (236.27– 235.34) / 235.34 = .395% 2015 = (237.82 – 234.83) / 234.83 = 1.27% 2016 = (242.78 – 237.99) / 237.99 = 2.01% Average % change: 1.293% b) ($52,490 x 1.293%) + $52,490 = $53,186.70 Learning Objective: 7-2. Discuss compensation survey practices. AACSB: Application of knowledge X.

Working Together: Team Exercise with Suggested Student Responses

Instructor Notes: Students should explore the FAQ section for the National Compensation survey respondents to learn more about seven survey program areas published by the U.S. Bureau of Labor Statistics. Questions and Suggested Student Responses: 7-13. What are two questions that you found most interesting and what recommendations do you have for clarifying answers to those questions? Explain. (Note: Answer these questions from the perspective of a possible firsttime survey participant.) Student responses will vary based on what each team finds most interesting. Learning Objective: 7-2. Discuss compensation survey practices. AACSB: Reflective thinking

7-14. FAQs usually don’t cover every possible question. As a prospective survey participant, what is an additional question or two you’d like to see included in the FAQ section? Explain. Student responses will vary, but should indicate that they have read and understand the purpose of the survey. Learning Objective: 7-2. Discuss compensation survey practices. AACSB: Reflective thinking XI.

Assisted-Graded Questions

7-15. Is it appropriate to utilize the same pay mix arrangement for clerical employees and sales professionals? Explain your answer and how the pay mix arrangements might differ. Answer to this question can be found in the MyLab Management

7-16. Explain what the market pay line is. How is it used in the context of pay level policies such as market lead, market lag, and market match Answer to this question can be found in the MyLab Management

7-17. MyLab Management Only – comprehensive writing assignment for this chapter. Answer to this question can be found in the MyLab Management XII.

Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses

Case Name: Analyzing Jobs at Custom Carpet Cleaning Instructor Notes: Many smaller companies must manage their staff with limited human resource management expertise. In this case, the company is making an effort to create written job descriptions, which will be useful in developing an internally consistent compensation system that is competitive in the market. However, it is unlikely that the process here will result in a valid and reliable job analysis. Developing job descriptions that are not thorough or entirely accurate will not effectively support the development of a compensation system. Many managers in small companies rely upon the Internet for information. In this case, it might be a good investment for the company to utilize an outside consultant or find an opportunity for formal training for the Office Manager in order to conduct an effective job analysis. 111 Copyright © 2020 Pearson Education, Inc.

Questions and Suggested Student Responses: 7-14.

Do you think Bob’s approach to job analysis will be effective in creating useful job descriptions?

While Bob has established a good starting point, overall the process will not provide him with full information. He is only collecting information from one employee at each location. Further, his questionnaire lacks detail. This process will only provide him with a limited view of the jobs within the company. AACSB: Analytical thinking

7-15. What can be done to improve this job analysis process? Bob should expand his data collection in several ways. First, he could create a more detailed questionnaire that could be distributed to more than one employee in each location. Because it is a small company, he could realistically collect information from all employees. Further, he may want to supplement the questionnaires through an additional data collection technique such as observation or follow-up interviews with employees. He should also collect information from another source such as the supervisors or possibly customers. AACSB: Analytical thinking

CHAPTER 8 Building Pay Structures That Recognize Employee Contributions Learning Objectives 8-1. 8-2. 8-3. 8-4. 8-5.

Explain the concept of pay structures and the five steps necessary to construct pay structures. Discuss the components of merit pay systems. Summarize the features of sales compensation plan design. Describe the essentials of person-focused pay program design. Summarize pay structure variations. Outline

I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII.

Constructing a Pay Structure Designing Merit Pay Systems Designing Sales Incentive Compensation Plans Designing Person-focused Programs Pay Structure Variations Key Terms Discussion Questions and Suggested Answers Preparing for My Career: Compensation in Action End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses Crunch the Numbers! Questions and Suggested Student Responses Working Together: Team Exercise with Suggested Student Responses Assisted-Graded Questions Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline

Constructing a Pay Structure A. Overview 1. Based on five steps a. Deciding on how many pay structures to construct b. Determining a market pay line c. Defining pay grades d. Calculating pay ranges for each pay grade e. Evaluating the results

B. Step 1: Deciding on the Number of Pay Structures 1. Usually more than one depending on market rates and company’s job structure 2. Exempt and nonexempt pay structures a. Categories reflect a distinction in the Fair Labor Standards Act (FLSA) b. Exempt jobs are not subject to overtime provisions of the act and are expressed as an annual salary c. Nonexempt jobs are subject to overtime provisions and compensation is expressed as an hourly pay rate 3. Pay structures based on job family a. Pay structures are defined on the basis of job family which show a distinct pattern in the market b. Distinct job families include: i. Executive ii. Managerial iii. Professional iv Technical v. Clerical vi. Craft 4. Pay structures based on geography a. The pay for similar positions that are within the same company, but are located in different parts of the country, can be paid differently b. Local influences, like cost-of-living, influence pay structures C. Step 2: Determining a Market Pay Line 1. Market pay line is representative of typical market pay rates relative to a company’s job structure 2. Pay levels that correspond with the market pay line are marketcompetitive pay rates D. Step 3: Defining Pay Grades 1. Pay grades group jobs for pay policy application based on similar compensable factors and value 2. Job groupings are influenced by other factors such as management philosophy 4. Wider pay grades minimize hierarchy and social distance between employees 5. Narrower pay grades tend to promote hierarchy and social distance 6. Companies may choose to vary the “absolute” point spread by increasing the point spread as they move of up the pay structure, in recognition of the broader range of skills that higher pay grades represent

E. Step 4: Calculating Pay Ranges for Each Pay Grade 1. Pay ranges build upon pay grades a. Pay ranges represent the vertical dimension (pay rates) and are designated with the following pay rates i. Minimum the lower bound of pay within a pay grade ii. Midpoint pay value is the halfway mark between the range minimum and maximum rates iii. Maximum the upper bound of pay with a pay grade 2. Setting pay range midpoints a. According to competitive pay policy b. If the company adopts a market lead policy, that company’s midpoint will be higher than the market average c. If the company adopts a market match policy, that company’s midpoint will be similar to the market average e. If the company adopts a market lag policy, that company’s midpoint will be lower than the market average 3. Setting pay range minimums and maximums a. According to the market averages b. By developing a range spread i. The difference between the minimum and maximum pay rates of a given pay grade ii. Progressively higher range spreads for pay grades that contain more valuable jobs in terms of a company’s criteria iii. Smaller range spreads characterize pay grades that contain narrowly defined jobs that require simple skills with relatively low responsibility c. Higher-level jobs afford employees greater promotion opportunities than entry level jobs d. Adjacent pay ranges usually overlap with other pay ranges so that the highest rate paid to one is greater than the lowest rate of the successive pay grade 4. Pay compression a. Occurs whenever a company’s pay spread between new hires or less qualified employees and more qualified job incumbents is small b. Occurs when i. Companies fail to raise pay range minimums and maximums ii. Scarcity of qualified candidates for particular jobs c. Can threaten a companies’ competitive advantage when it results in dysfunctional turnover (high performing employees voluntarily terminate their employment)

II.

5. Green circle pay rates a. Are below-minimum pay range rates b. Are usually offered because applicants do not meet every minimum requirement in the job description 6. Red circle pay rates a. Are above maximum pay range rates b. For exemplary performers, may offer lump sum bonus not added to regular pay F. Step 5: Evaluate the Results 1. To determine if there was any significant difference between the company’s internal values for jobs and the market’s value for the same jobs a. If the company’s valuation exceeds the market’s valuation, the company must decide whether its higher-than-market pay rates will undermine its attainment of competitive advantage b. If the company undervalues a position, it must determine if the discrepancy is limiting its ability to recruit quality employees 2. Compa-ratios a. Index the relative competitiveness of internal pay rates, based on pay range midpoints b. Are calculated by dividing the employee’s pay rate by the pay range midpoint c. A ratio of one means that the employee’s pay rate equals the pay range midpoint d. A ratio of less than one means the employee’s pay rate falls below the competitive pay rate for the job Designing Merit Pay Systems A. An effective merit pay program that recognizes employee contributions requires avoiding such pitfalls as ineffective performance appraisal methods and poor communication regarding the link between pay and performance B. Merit Increase Amounts 1. Should reflect prior job performance levels and motivate employees to perform their best

2. Considerations in setting amount: a. There are diminishing marginal returns on each additional dollar allocated to merit increases b. Employees’ perceptions of just-meaningful differences in merit increases depend on their cost of living, their attitudes toward the job, and their expectations of rewards from the job c. Equity theory suggests that an employee must regard his or her own ratio of merit increase pay to performance as similar to the ratio for other comparably performing people d. Compensation budgets are blueprints that describe the allocation of monetary resources to fund pay structures C. Timing 1. Most increases given on an annual basis 2. Two main approaches a. Common review date/period which is best suited for smaller companies b. Employee’s anniversary date, which can be burdensome, as reviews must be conducted regularly throughout the year D. Recurring versus Nonrecurring Merit Pay Increases 1. Recurring increases are permanently added to base pay 2. Nonrecurring increases contain costs and are given as one-time lump sum bonuses E. Present Level of Base Pay 1. Pay structures specify acceptable pay ranges for jobs within each pay grade 2. Should be within federal guidelines of several equal employment opportunity laws F. Rewarding Performance: The Merit Pay Grid 1. Amounts are determined by two main factors a. Performance ratings b. The position of employees’ present base pay rates within pay ranges 2. Employee performance ratings a. Overall performance ratings guide the pay raise decision b. Based on the principle of recognizing higher performance with greater rewards 3. Employees’ position within the pay range a. Salaries and hourly wages are indexed by quartile ranking b. Holding performance ratings constant, merit pay increase percentages are reduced as quartile ranks increase, to control employees’ progression through the pay ranges

III.

G. Merit Pay Increase Budgets 1. Budgets limit the merit pay increase percentages in each cell 2. Expressed as a percentage of the sum of employees’ current base pay 3. Varies according to performance level and position in the pay range 4. Steps to ensuring that merit pay increases do not exceed the limit a. Supervisors and managers determine how many employees fall within each performance category b. Determine the percentage of employees whose pay falls into each quartile c. Combine both sets of information to determine the percentage of employees who fall into each cell d. Calculate the expected number of employees in each cell to provide an estimate of the employees’ performance distribution e. Use this formula: (Expected number of each cell) X (Desired pay increase for cell %) X (Current median pay level for quartile) f. Ensure the total amount is within budget Designing Sales Incentive Compensation Plans A. Purposes of Sales Incentive Compensation Plans 1. Help businesses meet their objectives by aligning the financial self-interest of sales professionals with the company’s marketing objectives 2. Particular sales objectives include: a. Improve sales productivity b. Improve sales coverage of current customers c. Grow sales overall B. Alternative Sales Compensation Plans 1. Choosing the appropriate plan depends on the company’s competitive strategy 2. Five main alternatives a. Salary-only b. Salary-plus-bonus c. Salary-plus-commission d. Commission-plus-draw e. Commission-only 3. Salary-only plans a. Sales professionals receive fixed base compensation which does not vary with level of units sold, increase in market share, or any other indicator of sales performance b. Relatively risk-free compensation for employees c. Burdensome to employers because they must compensate regardless of their achievement levels d. Appropriate where 118 Copyright © 2020 Pearson Education, Inc.

i. Sales are of high-priced products and services, or technical products with long lead times for sales ii. Sales professionals are primarily responsible for generating demand whereas other employees actually close the sales iii. It is impossible to follow sales results for each sales professional since sales are accomplished through team efforts iv. Sales professionals are involved in training or other activities when they are not directly involved in making sales Salary-plus-bonus plans a. Offer set base pay with an incentive bonus b. Give one-time bonuses, usually tied to meeting specific, exceptional goals Salary-plus-commission plans a. A commission is a form of incentive compensation based upon a percentage of the selling price of the product or service b. These plans spread the risk of selling between the company and the sales professional Commission-plus-draw plans a. Award sales professionals with subsistence pay (draw) to cover basic living expenses and also incentives to excel b. The draws are just advances on the commissions the sales professional will earn in the future c. Two types of draws i. Recoverable draws act as company loans to employees that are carried forward indefinitely until the employee sells enough to repay ii. Non-recoverable draws act as salary because employees are not obligated to repay the loans if they do not sell enough Commission-only plans a. Sales professionals derive their entire income through commissions and therefore shoulder all the risk b. Straight commissions award sales professionals with a fixed percentage of the sales revenue d. Graduated commissions award sales professionals with an increased percentage of the sales price as the volume increases e. Multiple-tiered commissions i. Award sales professionals with higher percentages of the sales made in a given period ii. Earned if the sales level exceeds a predetermined level f. Commission plans not always best tactic i. Can cause competitive behaviors between employees ii. Can undermine employees’ intrinsic motivation to sell 119 Copyright © 2020 Pearson Education, Inc.

•

IV.

May lose their genuine interest for the challenge and enjoyment that selling brings • May “go through the motions” of selling and disregard quality and customer satisfaction C. Sales Compensation Plans and Competitive Strategy 1. Sales plans with salary components are most appropriate for differentiation strategies because sales professionals can turn attention to addressing client needs 2. Commission-oriented sales compensation plans are best suited for lowest cost strategies because compensation expenditures vary with sales revenue D. Determining Fixed Pay and the Compensation Mix 1. Depends mainly on three factors: a. Influence of the salesperson on the buying decision b. Competitive pay standards within the industry c. Amount of non-sales activities required 2. Influence of the salesperson on the buying decision a. The more influence sales professionals have on the “buying decisions”, the more the compensation mix will feature incentive pay b. In some industries, it is the sales professional’s technical expertise, more than sales skills that influences the “buying decision” 3. Competitive pay standards within the industry a. The compensation mix must be competitive with market standards to attract and retain quality sales professionals 4. Amount of non-sales activities required a. The more non-sales duties sales professionals are required to perform the more their compensation packages should include a fixed pay component Designing Person-focused Programs A. Overview 1. Person-focused programs refer to both knowledge and skills 2. Reward employees for acquisition of job-related knowledge and/or skills 3. A fundamental issue is whether investments in training provide measurable pay-offs to companies B. Establishing Skill Blocks 1. Skill or knowledge “blocks” are sets of skills necessary to perform a specific job, or group of jobs 2. The number of blocks varies according to the variety of jobs within a company generally from two to several 4. Development should be based on three considerations: a. Job descriptions should be developed b. Individual jobs should be organized into job families or groups c. Skills should be grouped into blocks 120 Copyright © 2020 Pearson Education, Inc.

C. Transition Matters 1. Concerns moving from job-based pay exclusively to including personfocused knowledge plans 2. Skills assessment a. Centers on who should assess: i. Whether employees possess skills at levels that justify a pay raise ii. On what basis assessments should be made iii. When assessments should be conducted b. Input should come from peers, self-assessment, and experts (e.g. supervisors) c. Must identify performance measures d. Performance should be assessed frequently to during transition phases 4. Aligning pay with the knowledge structure a. One of most difficult tasks in moving toward a person-focused system b. If an employee’s actual earnings is more than the person-focused system indicates as being appropriate, managers must develop a reasonable course of action for that employee to acquire the skills or knowledge c. If employees are underpaid (over qualified), the company must provide pay adjustments quickly 5. Access to training a. Person-focused systems make training necessary rather than optional for employees motivated towards self-improvement b. Employees must have equal access to training i. To meet the intended aim of person-focused programs ii. To reward employees for enhancing their skills iii. To address legal imperatives c. Restricting access to training can lead to violation of i. Title VII, Civil Rights Act of 1964 ii. Age Discrimination in Employment Act of 1967 d. Employees must be formally informed of the options and rewards D. Training and Certification 1. Successful person-focused programs depend on a company’s ability to develop and implement systematic training programs 2. Companies typically increase the amount of classroom and on-the-job training 3. Should be based on accurate job descriptions

E. In-house or Outsourcing Training 1. Training can be in-house or outsourced depending on: a. Expertise: The availability of in-house expertise b. Timeliness: Training will be outsourced if there is not enough time to develop and deliver it in-house c. Size of the employee population to be trained: Large numbers make in-house more cost effective d. Sensitivity or proprietary nature of the subject matter: The more sensitive the subject matter, the more likely the training will be inhouse 2. Certification and recertification a. Certification ensures that employees possess minimal levels of skills proficiency b. Recertification involves retraining or retesting employees to ensure employees have retained minimal skills proficiency Pay Structure Variations A. Broadbanding 1. The broadbanding concept and its advantages i. Consolidates existing pay grades and ranges into fewer, wider pay grades and broader pay ranges ii. Represents the organizational trend toward flatter, less hierarchical corporate structures that emphasize teamwork over individual contributions alone iii. Can reduce management layers and promote quicker decision-making cycles iv. Shifts responsibility to supervisors and managers for administering each employee’s compensation within the confines of the broadbands 2. Limitations of broadbanding a. Changes how compensation dollars are allocated, but not how much b. Broadbanding can increase compensation expenses, because managers have greater latitude in assigning pay to their employees c. Necessitates a trade-off between the flexibility to reward employees for their unique contributions and a perception among employees that fewer promotional opportunities are available d. Makes employees and employers rethink the idea of promotions as a positive step through the job hierarchy B. Two-Tiered Pay Structures 1. The two-tier pay system concept and its advantages a. Reward newly hired employees less than established employees b. On temporary basis, employees have opportunity to progress from lower entry-level pay rates to higher rates enjoyed by more senior employees 122 Copyright © 2020 Pearson Education, Inc.

c. Permanent two-tier systems reinforce the pay-rate distinction by retaining separate pay scales d. Lower-paying scales apply to newly hired employees, whereas current employees enjoy higher-paying scales e. Maximum rates to which newly hired employees can progress are always lower than more senior employees’ pay scales f. Most prevalent in unionized companies 2. Limitations of two-tier pay structures a. The lower pay scale for new hires may restrict a company’s ability to recruit and retain quality employees b. Lower tier employees may resent pay differential and not extend themselves beyond their job descriptions c. Can cause lower employee morale d. Can lead to excessive turnover End of Chapter VI.

Key Terms

Pay structures: Assign different pay rates for jobs of unequal worth and provide the framework for recognizing differences in individual employee contribution Pay grades: Group jobs for pay policy application Pay ranges: Represent the vertical dimension (pay rates) and includes midpoint, minimum, and maximum pay rates Midpoint pay value: The halfway mark between the range minimum and maximum rates Range spread: The difference between the maximum and minimum pay rates of a given pay grade Pay compression: Occurs whenever a company’s pay spread between newly hired or less qualified employees, and more qualified job incumbents is small Green circle rates: Below-minimum pay range rates Red circle rates: When companies pay certain employees greater than maximum rates for their pay ranges Compa-ratios: Index the relative competitiveness of internal pay rates based on pay range midpoints Equity theory: Suggests that an employee must regard his or her own ratio of merit increase pay to performance as similar to the ratio for other comparably performing people in the company Compensation budgets: Blueprints that describe the allocation of monetary resources to fund pay structures Common review date: All employees’ performances are evaluated on the same date Common review period: All employees’ performances are evaluated on the same date or during the same period Employee’s anniversary date: The day on which the employee began to work for the company 123 Copyright © 2020 Pearson Education, Inc.

Nonrecurring merit increases: Lump sum bonuses Merit pay increase budget: Is expressed as a percentage of the sum of employees’ current base pay Salary-only plans: Sales professionals receive fixed base compensation, which does not vary with the level of units sold, increase in market share, or any other indicator of sales performance Salary-plus-bonus plans: Offer a set salary coupled with a bonus Commission: A form of incentive compensation based on a percentage of the selling price of a product or service Salary-plus-commission plans: Spread the risk of selling between the company and the sales professional Commission-plus-draw plans: Award sales professionals with subsistence pay or draws Draw: Subsistence pay component awarded as an advance, which is charged against commissions that sales professionals are expected to earn Recoverable draws: Act as company loans to employees that are carried forward indefinitely until employees sell enough to repay their draws Nonrecoverable draws: Act as salary because employees are not obligated to repay the loans if they do not sell enough Commission-only plans: Salespeople derive their entire income from commissions Straight commission: Is based on a fixed percentage of the sales price of the product or service Graduated commissions: Increase percentage pay rates for progressively higher sales volume Multiple-tiered commissions: Similar to graduated commissions except employees earn a higher rate of commission for all sales made in a given period if the sales level exceeds a predetermined level Skill (knowledge) blocks: Sets of skills (knowledge) necessary to perform a specific job or group of similar jobs Certification: Ensures that employees possess at least a minimally acceptable level of skill proficiency upon completion of a training unit Recertification: Employees periodically must demonstrate mastery of all the jobs they have learned or risk losing their pay rates Broadbanding: Consolidates existing pay grades and ranges into fewer, wider pay grades and broader pay ranges Two-tier pay structures: Reward newly hired employees less than established employees.

VII.

Discussion Questions and Suggested Answers

8-1.

Respond to the following statement: Pay grades limit a company’s ability to achieve competitive advantage. Do you agree? Explain.

Pay grades group jobs for pay policy application. Human resource (HR) professionals typically group jobs into pay grades based on similar compensable factors and value. Wider pay grades minimize hierarchy and social distance between employees. Narrower pay grades, however, tend to promote hierarchy and social distance. Pay grades can be seen as a limitation to a company’s competitive advantage for it forces employees into specific categories. However, if a particular employee wants to improve him or her self and get paid more, he or she can strive to learn the skills of those who are of a higher pay grade. Therefore, pay grades improve a company’s advantage because they promote competition in and around the job setting. Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures. AACSB: Analytical thinking 8-2.

Two employees perform the same job, and each received exemplary performance ratings. Is it fair to give one employee a smaller percentage merit because his pay falls within the third quartile but give a larger percentage merit increase to the other because his pay falls within the first quartile? Explain your answer.

If company policy is to pay a market competitive wage and to trend toward that pay level then it is fair to accelerate base pay for a lower paid employee and slow base pay growth for a higher paid employee even if both have the same performance level. Learning Objective: 8-2. Discuss the components of merit pay systems. AACSB: Analytical thinking

8-3.

Describe some ethical dilemmas sales professionals may encounter. How can sales compensation programs be modified to minimize ethical dilemmas?

Sales compensation programs link sales professionals’ compensation to fulfilling customer needs or other marketing objectives. If a sales compensation program is not well-designed, it could influence unethical behavior by sales professionals. If sales professionals lose intrinsic motivation due to the design of a plan, they may just go through the motions to make money without regard to quality and customer satisfaction. Further, if sales goals are unrealistic, sales professionals may be influenced to engage in unprofessional behavior in order to meet those goals. Learning Objective: 8-3. Summarize the features of sales compensation plan design. AACSB: Analytical thinking 125 Copyright © 2020 Pearson Education, Inc.

8-4.

What are your reactions to the following statement? Merit pay grids have the potential to undermine employee motivation. Discuss your views.

Merit pay grids do in fact have the potential to undermine employee motivation primarily in the case of employees in top quartiles in the range. Having a low pay increase opportunity can cause lack of motivation. Merit pay grids can also act as a deterrent to achieve more because the pay grid scale is skewed. However, the basic nature of merit pay is to promote working hard and drive employees to perform better. In most cases merit pay grids work well to increase the motivation of employees. Learning Objective: 8-2. Discuss the components of merit pay systems. AACSB: Analytical thinking 8-5.

Compression represents a serious dysfunction of pay structures. What are some of the major ramifications of compression? Also, how can companies can minimize or avoid these ramifications?

Pay compression occurs when a company’s pay spread between new hires or less qualified employees and more qualified job incumbents is small. High-performing employees may perceive their pay as inequitable because they are receiving lower pay relative to their positive contributions. This may result in dysfunctional turnover, which could affect an organization’s competitive advantage. Pay compression may occur when companies fail to raise pay minimums and maximums. Therefore, it is important for companies to keep their pay structure aligned with the market. Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures. AACSB: Analytical thinking VIII. Preparing for My Career: Compensation in Action Instructor Notes: This section outlines the role human resources professionals and line managers take in determining which pay structure best suits the employee population of the company. HR assesses the organization and works with compensation specialists to develop the pay structure. Line managers work with HR to make sure the system is working for employees. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager. IX.

End of Chapter Cases Instructor Notes, and Questions and Suggested Student Responses Case 1: A New Sales Representative

Instructor Notes: This new position is the first outside sales position for UFS and John must carefully design a compensation package to motivate the Sales Representative to focus his or her efforts on the appropriate activities. John wants to expand his business and sees two distinct opportunities to do so. Expanding the business through adding new customers is one approach, and John also sees an opportunity to expand the business through further development of relationships with current customers. Both of these activities will take a great deal of time without promise of immediate sales and the compensation structure should recognize that requirement. However, as a small business, the company must closely monitor their salary budget and therefore, connecting at least part of the salary to actual sales will help ensure that the Sales Representative generates the revenue necessary to support his or her position. Questions and Suggested Student Responses: 8-6.

What are the sales objectives for the new Sales Representative?

The sales objectives for the new Sales Representative include opening new accounts and growing sales with current accounts. Learning Objective: 8-3. Summarize the features of sales compensation plan design. AACSB: Application of knowledge 8-7.

What role will the compensation design play in motivating the new Sales Representative?

It is important that the compensation structure motivates the new Sales Representative to spend her or his time on activities that will help the organization achieve its’ goals. John wants to expand the business through growing transactions with current customers and securing sales agreements with new customers. Learning Objective: 8-3. Summarize the features of sales compensation plan design. AACSB: Analytical thinking 8-8.

What kind of sales incentive plan do you recommend? Why?

Because this position requires providing customer service to current customers, a compensation structure that includes a base pay is important. Further, to provide incentives to grow the customer base, part of the compensation should include salesbased incentive pay. Students could provide a wide range of creative designs that contain a base pay plus incentive pay structure. Learning Objective: 8-3. Summarize the features of sales compensation plan design. AACSB: Application of knowledge Case 2: Ethics Dilemma: Arbitrary Compa-ratios 127 Copyright © 2020 Pearson Education, Inc.

Instructor Notes: The Director of HR has grouped the customer service representatives into two groups: those who have complained about their pay rate, and those who have not complained. After finding no significant difference in pay between the two groups, she has instructed the compensation analyst to calculate different compa-ratios for each group, which will later result in lower market pay adjustments for those who complained. Questions and Suggested Student Responses: 8-9.

As a compensation professional, what would you do?

There seems to be no reason for the different compa-ratio calculation for each group beyond an intent to penalize those who complained. The compensation analyst should ask the HR Director for her business reason to see if there is a valid reason. Otherwise he should deny the request and use the same calculation for everyone. The compensation analyst may want to suggest to the HR Director that they do more research to understand why some employees are complaining when others are not. Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures. AACSB: Ethical understanding and reasoning 8-10. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? It seems that the HR Director is frustrated by the complainers as she feels there is not a basis for their complaints. This frustration could have impacted her decision. Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures. AACSB: Ethical understanding and reasoning

Crunch the Numbers! Questions and Suggested Student Responses

Calculating Pay Range Minimums, Maximums, and Pay Range Overlap 8-11. Pay Range A: For a pay range midpoint equal to $47,500, calculate the minimum and maximum pay values for a 15 percent range spread. Minimum: $47,500 / 100% + (15%/2) = $44,186.05

Maximum: $44,186.05 + (15% x $44,186.05) = $50,813.96 Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures. AACSB: Application of knowledge 8-12. Pay Range B: For a pay range midpoint equal to $53,750, calculate the minimum and maximum pay rates for a 25 percent range spread. Minimum: $53,750 / 100% + (25%/2) = $47,777.78 Maximum: $47,777.78+ (25% x $47,777.78) = $59,722.23 Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures. AACSB: Application of knowledge 8-13. What is the overlap between pay range A and pay range B Overlap = 100%  ($50,813.96 – $47,777.78) / ($50,813.96 – $44,186.05) = 100%  ($3,096.18 / $6,627.91) = 46.7% Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures. AACSB: Application of knowledge XI.

Working Together: Team Exercise with Suggested Student Responses

Instructor Notes: Students should find articles about pay transparency and consider arguments for and against pay transparency from the company’s and the employee’s perspective.

Questions and Suggested Student Responses: 8-14. From each perspective, what are some of the arguments for and against pay transparency practices? Student responses may vary based on the articles they find. Arguments for pay transparency might include fewer concerns about pay discrimination, more trust in the company, and more job satisfaction. Arguments against may include concerns that some workers would become dissatisfied with their pay and loss of flexibility for companies in setting pay. Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures. AACSB: Analytical thinking

8-15. What do you believe companies should do? Explain. Student responses will vary based on their views. Learning Objective: 8-1. Explain the concept of pay structures and the five steps necessary to construct pay structures. AACSB: Reflective thinking

XII.

Assisted-Graded Questions

8-16.

How should companies address red circle rates for high performers and low performers, respectively?

Answer to this question can be found in the MyLab Management 8-17. Briefly discuss designing job-based pay systems (e.g., merit pay, sales incentive pay) and person-focused programs. What considerations arise when making a transition from using a job-based pay system to using a person-focused plan? Answer to this question can be found in the MyLab Management 8-18.

MyLab Management Only – comprehensive writing assignment for this chapter.

XIII. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Competing for Software Designers Instructor Notes: Market-competitive pay systems play a significant role in attracting and retaining talented staff. When setting a pay policy, companies have the option of lagging behind the competition, matching the competition, or taking the lead and paying employees more than competitors. This decision depends on the competitive strategy of the company, the type of positions the company seeks to fill and the relevant qualified labor market, and the financial resources available. Most companies pursue more than one pay policy for different types of positions within a company. Questions and Suggested Student Responses: 8-19. Should Docutrend use the same pay policy for all of its open positions? Docutrend should not necessarily adopt the same pay policy for all of its open positions. It is clear that the labor market is more competitive for the software designers and will likely require a different approach. Carrie must carefully examine the relevant labor market for the different positions the company will be filling. Further, some of the positions will not have as direct of impact on the success of the company. For example, the administrative support staff may not require as competitive of pay as the software designers. Docutrend must set pay at a competitive level, while still focusing on cost containment. AACSB: Application of knowledge 8-20. What pay policy would you recommend? Why? Docutrend may want to consider establishing a lead policy for paying the software designers. Because the company’s competitive strategy is a differentiation strategy, Docutrend needs to recruit talented software designers to ensure that that their software provides the unique solution to their client’s needs that Docutrend expects. As the company is competing against several other companies for the designers, and Docutrend is not well known, a generous pay structure may be necessary to attract the needed designers. Depending on the talent available in the area, they may also want to pursue a lead strategy for other professional positions such as the sales and marketing professionals. This positions will likely be key in implementing the company’s business strategy. A match strategy is the best approach for the other positions such as the administrative staff. Pursuing the match strategy will allow them to remain competitive in the market place while containing some labor costs. AACSB: Application of knowledge 131 Copyright © 2020 Pearson Education, Inc.

CHAPTER 9 Discretionary Benefits Learning Objectives 9-1. 9-2. 9-3. 9-4. 9-5.

Discuss the origins of discretionary benefits. Explain the three categories of discretionary benefits. Summarize legislation that pertains to discretionary benefits. Discuss the fundamentals of designing and planning the benefits program. Explain the benefits and costs of discretionary benefits. Outline

I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII.

Origins of Discretionary Benefits Categories of Discretionary Benefits Legislation Pertinent to Discretionary Benefits Designing and Planning the Benefits Program The Benefits and Costs of Discretionary Benefits Key Terms Discussion Questions and Suggested Answers Preparing for My Career: Compensation in Action End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses Crunch the Numbers! Questions and Suggested Student Responses Working Together: Team Exercise with Suggested Student Responses Assisted-Graded Questions Additional Cases from the MyLab Management Website; Instructor Notes, Questions and Suggested Student Responses Lecture Outline

Origins of Discretionary Benefits 1. Firms have offered a tremendous number of both legally required and discretionary benefits 2. Retirement plans appeared as one of the first signs of discretionary benefits with first plan offered in 1759 to benefit widows and children of Presbyterian ministers 3. Growth in 1940s in response to government-imposed wage freezes a. Companies began to offer welfare practices, anything for the comfort and improvement, intellectual or social, of employees 4. Unions directly contributed to increase in welfare practices through National Labor Relations Act of 1935 (NLRA) a. Legitimized bargaining for employee benefits b. Nonunion employers offered similar benefits in attempt to keep unions out 132 Copyright © 2020 Pearson Education, Inc.

II.

5. Increasing workplace diversity has led to more flexible benefit offerings Categories of Discretionary Benefits A. Protection Programs 1. Disability insurance a. Replaces income when employee becomes hurt or ill b. Short-term disability provides benefits for a limited time, usually less than six months i. Most short-term disability plans pay between 60 to 70 percent of their pretax salary ii. Insurance companies may impose preexisting conditions to limit their liabilities iii. Two waiting periods • Preeligibility period spans from the initial date of hire to the time of eligibility for coverage • Elimination period refers to the minimum amount of time an employee must waist after becoming disabled before disability insurance payments begin iv. Exclusion provisions list the particular health conditions that are ineligible for coverage c. Long-term disability provides benefits for extended periods between 6 months and life i. Payments generally equal a fixed percentage of predisability earnings, most typically 50 to 70 percent ii. Initially refers to illnesses or actions that prevent employee from performing their ‘own occupation’ iii. Eventually refers to ‘any occupation’ iv. Also includes preexisting condition and exclusion clauses 2. Life insurance a. Pays employees’ beneficiaries upon employee’s death b. Pays a multiple of the employee’s salary c. Three kinds i. Term life insurance ii. Whole life insurance iii. Universal life insurance d. Term life insurance provides income to employee’s beneficiaries only during a limited period based on a specified number of years subject to a maximum age e. Whole life insurance pays an amount to the designated beneficiaries and does not terminate until payment is made to beneficiaries f. Universal life insurance provides more flexible savings or cash accumulation plan than whole life insurance plans 133 Copyright © 2020 Pearson Education, Inc.

3. Retirement programs a. Provide income to employees and their beneficiaries during some or all of their retirement b. Defined benefit plans (pension plans) guarantee retirement benefits specified in the plan document i. Expressed in terms of monthly sum equal to a percentage of a participant’s preretirement pay multiplied by the number of years he or she has worked for the employer c. Defined contribution plans allow employees the option to make regular contributions to separate accounts in their names, based on a formula contained in the plan document i. Employers contribute money in form of company match ii. Internal Revenue Code (IRC) is the body of tax regulation in the U.S. and sets the annual contribution amounts to these plans on a pretax basis iii. The annual maximum allowable contribution to a participant’s account is the annual addition iv. Private sector Section 401(k) plans are named for the section of the IRC that created them v. Roth 401(k) plans are similar to 401(k) plans but employee contributions are taxed at the individual’s income tax rate and upon retirement, employee withdrawals are not taxed vi. Section 403(b) plans are offered to employees of government and tax-exempt groups vii. Section 457 plans apply to state government employees d. Profit sharing plans distribute money to employees i. Current profit sharing plans award employees with a share of the company’s profits ii. Deferred profit sharing plans set aside money in employee accounts for use in retirement e. Hybrid plans combine features of traditional defined benefit and defined contribution plans i. Cash-balance plans are the most common hybrid plan B. Paid Time Off 1. Compensates employees when they are not performing their primary work duties 2. Major types: a. Holidays b. Vacation c. Sick leave d. Personal leave 134 Copyright © 2020 Pearson Education, Inc.

e. Jury duty f. Funeral leave g. Military leave h. Clean-up, preparation, or travel time i. Rest period “break” j. Lunch period k. Integrated time off policies l. Sabbatical leave m. Volunteerism 3. Helps employee balance work and non-work activities 4. Can reduce absenteeism and improve productivity 5. Vacation refers to paid time off for reasons other than illness, holidays, parental leave, or formally designated paid time off 6. Sick leave benefits compensate employees for a specified number of days absent due to personal illness 7. Private-sector employers usually follow the holiday time-off practices for federal employees 8. Integrated time off policies or paid time off banks a. Combine holiday, vacation, sick leave, and personal leave policies into a single paid time off policy b. Provide individuals the freedom to schedule time off without justifying the reasons c. Relieve the administrative burden of managing separate plans and the necessity to process medical certifications in the case of sick leave policies d. Bereavement or funeral leave are not included because the death of a friend or relative is typically an unanticipated event beyond an employee’s control 9. Sabbatical leave a. Paid time off for such professional activities as a research project or curriculum development b. Common in college and university settings and apply most often to faculty members 10. Volunteerism a. Refers to giving of one’s time to support a meaningful cause b. Companies are providing employees with paid time off to contribute to causes of their choice

c. Companies favor providing paid time off for volunteer work for three reasons: i. First, volunteer opportunities allow employees to balance work and life demands ii. Second, giving employees the opportunity to contribute to charitable causes on company time represents positive corporate social responsibility, enhancing the company’s overall image in the public eye iii. Third, paid time off to volunteer is believed to help promote retention C. Services 1. Employee assistance programs a. Help employees cope with such personal problems that may impair their job performance such as alcohol or drug abuse, domestic violence, the emotional impact of diseases, clinical depression, and eating disorders b. Annual cost per employee of an EAP is approximately $50 to $60 c. Employers’ gains outweigh their out-of-pocket expenses for EAPs due to reduced costs of turnover, absenteeism, medical costs, unemployment insurance rates, workers’ compensation rates, accident costs, and disability insurance costs 2. Family assistance programs a. Help employees provide elder care and child care b. Elder care provides physical, emotional, or financial assistance for aging parents, spouses, or other relatives who are not fully selfsufficient because they are too frail or disabled c. Child care programs focus on supervising preschool-age dependent d. Flexible scheduling and leave allows employees the leeway to take time off during work hours to care for relatives or react to emergencies e. Day care is a benefit where companies subsidize child or elder day care in community-based centers 3. Educational benefits a. Educational assistance includes advance payment for tuition, fees, and similar expenses, books, supplies, and equipment b. An employer fully or partially reimburses an employee for expenses incurred for education or training under a tuition reimbursement program 4. Transportation services a. Help bring employees to the workplace and back home again by using more energy-efficient forms of transportation b. Sponsor public transportation or vanpools: Employer-sponsored vans or buses that transport employees between their homes and the workplace

c. Provide transit subsidies to employees working in metropolitan and suburban areas served by mass transportation (e.g., buses, subways, and trains) d. Many employers must offer transportation services to comply with local or state laws 5. Outplacement assistance a. Provides technical and emotional support to employees who are being laid off or terminated b. Variety of career and personal programs designed to develop employees’ job-hunting skills and strategies and to boost employees’ self-confidence c. Those best suited to outplacement assistance programs include: i. Layoffs due to economic hardship ii. Mergers and acquisitions iii. Company reorganizations iv. Changes in management v. Plant closings or relocation vi. Elimination of specific positions, often the result of changes in technology d. Promote a positive image of the company among those being terminated, as well as their families and friends, by helping these employees prepare for employment opportunities 6. Wellness programs a. Promote and maintain employees’ physical and psychological health b. Must not make a condition of employment c. The most common programs include smoking cessation, stress reduction, nutrition and weight loss, exercise and fitness activities, and health-screening programs d. Smoking cessation plans range from simple campaigns that stress the negative aspects of smoking to intensive programs directed at helping individuals to stop smoking e. Stress management programs help employees cope with many factors inside and outside work that contribute to stress f. Weight control and nutrition programs educate employees about proper nutrition and weight loss, both of which are critical to good health 7. Financial education a. Provides employees with the resource for managing personal budgets and long-term savings (e.g., for retirement) b. Relatively low cost benefit that helps employees plan current and future (retirement) budgets 8. Student loan repayment assistance a. Goal is to promote recruitment and retention of recent college graduates and to reduce stress levels 137 Copyright © 2020 Pearson Education, Inc.

III.

9. Pet insurance a. Provides access to comprehensive medical care for pets Legislation Pertinent to Discretionary Benefits A. Internal Revenue Code 1. The Internal Revenue Code (IRC) is a set of regulations pertaining to taxation in the United States 2. The Internal Revenue Service (IRS) is the government agency that develops and implements the IRC and levies penalties against companies and individuals who violate the IRC 3. The government encourages employers to offer retirement plans by offering tax breaks or deductions 4. The IRC also permits employees to make contributions to benefits such as health care and retirement plans on pretax basis B. Employee Retirement Income Security Act of 1974 (ERISA) 1. Established to regulate the implementation of various employee benefits programs, including medical, life, and disability programs, as well as pension programs 2. Addresses matters of employers’ reporting and disclosure duties, funding of benefits, the fiduciary responsibilities for these plans, and vesting rights 3. Provisions set minimum standards required to qualify pension plans for favorable tax treatment a. Qualified plans entitle employers and employees to substantial tax benefits b. Nonqualified plans refer to pension plans that fail to meet at least one of the minimum standard provisions 4. Participation requirements: Employees must specifically be allowed to participate in pension plans after they have reached age 21 and have completed 1 year of service (based on 1,000 work hours) 5. Coverage requirements limit the freedom of employers to exclude employees 6. Vesting refers to an employee’s nonforfeitable rights to retirement plan benefits a. Employees are always vested in their contributions to pension plans b. Cliff vesting: Must grant employees 100 percent vesting after no more than 3 years of service c. 6-year graduated schedule: Allows workers to become 20 percent vested after 2 years and to vest at a rate of 20 percent each year thereafter until they are 100 percent vested after 6 years of service 7. Nondiscrimination rules: Prohibit employers from discriminating in favor of highly compensated employees in contributions or benefits, availability of benefits, rights, or plan features C. Pension Protection Act of 2006 1. Designed to strengthen employee rights and is an amendment to ERISA

IV.

2. Defined benefit plans a. Strengthens the condition of the Pension Benefit Guaranty Corporation which is a self-financed corporation established by ERISA to insure private-sector defined benefit plans 3. Defined contribution plans a. Makes it easier for employees to participate by allowing companies to enroll employees automatically and providing greater access to professional advice about investing for retirement Designing and Planning the Benefits Program A. Benefits can work strategically by offering protection programs, paid time off, and services 1. Companies can involve employees in benefits determination process using surveys, interviews, and focus groups 2. Design issues include: a. Who receives coverage b. Financing of benefits c. Employee choice d. Cost containment e. Communication B. Determining Who Receives Coverage 1. Must decide if company should extend benefits to part-time employees 2. Some companies withhold benefits during the probationary period which is the initial term of employment (usually less than 6 months) C. Financing 1. Noncontributory financing implies that the company assumes total costs for each discretionary benefit 2. Contributory financing exists when the company and its employees share the costs 3. Employee-financed benefits exists when employers do not contribute to the financing of discretionary benefits D. Employee Choice 1. Human resources professionals must decide on the degree of choice employees should have in determining the set of benefits they will receive 2. Flexible benefits plans or cafeteria plans allow Employees within a company to choose from among a set of benefits, as opposed to all employees receiving the same set of benefits 3. Core plus option plans extend a preestablished set of such benefits as medical insurance as a program core, which is usually mandatory for all employees E. Cost Containment 1. Due to rising health care costs, employee benefits account for a substantial percentage of total compensation costs 2. Employers face difficult trade-offs between employee benefits offerings and increases in core compensation

VI.

F. Communication 1. Employees often are unaware of the value of benefits so companies should try to convey to employees the value they are likely to derive from having such benefits 2. A personal benefits summary is a useful approach 3. An effective communication program should have three objectives a. Create an awareness of and appreciation for the financial security and well-being of employees b. Provide an understanding about available benefits c. Encourage wise use of benefits 4. The company intranet is a useful way to communicate benefits to employees The Benefits and Costs of Discretionary Benefits A. Overview 1. Discretionary benefits can promote competitive advantage 2. Companies that provide discretionary benefits as entitlements are less likely to promote competitive advantage than companies that design discretionary fringe compensation programs to fit the situation 3. Discretionary benefits offerings can promote particular employee behaviors that have strategic value 4. Discretionary benefits can distinguish a company from its competition 5. Discretionary benefits have tax advantages a. Can translate into cost savings b. Companies pursuing differentiation strategies might invest more in research and development c. Companies pursuing lowest cost strategies might be able to lower prices End of Chapter Key Terms

Welfare practices: Anything for the comfort and improvement, intellectual or social, of the employees, over and above wages paid, which is not a necessity of the industry nor required by law Short-term disability insurance: Provides benefits for a limited time, usually less than 6 months Long-term disability insurance: Provides benefits for extended periods between 6 months and life Short-term disability: An inability to perform the duties of one’s regular job Preexisting condition: A mental or physical disability for which medical advice, diagnosis, care, or treatment was received during a designated period preceding the beginning of disability insurance coverage Preeligibility period: Spans from the initial date of hire to the time of eligibility for coverage in a disability insurance program

Elimination period: Refers to the minimum amount of time an employee must wait after becoming disabled before disability insurance payments begin Exclusion provisions: List the particular health conditions that are ineligible for coverage Long-term disability: Initially refers to illnesses or accidents that prevent an employee from performing his or her “own occupation” over a designated period Life insurance: Protects employees’ families by paying a specified amount to an employee’s beneficiaries upon the employee’s death Term life insurance: Provides protection to employees’ beneficiaries only during a limited period based on a specified number of years (e.g., 5 years) subject to a maximum age (e.g., 65 or 70) Whole life insurance: Pays an amount to the designated beneficiaries of the deceased employee, but unlike term policies, whole life plans do not terminate until payment is made to beneficiaries Universal life insurance: Combines features of term life insurance and whole life insurance Retirement programs: Provide income to employees and their beneficiaries during some or all of their retirement Pension plan: A defined benefit retirement plan Defined benefit plans: Guarantee retirement benefits specified in the plan document Defined contribution plans: Employees have the option to make regular contributions to separate accounts in their names, based on a formula contained in the plan document Company match: When employers contribute money to defined contribution plans Internal Revenue Code (IRC): The body of tax regulation in the United States, sets annual contribution amounts to these plans on a pretax basis Annual addition: Refers to the annual maximum allowable contribution to a participant’s account in a defined contribution plan Section 401(k) plans: Retirement plans named after the section of the IRC that created them Roth 401(k) plans: Similar to 401(k) plans, but employee contributions are taxed at the individual’s income tax rate and upon retirement, employee withdrawals are not taxed Section 403(b) plans: Retirement plans offered to employees of government and taxexempt groups, such as schools, hospitals and churches Section 457 plans: Retirement plans that apply to state government employees Profit sharing plans: (Current) plans award employees with a share of the company’s profits, usually on an annual basis Deferred profit sharing plans: Set aside money in employee accounts for use in retirement Hybrid plans: Combine features of traditional defined benefit and defined contribution plans Cash-balance plans: Structured as “defined benefit plans that define benefits for each employee by reference to the amount of the employee’s hypothetical account balance” Sick leave: Compensating employees for a specified number of days absent due to personal illness

Vacation: Paid time off for reasons other than illness, holidays, parental leave, or formally designated paid time off Integrated paid time off policies: Combine holiday, vacation, sick leave, and personal leave policies into a single paid time off policy Paid time off banks: Combine holiday, vacation, sick leave, and personal leave policies into a single paid time off policy Sabbatical leaves: Paid time off for such professional activities as a research project or curriculum development Volunteerism: Refers to giving of one’s time to support a meaningful cause Employee assistance programs (EAPs): Help employees cope with such personal problems that may impair their job performance as alcohol or drug abuse, domestic violence, the emotional impact of AIDS and other diseases, clinical depression, and eating disorders Family assistance programs: Help employees provide elder care and child care Flexible scheduling and leave: Allows employees the leeway to take time off during work hours to care for relatives or react to emergencies Day care: Subsidized child or elder day care in community-based centers Educational assistance: Includes advance payment for tuition, fees, and similar expenses, books, supplies, and equipment Tuition reimbursement programs: The employer fully or partially reimburses an employee for expenses incurred for education or training Transportation services: Programs that help bring employees to the workplace and back home again by using more energy-efficient forms of transportation Outplacement assistance: A variety of career and personal programs designed to develop employees’ job-hunting skills and strategies and to boost employees’ selfconfidence that are provided to employees that are laid off Wellness programs: Promote and maintain employees’ physical and psychological health Smoking cessation: Range from simple campaigns that stress the negative aspects of smoking to intensive programs directed at helping individuals to stop smoking Stress management: Help employees cope with many factors inside and outside work that contribute to stress Weight control and nutrition programs: Designed to educate employees about proper nutrition and weight loss, both of which are critical to good health Employee Retirement Income Security Act of 1974 (ERISA): Established to regulate the implementation of various employee benefits programs, including medical, life, and disability programs, as well as pension programs Qualified plans: Entitle employers and employees to substantial tax benefits Nonqualified plans: Refer to pension plans that fail to meet at least one of the minimum standard provisions Participation requirements: Employees must specifically be allowed to participate in pension plans after they have reached age 21 and have completed 1 year of service (based on 1,000 work hours) Coverage requirements: Limit the freedom of employers to exclude employees Vesting: Refers to an employee’s nonforfeitable rights to retirement plan benefits

Cliff vesting: Must grant employees 100 percent vesting after no more than 3 years of service 6-year graduated schedule: Allows workers to become 20 percent vested after 2 years and to vest at a rate of 20 percent each year thereafter until they are 100 percent vested after 6 years of service Nondiscrimination rules: Prohibit employers from discriminating in favor of highly compensated employees in contributions or benefits, availability of benefits, rights, or plan features Pension Protection Act (PPA): Pension Benefit Guaranty Corporation (PBGC): A self-financed corporation established by ERISA to insure private-sector defined benefit plans Probationary period: Employees’ initial term of employment Noncontributory financing: Implies that the company assumes total costs for each discretionary benefit Contributory financing: The company and its employees share the costs Employee-financed benefits: Employers do not contribute to the financing of discretionary benefits Flexible benefits plan: Employees within a company can choose from among a set of benefits, as opposed to all employees receiving the same set of benefits Cafeteria plan: Employees within a company can choose from among a set of benefits, as opposed to all employees receiving the same set of benefits Core plus option plans: Extend a preestablished set of such benefits as medical insurance as a program core, which is usually mandatory for all employees

VII.

Discussion Questions and Suggested Answers

9-1.

Many compensation professionals are faced with making choices about which discretionary benefits to drop because funds are limited and the costs of these benefits continually increase. What benefits would you most likely eliminate? What would you least likely eliminate? Explain your rationale.

Student responses may vary. However, students should note that benefits should connect to a company’s strategic objectives. Further, they may note that it is important to learn from employees what benefits they believe are important. Learning Objective: 9-4. Discuss the fundamentals of designing and planning the benefits program. AACSB: Analytical thinking

9-2.

What are your beliefs about whether discretionary employee benefits should be an entitlement or something earned based on job performance? Explain.

Discretionary benefits can promote competitive advantage for a company through tax advantages, recruiting, and promoting employee behaviors that have strategic value. However, companies that provide discretionary benefits as entitlements are less likely to promote competitive advantage than companies that design discretionary benefits programs to fit the situation. Learning Objective: 9-5. Explain the costs and benefits of discretionary benefits. AACSB: Analytical thinking 9-3.

Assume that you are an HRM professional whose responsibility is to develop a brochure for conveying the value of your company’s benefits program to potential employees. Your company has asked you to showcase the benefits program in a manner that will encourage recruits to join the company. Which features would you showcase to prospective and current employees? Explain.

Student responses will vary based on beliefs of what benefits are important to prospective and current employees. Learning Objective: 9-4. Discuss the fundamentals of designing and planning the benefits program. AACSB: Application of knowledge

9-4.

Conduct some research in order to identify examples of innovative benefit practices. A useful starting point is an Internet search using phrases such as “best companies to work for.” What are some of the more innovative benefit practices that you found? Explain.

This is a practical exercise. Results will vary widely. Learning Objective: 9-4. Discuss the fundamentals of designing and planning the benefits program. AACSB: Application of knowledge

9-5.

Are employees more likely to favor defined contribution plans over defined benefit plans? How about employers? Explain your answers.

Employees are likely to favor defined benefit plans as the employer bears the risk in the investment. Employees know what to expect in their retirement based on the formula for the plan. Employers are likely to favor defined contribution plans as the employee bears the risk in the investment. Employers are obligated to assure their company match is provided, but they do not have to guarantee the employee a specific level of funding as they do with defined benefit plans. Learning Objective: 9-2. Explain the three categories of discretionary benefits. AACSB: Analytical thinking VIII. Preparing for My Career: Compensation in Action Instructor Notes: This section outlines the role human resources professionals and line managers take in supporting the benefit administration process by interpreting benefit offerings. HR takes the lead in communicating benefits to employees, while line managers provide feedback on what employees need to know. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager. IX.

End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses

Case 1: Employee Benefits that Matter Instructor Notes: Wayne, company recruiter, is preparing to interview a promising candidate for Beco Electric. Robert is a recent college graduate who offers skills and experiences that set him apart from the other candidates. To prepare for the interview, Wayne reviews the benefits the company offers and considers which benefits he thinks Robert might have an interest in learning about. The benefits include: • Profit sharing plan with 80% deferred to retirement • Long-term care insurance • Medical and dental insurance • 70% off lunch • One week of vacation, two weeks after two years • Two weeks of sick leave • 12 paid holidays • Tuition reimbursement and time-off to attend classes

Questions and Suggested Student Responses: 9-6.

What aspects of Beco’s benefits program are likely to appeal to Robert? Explain.

As an entry-level employee, Robert likely is tight on money and therefore the discounted lunch may be appealing. Further, the vacation and paid holidays would provide him with some time off to pursue any personal interests. Although he just finished school, Robert may be considering graduate school, which would make the tuition reimbursement attractive. Learning Objective: 9-2. Explain the three categories of discretionary benefits. AACSB: Analytical thinking

9-7.

In today’s work environment, what additional benefits might be more attractive to Robert? Explain.

If he does have personal interests outside of work, Robert might be interested in flexible scheduling as well as paid time off to volunteer. Further, if he is health conscious, he may have an interest in wellness related benefits. Learning Objective: 9-2. Explain the three categories of discretionary benefits. AACSB: Analytical thinking

9-8.

What aspects of Beco’s benefits program would likely be the least appealing to Robert? Discuss.

Robert probably isn’t worried about becoming ill, so he may not appreciate the medical insurance, sick leave, or long-term care insurance. Further, he may think retirement is far in the future so the profit-sharing plan may not be important to him. Learning Objective: 9-2. Explain the three categories of discretionary benefits. AACSB: Analytical thinking Case 2: Ethics Dilemma: A Poor Bid Instructor Notes: An HR VP must decide on whether or not to include the bid of a subcontractor who did not include benefit costs in their bid, resulting in a bid $30,000 less than other subcontractors. Accepting the bid will improve the company’s chance of winning the contract for a big housing project.

Questions and Suggested Student Responses: 9-9.

As a compensation professional, what would you do?

Benefits are an important component in a company’s ability to attract and retain talent. If the sub-contractor does not offer benefits, the company could save money, but the quality of work could be negatively impacted. In this case, the HR VP should confirm with the sub-contractor if benefit costs were left out in error. Learning Objective: 9-5. Explain the costs and benefits of discretionary benefits. AACSB: Ethical understanding and reasoning 9-10.

What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision?

There is likely pressure on the VP of HR to contain costs, which could influence the lessthan-ethical decision. Learning Objective: 9-5. Explain the costs and benefits of discretionary benefits. AACSB: Ethical understanding and reasoning X.

Crunch the Numbers! Questions and Suggested Student Responses

Calculating Employer Matching Contributions 9-11. Full match: What is the employer’s contribution for (a) Amanda, (b) Shiyu, and (c) Onkar? a) Amanda: No contribution because Amanda does not contribute b) Shiyu: .07 x $125,000 = $8,750; Employer’s contribution is $8,750 c) Onkar: .02 x $80,000 = $1,600; Employer’s contribution is $1,600 Learning Objective: 9-2. Explain the three categories of discretionary benefits. AACSB: Application of knowledge 9-12. Fixed dollar match: 75 cents per each $1 employee contribution. What is the employer’s contribution for (a) Amanda, (b) Shiyu, and (c) Onkar? What is the total contribution (employee’s contribution plus employer’s contribution) to each employee’s 401(k) account: (d) Amanda, (e) Shiyu, and (f) Onkar? In 9-11. we calculated the total number of dollars each employee contributed. 75 cents for each dollar equals 75% of that contribution. a) Amanda: No contribution because Amanda does not contribute b) Shiyu: .75 x $8,750 = $6562.50 c) Onkar: .75 x $1,600 = $1,200 147 Copyright © 2020 Pearson Education, Inc.

d) Amanda: 0 e) Shiyu: $8,750 + $6562.50 = $15,312.50 f) Onkar: $1,600 + $1,200 = $2,800 Learning Objective: 9-2. Explain the three categories of discretionary benefits. AACSB: Application of knowledge 9-13. Variable dollar match: $1 per each $1 employee contribution on the first 2 percent of pay and 75 cents per $1 employee contribution for the next 3 percent of pay. What is the employer’s contribution for (a) Amanda, (b) Shiyu, and (c) Onkar? What is the total contribution (employee’s contribution plus employer’s contribution) to each employee’s 401(k) account: (d) Amanda, (e) Shiyu, and (f) Onkar? a) Amanda: No contribution because Amanda does not contribute b) Shiyu: $1 for $1 match on first 2% of contribution = .02 x $125,000 = $2,500, plus 75 cents per $1 contribution for next 3% of pay = (.03 x $125,000) x .75 = $2,812.50. Total employer contribution = $2,500 + $2,812.50 = $5,312.50. c) Onkar: : $1 for $1 match on first 2% of contribution = .02 x $80,000 = $1,600. This is the only employer contribution because Onkar only contributes 2%. d) Amanda: 0 e) Shiyu: $8,750 + $5,312.50 = $14,062.50 f) Onkar: $1,600 + $1,600 = $3,200 Learning Objective: 9-2. Explain the three categories of discretionary benefits. AACSB: Application of knowledge

XI.

Working Together: Team Exercise with Suggested Student Responses

Instructor’s Notes: Students should discuss in groups their work and non-work goals for the next five to ten years. Questions and Suggested Student Responses: 9-14. What are some of the various work and non-work goals after graduation from school for each time frame? Briefly describe them. Student responses will vary. Learning Objective: 9-5. Explain the costs and benefits of discretionary benefits. AACSB: Reflective thinking

9-15. What are two employee benefits that will support the attainment of these goals during each time frame? Explain. Responses will vary depending on the goals each student describes. However, benefits such as tuition reimbursement or flexible scheduling are examples. Learning Objective: 9-5. Explain the costs and benefits of discretionary benefits. AACSB: Analytical thinking

XII.

Assisted-Graded Questions

9-16. If a company’s budget were extremely limited and could only afford to offer one benefit, which would you select? Provide your rationale. Answer to this question can be found in the MyLab Management 9-17. Name at least one discretionary benefit practice that would help companies to have better control over absenteeism. Answer to this question can be found in the MyLab Management 9-18. MyLab Management Only – comprehensive writing assignment for this chapter.

XIII. Additional Cases from the MyLab Management Website; Instructor Notes, Questions and Suggested Student Responses Case Name: Boosting Sales or Boosting Commissions? Instructor Notes: A commission pay plan is a common compensation approach for sales representatives because it recognizes the individual contributions of each sales representative. Further, if a company is pursuing a low-cost competitive strategy, a commission pay plan supports the strategy by only paying employees for activities that directly contribute to the bottom line success of the company. However, designing a commission pay plan is not as simple as just determining a percentage of sales to pay in commission. There are many factors that impact the effectiveness of a commission pay plan. In this case, while a commission pay plan makes sense, the design of the plan could lead to some unethical behavior on behalf of the sales representatives. While avoiding ethical issues can be addressed through other strategies such as effective hiring practices, it should also be a consideration when designing the commission pay plan structure.

Suggested Student Responses: 9-19. What are some potential problems with Aspect’s compensation structure for sales representatives? Because the compensation is structured as commission only plan, there is no incentive for the sales representatives to work with a customer after the sale. In fact, doing so likely takes time away from activities that could lead to other sales. Further, the higher commission paid on add-on products and services may lead to some sales representatives aggressively selling extra services that are not needed. While these practices do support sales productivity, they do not provide incentives for the sales representatives to act in the best interest of the customers. AACSB: Analytical thinking

9-20. What changes do you recommend? Aspect may want to consider offering some base salary to help encourage the sales representatives to provide service to recent customers. This could ultimately help the sales representatives because it will encourage them to spend some time working with recent customers who could become referral sources for future sales. Further, Aspect may want to make the commission for selling add-on services the same as the basic plan so there is not an incentive to unnecessarily sell features. As an alternative to provide additional incentives to the sales representatives, Aspect could consider a graduated commission pay plan so that the sales representatives received a higher commission rate for selling more units overall. AACSB: Application of knowledge

CHAPTER 10 Legally Required Benefits Learning Objectives 10-1. Discuss the origins of legally required benefits. 10-2. Summarize the four main categories of legally required benefits. 10-3. Describe fee-for-service plans, traditional managed-care plans, and more recent consumer-driven approaches to providing health care coverage. 10-4. Summarize two additional key laws pertaining to legally required benefits. 10-5. Discuss the main benefits and costs of legally required benefits. Outline I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII.

Origins of Legally Required Benefits Categories of Legally Required Benefits Health Insurance Program Design Alternatives Additional Health Care Legislation The Benefits and Costs of Legally Required Benefits Key Terms Preparing for My Career: Compensation in Action Discussion Questions and Suggested Answers End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses Crunch the Numbers! Questions and Suggested Student Responses Working Together: Team Exercise with Suggested Student Responses Assisted-Graded Questions Additional Cases from the MyLab Management Website; Instructor Notes, and Suggested Student Responses Lecture Outline

Origins of Legally Required Benefits A. Historic background 1. Historically provided a form of social insurance 2. Designed to minimize the possibility that individual who became unemployed or severely injured while working would become destitute 3. Workers’ compensation insurance came into existence when industrial accidents were very common 4. Income discontinuity caused by the Great Depression led to the Social Security Act 5. Recently healthcare become a legally required benefit through the Patient Protection and Affordable Care Act (PPACA) 151 Copyright © 2020 Pearson Education, Inc.

II.

Categories of Legally Required Benefits A. Social Security Programs 1. Social Security Act established the following programs: a. Unemployment Insurance b. Old Age, Survivor, and Disability Insurance, OASDI c. Medicare 2. Unemployment Insurance a. For those unemployed through no fault of their own b. States administer within federal parameters i. States pay into a (federal) central unemployment fund, federal government invests, then disburse funds back to states ii. Does not cover most agricultural or domestic workers c. Criteria to qualify for benefits i. Varies from state to state ii. In general, workers must have been employed for a minimum period of time before filing a claim (base period) d. Individuals receive weekly benefits, vary by state e. Financed by federal and state taxes levied on employers under the Federal Unemployment Tax Act (FUTA) 3. Old age, survivor, and disability insurance provides retirement income, survivors’ insurance, disability and Medicare 4. Old age benefits a. Determined by how much credit each worker has earned i. Based on “quarters of coverage” ii. Fully insured after earning credit for 40 quarters of coverage, or 10 years of employment b. To receive benefits, the retired worker must: i. Be at least 62 years of age to receive reduced benefits ii. Be at least 65 years of age to receive full benefits iv. Between 2000–2022 age will increase to 67 (to receive full benefits) 5. Survivor benefits a. Based on insured’s employment status and survivor’s relationship to deceased i. Spouse (at least age 60) ii. Dependent, unmarried children iii. Parent (at least age 62) b. Deceased must be fully insured for dependents to receive full benefits

6. Disability benefits a. Must be totally disabled, based on inability to perform work done before becoming disabled and inability to adjust to other work because of the medical condition c. Worker must be disabled for at least a year, or the injury diagnosed as terminal d. Quarters of coverage needed to qualify varies based on age 7. Medicare a. Serves citizens at least 65 years of age by providing them with insurance coverage for hospitalization, convalescent care and major doctor bills b. Five Separate Plans i. Medicare Part A—hospital insurance ii. Medicare Part B—medical insurance iii. Medigap—voluntary supplemental insurance to pay for services not covered in Parts A and B iv. Medicare Part C: Medicare Advantage—choices in health care providers, such as through HMOs and PPOs v. Medicare Part D: Medicare Prescription Drug Benefit— prescription drug coverage vi. May receive coverage under the original Medicare Plan or Medicare Advantage plans 8. Medicare Part A Coverage a. Compulsory hospitalization insurance covers both inpatient and outpatient hospital care and services b. Financed by both employer and employee contributions of 1.45 percent of all earnings 9. Medical Part B Coverage a. A voluntary supplementary medical insurance covers 80 percent of medical services and supplies after individual pays annual deductible b. Pays for medical care such as doctors’ services, outpatient care, clinical laboratory services (e.g., blood tests, urinalysis) and some preventive health services (e.g., cardiovascular screenings, bone mass measurement), and ambulatory services when alternate transportation would endanger one’s health c. Part A coverage automatically qualifies an individual to enroll in Part B coverage for a monthly premium 10. Medigap insurance a. Supplements Parts A and B b. Available through private insurance companies c. Federal and state laws limit plans to ten standardized choices d. Medicare Select offers lower premiums in exchange for limiting the choice of providers 153 Copyright © 2020 Pearson Education, Inc.

11. Medicare Part C Coverage – Medicare Advantage a. Established as part of the Balanced Budget Act of 1997 renamed Medicare Advantage in 2004 b. An alternative to Parts A and B c. Allows beneficiaries the opportunity to receive healthcare from a variety of options i. Private fee-for-service plans ii. Managed care plans iii. Medical savings accounts 12. Medicare Prescription Drug Benefits a. Instituted in 2003, with passage of the Medicare Prescription Drug, Improvement and Modernization Act b. Gap in coverage in Medicare is known as the “donut hole” c. Pays 95 percent after enrollees total $4,750 of out-of-pocket expenditures 13. Financing OASDI and Medicare programs a. Requires equal employer and employee contributions under the Federal Insurance Contributions Act (FICA) b. Self-Employment Contributions Act (SECA) requires that selfemployed individuals contribute to the OASDI and Medicare programs, but at a different tax rate 14. OASDI Programs a. The largest share of the FICA tax funds OASDI programs b. OASDI taxes are subject to a taxable wage base c. Taxable wage bases limit the amount of annual wages or payroll cost per employee subject to taxation and may increase over time to account for increases in the cost of living 15. Medicare Programs a. Medicare tax, or hospital insurance tax, supports the Medicare Part A program b. Employers, employees, and self-employed individuals contribute 1.45 percent; self-employed individuals contribute double the amount, or 2.9 percent B. Workers’ Compensation 1. Run by states individually, covers expenses incurred in employees’ workrelated accidents 2. Maritime, federal civilian, agricultural, and small businesses (less than twelve employees) are not covered a. Maritime workers are covered by the Longshore and Harbor Workers’ Compensation Act b. Federal civilian workers are covered by the Federal Employees’ Compensation Act

3. Workers’ compensation objectives and obligations to the public a. Provide sure, prompt, and reasonable income and medical benefits to work-accident victims, or income benefits to their dependents, regardless of fault b. Provide a single remedy and reduce court delays, costs, and workloads arising out of personal injury litigation c. Relieve public and private charities of financial drains d. Eliminate payment of fees to lawyers and witnesses as well as timeconsuming trials and appeals e. Encourage maximum employer interest in safety and rehabilitation through appropriate experience-rating mechanisms f. Promote frank study of causes of accidents (rather than concealment of fault), reducing preventable accidents and human suffering 4. How workers’ compensation compares to social security benefits a. Workers’ compensation only pays for work-related injuries whereas social security pays benefits to workers with long-term disabilities from any cause, but only when the disabilities preclude work 5. Recent trends in workers’ compensation a. Number and amount have increased dramatically b. The dramatic increase in repetitive strain injuries is a major cause of increases 6. Financing workers’ compensation programs a. Employers generally subscribe to workers’ compensation insurance through private carriers, or, in some instances, through state funds b. A third funding option, self-insurance, requires companies to deposit a surety bond, enabling them to pay their own workers’ claims directly C. Family and Medical Leave 1. The Family and Medical Leave Act of 1993 (FMLA) aims to provide employees with job protection in cases of family or medical emergency 2. Guarantees employees the right to return to either their same position or a comparable one, if they are off work because of a family or medical emergency 3. Recognizes increasing prevalence of two-income families 4. Title I eligibility rules allowed up to 12 weeks of unpaid leave in a 12 month period if: a. Absence is due to the family size increasing due to a birth or a child placement, and is applied for within 12 months of the addition b. There is a family member suffering from a serious medical condition c. The employee suffers from a serious medical problem

5. Eligibility rules a. Must be a private employer with fifty or more employees, or b. A civilian unit of the federal government c. Must have put in at least 1,250 hours in a 12 month period prior to application 6. Benefits a. Twelve weeks of unpaid leave, but may be required to first use up all paid personal, sick or vacation leave b. Retention of all: i. Earned seniority or employment benefits although they do not accrue while on leave ii. Health insurance coverage 7. Major Revisions to FMLA instituted in January of 2009 include: a. Relatives of seriously injured members of the military may take up to 26 weeks off to care for their injured military family members b. Relatives of members of the National Guard or reserves who are called to activity duty may receive up to 12 weeks of leave to attend military programs (official send off of the family member’s troop), arrange child care, or make financial arrangements c. Nonmilitary workers who claim to have chronic health conditions (for example, ongoing back pain) must see their doctor at least twice per year for documentation 8. Revisions in 2015 a. Incorporates broader definition of spouse to include employees in legal same sex marriages D. State and Local Planned Leave Laws 1. Several states and local governments have instituted laws which mandate that employers furnish paid family and sick leave 2. Six states and the District of Columbia have paid family leave laws 2. State laws governing paid sick leave specify the criteria for what constitutes illness E. Health Insurance 1. Health insurance covers the costs of a variety of services that promote sound physical and mental health including physical examinations, diagnostic testing, surgery, hospitalization, psychotherapy, dental treatments, and corrective prescription lenses for vision deficiencies 2. The Patient Protection and Affordable Care Act of 2010 (PPACA) is a comprehensive law that mandates health insurance coverage and sets minim standards for insurance a. Companies with at least 50 employees are required to offer affordable health insurance under the law b. Employers ad individuals are subject to monetary penalties for failure to provide or carry insurance coverage

c. PPACA distinguishes between health plans that existed prior to the March 23, 2010 enactment date and those that came into existence after i. Grandfathered plans in existence before law ii. Non-grandfathered plans that were new or substantially altered after law iii. Grandfathered plans could lose status if a variety of modifications were made d. PPACA instituted requirements that health plans remove annual dollar amount limits on most health benefits and eliminates preexisting condition clauses all together e. Starting in 2020, the Cadillac tax will apply to high-cost employersponsored health plans III. Health Insurance Program Design Alternatives A. Overview 1. Employers usually enter into a contractual relationship with one or more insurance companies to provide health-related services for their employees and, if specified, employees’ dependents 2. The insurance policy specifies the amount of money the insurance company will pay for such particular services as physical examinations 3. Employers pay insurance companies a negotiated amount, or premium, to establish and maintain insurance policies; the term insured refers to employees covered by the insurance policy 4. The U.S. Bureau of Labor Statistics provides four questions to distinguish among the variety of health care plan designs: a. Is it an indemnity or prepaid plan? i. Indemnity plans reimburse the patient or provider as medical expenses occur or afterward ii. Prepaid plans pay medical service providers a fixed amount regardless of the services received b. Does it have a network? i. A network is a specific group of doctors, hospitals, suppliers, and clinics that provide services at an agreed rate c. Does the plan allow people to receive nonemergency care outside the network? d. Does the plan have more than two levels of coverage? B. Fee-for-Service Plans 1. Overview a. Provide protection against health care expenses in the form of a cash benefit paid to the insured or directly to the health care provider after the employee has received health care services b. Three types of eligible health expenses are hospital expenses, surgical expenses, and physician charges

Managed Care Approach 1. Overview a. Emphasize cost control by limiting an employee’s choice of doctors and hospitals b. Four kinds: i. Health maintenance organizations (HMOs) ii. Exclusive provider organizations (EPOs) iii. Preferred provider organizations (PPOs) iv. Point-of-Service plans (POS) 2. Health Maintenance Organizations a. Prepaid medical services—fixed periodic enrollment fees cover HMO members for all medically necessary services only if the services are delivered or approved by the HMO b. Generally provide inpatient and outpatient care as well as services from physicians, surgeons, and other health care professionals c. Most medical services are either fully covered or, in the case of some HMOs, participants are required to make nominal copayments d. Open-access HMO plans require the use of network providers, except emergency rooms e. Primary care physicians determine when patients need the care of specialists f. Copayments refer to the nominal payments an individual makes as condition of receiving services 3. Preferred Provider Organizations a. Select group of health care providers agrees to furnish health care services to a given population at a higher level of reimbursement than under fee-for-service plans b. Physicians qualify as preferred providers by meeting quality standards, agreeing to follow cost-containment procedures implemented by the PPO, and accepting the PPOs reimbursement structure c. PPOs provide lower reimbursements for services outside preferred networks 4. Exclusive Provider Organizations a. An exclusive provider organization (EPO) is a variation of a PPO but are more restrictive b. Do not require having a primary care physician 5. Point-of-Service Plans a. Combines features of fee-for-service systems and health maintenance organizations b. Employees pay a nominal copayment for each visit to a designated network of physicians D. Features of Health Care Plans 1. Health care plans share a few features in common a. Deductible b. Coinsurance c. Out-of-pocket maximum 158 Copyright © 2020 Pearson Education, Inc.

d. Preexisting condition clauses e. Lifetime and yearly limits 2. Deductibles a. The deductible is an amount an insured must pay for services before health insurance benefits become active b. Employees must pay for services and meet the deductible before insurance benefits become active 3. Coinsurance a. Coinsurance refers to the percentage of covered expenses paid by the insured 4. Out-of-pocket maximum a. Most plans specify the maximum amount the insured must pay per calendar year or plan year b. The purpose is to protect individuals from catastrophic medical expenses 5. Preexisting condition clauses a. A preexisting condition is a condition for which medical advice, diagnosis, care, or treatment was received or recommended during a designated period preceding the beginning of coverage. b. The PPACA eliminated preexisting condition clauses 6. Lifetime and yearly limits a. Lifetime limits refer to the maximum amount a plan would include if a person receives coverage b. Yearly limits refer to the maximum amount a plan would cover each year Specialized Insurance Benefits 1. Overview a. Carve-out plans are set up to cover dental care, vision care, prescription drugs, mental health and substance abuse, and maternity care b. Specialty HMOs or PPOs usually manage carve-out plans based on the expectation that single-specialty practices may control costs more effectively than multispecialty medical practices 2. Prescription Drug Plans a. Cover the costs of drugs b. Apply exclusively to drugs that state or federal laws require to be dispensed by licensed pharmacists c. Three kinds of prescription drug programs: i. Medical reimbursement plans reimburse employees for some or all of the cost of prescription drugs ii. Prescription card programs offer prepaid benefits with nominal copayments iii. Mail order prescription drug programs dispense expensive medications used to treat chronic health conditions such as HIV infection or such neurological disorders as Parkinson’s disease

3. Mental Health and Substance Abuse a. Twenty percent of Americans experience some form of mental illness (e.g., clinical depression) at least once during their lifetime b. As a result, insurance plans provide mental health and substance abuse benefits designed to cover treatment of mental illness and chemical dependence on alcohol and legal and illegal drugs c. Employee Assistance Programs (EAPs) represent a portal to taking advantage of employer-sponsored mental health and substance abuse treatment options F. Consumer-Driven Health Care 1. Despite cost-control objectives of other plans, health care costs have continued to rise 2. Consumer-Driven Health Plan (CDHP) approach refers to the objective of helping companies maintain control over costs while enabling employees to make wise choices 3. High-Deductible Health Plans (HDHPs) have two factors that distinguish them from other plans i. Substantially higher deductible ii. Out-of-pocket maximum 4. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added section 223 to the IRC, effective January 1, 2004, to permit eligible individuals to establish Health Savings Accounts (HSAs) to help employees that are enrolled in HDHPs to pay for medical expenses a. The sum of an employer’s and employee’s contribution to an HS cannot exceed the high-deductible’s health plan’s annual deductible b. Employers may require employees to contribute to these limits c. An unused balance at the end of the year carries over the next year and the employee owns the account and its holding following termination or retirement 5. Employers may offer two other health accounts to help defray the costs of medical care a. Health Reimbursement Arrangements (HRAs) reimburse employees for health care b. Flexible spending accounts permit employees to pay for specified health care costs that are not covered by an employer’s insurance plan i. Prior to each plan year, employees elect the amount of pay they wish to allocate to this kind of plan and employers then use these monies to reimburse employees for expenses incurred during the plan year that qualify for repayment IV. Additional Health Care Legislation A. Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) 1. Enacted to provide employees with the opportunity to continue receiving their employer-sponsored medical care insurance temporarily under their employer’s plan if their coverage otherwise would cease because of termination, layoff, or other change in employment status 2. Individuals may continue coverage for up to 18 months 160 Copyright © 2020 Pearson Education, Inc.

3. Companies are permitted to charge a premium for continuation coverage of up to 102 percent of the cost of the coverage to the plan

B. Health Insurance Portability and Accountability Act of 1996 (HIPAA) 1. Contains three provisions a. Guarantee that employees and their dependents that leave their employer’s group health plan will have ready access to coverage under a subsequent employer’s health plan, regardless of their health or claims experience b. Limits on preexisting conditions, however, under the PPACA preexisting condition clauses are eliminated c. Protects the transfer, disclosure, and use of health care information The Benefits and Costs of Legally Required Benefits A. Benefits tend to emphasize social adequacy—benefits are designed to provide subsistence income to all beneficiaries regardless of their performance in the workplace B. Legally required benefits may be a hindrance to companies in the short term because these offerings require substantial employee expenditures (e.g., contributions mandated by the SSA and various state workers’ compensation laws) C. HR managers and other business professionals minimize the cost burden associated with legally required benefits: 1. Reducing the likelihood of workers’ compensation claims a. Implementation of workplace safety programs is one strategy for reducing workers’ compensation claims b. Health promotion programs that include inspections of the workplace to identify health risks (e.g., high levels of exposure to toxic substances), and then to eliminate of those risks 2. Integrating workers’ compensation benefits into the rest of the benefits program 3. Employers can contain costs for unemployment insurance—systematically monitor the reasons they terminate workers’ employment and avoiding terminations that lead to unemployment insurance claims

End of Chapter VI. Key Terms Base period: The minimum period of time one must be employed to be eligible for unemployment insurance benefits Federal Unemployment Tax Act (FUTA): Levies federal and state taxes on employers to fund unemployment insurance benefits Quarters of coverage: Three consecutive months of employment during a calendar year Fully insured: Workers become fully insured when they earn credit for 40 quarters of coverage, or 10 years of employment, and remain fully insured during their lifetime 161 Copyright © 2020 Pearson Education, Inc.

Medicare Part A: This compulsory hospitalization insurance covers both inpatient and outpatient hospital care and services Medicare Part B: This voluntary supplementary medical insurance covers 80 percent of medical services and supplies after the enrolled individual pays an annual deductible for services furnished under this plan Medigap: Insurance that supplements Part A and Part B coverage and is available to Medicare recipients in most states from private insurance companies for an extra fee Medicare Select plans: Medigap policies that offer lower premiums in exchange for limiting the choice of health care providers Medicare Advantage: A third Medicare program, informally referred to as Part C, provides beneficiaries the opportunity to receive health care from a variety of options, including private fee-for-service plans, managed care plans, or medical savings accounts Federal Insurance Contributions Act (FICA): Requires that employers pay a tax based on their payroll; employees contribute a tax based on earnings, which is withheld from each paycheck Self-Employment Contributions Act (SECA): Requires that self-employed individuals contribute to the OASDI and Medicare programs, but at a higher tax rate Taxable wage base: Limits the amount of annual wages or payroll cost per employee subject to taxation Medicare tax: Portion of FICA that supports the Medicare Part A program Hospital insurance tax (HI): Portion of FICA that supports the Medicare Part A program Longshore and Harbor Workers’ Compensation Act: Mandates the maritime workers’ compensation program Federal Employees’ Compensation Act: Provides workers’ compensation protection to federal civilian employees receive Family and Medical Leave Act of 1993 (FMLA): Aims to provide employees with job protection in cases of family or medical emergency Health insurance: Covers the costs of a variety of services that promote sound physical and mental health, including physical examinations, diagnostic testing, surgery, hospitalization, psychotherapy, dental treatments, and corrective prescription lenses for vision deficiencies Patient Protection and Affordable Care Act of 2010 (PPACA): A comprehensive law that mandates health insurance coverage and sets minimum standards for insurance Grandfathered plans: Individual and group health plans already in existence prior to enactment of the PPACA Non-grandfathered plans: New health plans or preexisting plans that have been substantially modified after March 23, 2010 Cadillac tax: Applies to high-cost employer-sponsored health plans Single coverage: Extends benefits only to the covered employee Family coverage: Offers benefits to the covered employee and qualified dependents Insurance policy: Refers to a contractual relationship between the insurance company and the beneficiary Premium: A negotiated amount the employer pays to the insurance company to establish and maintain insurance policies 162 Copyright © 2020 Pearson Education, Inc.

Indemnity plans: Reimburse the patient or the provider as medical expenses occur or afterward Prepaid plans: Pay medial service providers a fixed amount based on the number of people regardless of services received Network: A specific group, composed of doctors, hospitals, suppliers, and clinics, that has contracted to provide services for an agreed rate Fee-for-service plans: Provide protection against health care expenses in the form of a cash benefit paid to the insured or directly to the health care provider after the employee has received health care services Managed care plans: Emphasize cost control by limiting an employee’s choice of doctors and hospitals Open-access HMO: Require the use of network providers, except emergency rooms Primary care physicians: Determine when patients need the care of specialists Copayments: Represent nominal payments an individual makes as a condition of receiving service Preferred Provider Organization (PPO): A select group of health care providers agrees to furnish health care services to a given population at a higher level of reimbursement than under fee-for-service plans Point-of-Service plan (POS): Combines features of fee-for-service systems and HMOs Exclusive Provider Organization (EPO): Offer reimbursement for services within the established network, but are more restrictive than PPO’s Deductible: The amount the employee must pay in a designated period before insurance benefits become active Coinsurance: Refers to the percentage of covered expenses paid by the insured Out-of-pocket maximum: The maximum amount the insured must pay per calendar year or plan years Preexisting condition: A condition for which medical advice, diagnosis, care, or treatment was received or recommended during a designated period preceding the beginning of coverage Lifetime limits: Refer to the maximum amount a plan would include if a person receives coverage Yearly limits: Refer to the maximum amount a plan would cover each year Carve-out plans: When employers use separate insurance plans to provide specific kinds of benefits Prescription drug plans: Cover the costs of drugs Medical reimbursement plans: Reimburse employees for some or all of the cost of prescription drugs Prescription card program: Offer prepaid benefits with nominal copayments Mail order prescription drug program: Dispenses expensive medications used to treat chronic health conditions such as human immunodeficiency virus (HIV) or such neurological disorders as Parkinson’s disease Consumer-driven health care plan: Refers to the objective of helping companies maintain control over costs while also enabling employees to make smarter choices about health care 163 Copyright © 2020 Pearson Education, Inc.

High-Deductible Health Insurance Plans (HDHPs): Require substantial deductibles and low out-of-pocket maximum Medicare Prescription Drug, Improvement and Modernization Act of 2003: Added Section 223 to the IRC, effective January 1, 2004, to permit eligible individuals to establish health savings accounts Health savings accounts (HSAs): Help employees pay for medical expenses Health reimbursement arrangements (HRAs): Reimburse employees for health care expenses Flexible Spending Accounts (FSAs): Permit employees to pay for specified health care costs that are not covered by an employer’s insurance plan Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA): Enacted to provide employees with the opportunity to continue receiving their employersponsored medical care insurance temporarily under their employer’s plan if their coverage otherwise would cease because of termination, layoff, or other change in employment status Health Insurance Portability and Accountability Act of 1996 (HIPAA): Provides access to coverage under a subsequent employer’s health plan, regardless of their health or claims experience and protects the transfer, disclosure, and use of health care information VII.

Discussion Questions and Suggested Answers

10-1. Except for the Patient Protection and Affordable Care Act, the remaining legally required benefits were conceived more than a decade ago. What changes in the business environment and society might affect the relevance or perhaps the viability of any of these benefits? Discuss your ideas. Social Security is going to be experiencing a large shift on an economic standpoint as begins to give out more money than it’s taking in, which will cause numerous cuts in Social Security benefits for the future. Other changes or rather lack of changes could affect benefits, such as the FUTA not raising or lowering the taxable wage base as the economy shifts. This potential change or lack of change could cause an unfair advantage for certain wage earners and begin to skew the potential income of employees to a new level. Further, changes in the demographics in the workforce could impact societal needs including the continuing rise of two-income families needing more flexibility to raise families. Learning Objective: 10-1. Discuss the origins of legally required benefits. AACSB: Analytical thinking 10-2. Describe the principles of fee-for-service plans and managed care plans. What are the similarities and differences? Fee-for-service plans provide protection against health care expenses in the form of a cash benefit paid directly to the health care provider after the employee has received health care services. 164 Copyright © 2020 Pearson Education, Inc.

Managed care plans emphasize cost control by limiting an employee’s choice of doctors and hospitals. These plans are similar in that they allow employees to seek medical care under the company’s insurance program. Some managed care plans do operate through reimbursements similar to the fee-for-service plans. However, managed care plans require employees to use specific networks of doctors, whereas employees can go generally go to any doctor under a fee-for-service plan. Further, managed care plans focus on cost savings, while fee-for-service plans offer employees choice in selecting their medical care providers. Learning Objective: 10-3. Describe fee-for-service plans, traditional managed-care plans, and more recent consumer-driven approaches to providing health care coverage. AACSB: Analytical thinking 10-3. What are some of the choices an employer may make to help control health care costs? Explain. Companies can help control costs in a few different ways. Employers can implement safety programs to reduce the likelihood of workers’ compensation claims, and they can lower unemployment insurance costs through avoiding terminations the lead to unemployment insurance claims whenever possible. Companies can control healthcare insurance costs through selecting lower cost programs such as managed care plans. Further, an insurance plan can adjust features such as deductibles or coinsurance to get a lower premium. Learning Objective: 10-5. Discuss the main benefits and costs of legally required benefits. AACSB: Analytical thinking

10-4. In what ways may legally required benefits have contributed to an employee entitlement mentality regarding discretionary benefit offerings? Explain your rationale. Employees do indeed often see benefits as entitlements for their membership in companies because they often believe that by working for a company they should get the benefits of employment that they deserve. As legally required benefits outline some requirements for retirement and health care insurance are available, employees believe they are entitled to these. It is the employer’s job to make sure that the employees are doing what they ought to do according to the companies’ expectations as well as to provide them with the promised benefits. Learning Objective: 10-1. Discuss the origins of legally required benefits. AACSB: Analytical thinking 165 Copyright © 2020 Pearson Education, Inc.

10-5.

How do legally required benefits relate to a company’s competitive advantage? And, which benefit do you feel is most impactful? Explain.

Legally required benefits may contribute indirectly to competitive advantage by enabling individuals to remain participants in the economy. Student responses may vary, however, some might argue that health insurance is the most important to keep employees healthy and working. Learning Objective: 10-5. Discuss the main benefits and costs of legally required benefits. AACSB: Analytical thinking VIII. Preparing for My Career: Compensation in Action Instructor Notes: This section outlines the role human resources professionals and line managers take in educating employees about the broad array of benefit options available, and protecting the company from liabilities associated with failing to comply with certain legally mandated benefits. HR takes the lead in benchmarking other companies and talking to employees to make recommendations on programs. Line managers must understand the legally required benefits to communicate to employees. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager. IX.

End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses

Case 1: Social Security and Retirement Planning at Taylor Foods Instructor Notes: The instability of the Social Security system is causing companies to reconsider their retirement benefit offerings. Employees retiring in the near future may delay their retirements in order to receive full Social Security benefits. Long-term, employees will rely more on their company retirement benefits so companies need to consider this as they design their retirement benefits.

Questions and Suggested Student Responses: 10-6. How does the instability for the Social Security system affect retirement benefit planning at Taylor Foods? (Note: You may find it helpful to consider the material on retirement plans in Chapter 9.) Knowing that Social Security may not be available for future employees at Taylor Foods, the company should consider the retirement plans that they offer their employees. These plans should allow employees to save sufficiently to support themselves in retirement. The company could consider offering a 401(k) plan that allows employees to determine how much they want to invest in their retirement. The company could provide a matching contribution to the plan to encourage employees to participate. Learning Objective: 10-2. Summarize the four main categories of legally required benefits. AACSB: Application of knowledge 10-7. Should Gavin consider the possibility of employees delaying retirement in the company’s human resource planning process? Yes, he should consider this possibility. Given the incentives the Social Security program has in place that may impact an employee’s choice to delay retirement, Gavin needs to adjust his staffing projections to include lower turnover rates. Learning Objective: 10-2. Summarize the four main categories of legally required benefits. AACSB: Application of knowledge 10-8.

What do you recommend? Why?

Student responses will vary. Learning Objective: 10-2. Summarize the four main categories of legally required benefits. AACSB: Application of knowledge Case 2: Ethics Dilemma: Go with the High-Deductible Plan Health Plan Instructor Notes: Healthcare insurance costs are up 15% at Simpson Automotive due to high employee utilization of the more costly fee-for-service, HMO, and PPO plans. The director of HR’s solution is to encourage employees to switch to a high-deductible plan in exchange for a $1000 bonus. However, those employees who do not switch will forfeit the bonus as well as a long awaited cost-of-living pay increase.

Questions and Suggested Student Responses: 10-9. As compensation professional, what would you do? While the $1000 bonus to elect the high-deductible plan might be a good start to cutting costs, it is not a long-term solution. Employees would likely change back to the more expensive plans the next year. The company needs to examine other cost saving measures in the design of their program such as adjusting deductibles that could lead to a lower premium. Beyond looking at the costs, the company has to consider the possible ramifications of penalizing employees by denying them the cost-of-living pay increase. The pay increase is not connected to health insurance benefits and employees will likely react strongly and negatively to such a penalty. Learning Objective: 10-3. Describe fee-for-service plans, traditional managed-care plans, and more recent consumer-driven approaches to providing health care coverage. AACSB: Ethical understanding and reasoning 10-10. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? The pressure to cut costs for the company likely influenced the director of HR to suggest the penalty of losing the pay increase. The rising costs of healthcare was also an influence on the situation. Learning Objective: 10-3. Describe fee-for-service plans, traditional managed-care plans, and more recent consumer-driven approaches to providing health care coverage. AACSB: Ethical understanding and reasoning X.

Crunch the Numbers! Questions and Suggested Student Responses

Calculating FICA Taxes 10-11. How much does the employer and employee pay in total for OASDI each monthly pay period for (a) Ana, (b) Roberto, (c) Maria, and (d) Jim? How much do the employer and employee pay for Medicare each monthly pay period for (a) Ana, (b) Roberto, (c) Maria, and (d) Jim? Of the 7.65 percent of FICA tax, 6.20 percent is set aside for OASDI. 1.45 percent is set aside for Medicare. For self-employed, of the 15.30 percent SECA tax, 12.40 is set aside for OASDI, and 2.9 percent for Medicare. a) Ana’s $250,000 annual salary is above the $128,400 taxable wage base for OASDI, so the monthly calculation is based on $128,400. $128,400 / 12 = $10,700 monthly OASDI wage base. There is no limit for Medicare wage base so the monthly calculation is based on $250,000. $250,000 / 12 = $20,833.33 monthly Medicare wage base. OASDI = .1240 x $10,700.00 = $1,326.80 Medicare = .029 x $20, 833.33 = $604.17 168 Copyright © 2020 Pearson Education, Inc.

b) Roberto: Monthly pay = $90,000 / 12 = $7,500 OASDI: The employer and the employee make equal contributions. Roberto has .0620 x $7,500 = $465.00 withheld from his paycheck. His company then matches the same amount of $465.00. For a total monthly amount of OASDI = $930.00. Medicare: The employer and the employee make equal contributions. Roberto has .0145 x $7,500 = $108.75 withheld from his paycheck. His company then matches the same amount of $108.75. For a total monthly amount of Medicare = $217.50. c) Maria: Monthly pay = $120,000 / 12 = $10,000 OASDI: The employer and the employee make equal contributions. Maria has .0620 x $10,000 = $620.00 withheld from her paycheck. Her company then matches the same amount of $620.00. For a total monthly amount of OASDI = $1,240.00. Medicare: The employer and the employee make equal contributions. Maria has .0145 x $10,000 = $145.00 withheld from her paycheck. Her company then matches the same amount of $145.00. For a total monthly amount of Medicare = $290.00 d) Jim: Monthly pay = $50,000 / 12 = $4,166.67 OASDI = .1240 x $4,166.67 = $516.67 Medicare = .029 x $4,166.67 = $120.83 Learning Objective: 10-2. Summarize the four main categories of legally required benefits. AACSB: Application of knowledge 10-12. How much does the employer pay in total for OASDI each monthly pay period for (a) Ana, (b) Roberto, (c) Maria, and (d) Jim? (Remember that for self-employment, the individual and the employer are one and the same.) a) Ana is self-employed therefore she is considered both the employee and employer. Her total amount of OASDI is $1326.80 (calculation from 10-11). b) Roberto: OASDI = .0620 x $7,500 (monthly pay) = $465.00 c) Maria: OASDI = .0620 x $10,000 (monthly pay) = $620.00 d) Jim is self-employed, therefore he is considered both the employee and employer. His total amount of OASDI is $4,166.67 (calculation from 10-11) Learning Objective: 10-2. Summarize the four main categories of legally required benefits. AACSB: Application of knowledge

10-13. If the taxable wage base were to increase to $135,000, how much do the employer and employee pay in total for OASDI each monthly pay period for (a) Ana, (b) Roberto, (c) Maria, and (d) Jim? a) Ana’s $250,000 annual salary is above the $135,000 taxable wage base for OASDI, so the monthly calculation is based on $135,000. $135,000 / 12 = $11,250 monthly OASDI wage base. OASDI = .1240 x $11,250 = $1,395 b) Roberto: Same as 10-11. He is below the taxable wage base = $930.00 c) Maria: Same as 10-11. She is below the taxable wage base = $1,240.00 d) Jim: Same as 10-11. He is below the taxable wage base = $516.67 Learning Objective: 10-2. Summarize the four main categories of legally required benefits. AACSB: Application of knowledge XI.

Working Together: Team Exercise with Suggested Student Responses

Instructor’s Notes: Groups should conduct research on one of the legally required benefits in the chapter. Questions and Suggested Student Responses: 10-14. What are some of the facts and ideas that you learned? Describe them. Student responses will vary depending on what benefit they selected. Learning Objective: 10-2. Summarize the four main categories of legally required benefits. AACSB: Analytical thinking 10-15. Which fact or idea about the benefit did you find the most surprising? Explain. Student responses will vary depending on what benefit they selected. Learning Objective: 10-2. Summarize the four main categories of legally required benefits. AACSB: Reflective thinking XII. Assisted-Graded Questions 10-16. How does a state determine if an individual is eligible for unemployment insurance benefits? Answer to this question can be found in the MyLab Management 170 Copyright © 2020 Pearson Education, Inc.

10-17. Define health insurance concepts such as insurance policy and premium, and explain the different types of health insurance programs. What are the main differences among these programs? Answer to this question can be found in the MyLab Management 10-18. MyLab Management Only comprehensive writing assignment for this chapter. XIII. Additional Cases from the MyLab Management Website; Instructor Notes, and Suggested Student Responses Case Name: Cutting Costs at Venta Care Instructor Notes: As personnel expenses are one of the most significant costs in any company, management often looks toward employee-related expenses when the budget needs trimmed. At Venta Care Nursing Homes, costs have been contained in every aspect of the business. Staffing is at minimum levels and the HR director has frozen salaries. She is now looking at where the company could cost in their generous benefit program that contributes to high levels of employee retention. Current benefits include: • Healthcare insurance program • Short and long-term disability and life insurance • 8 paid holidays, 10 vacation days, and 5 sick days • 401(k) plan with a 3% match • Tuition reimbursement for pursuing advanced degrees • Employee wellness programs • Full-service Employee Assistance Program Questions and Suggested Student Responses: 10-19. Do you think eliminating benefits is a good way to cut costs? Explain. Generally eliminating benefits that employees have received in the past can create challenges for companies. Some employees see benefits as entitlements, and even if they know the value of the benefit, taking it away could affect employee morale. Instead of eliminating benefits, the HR director may want to explore how to lower benefit costs without eliminating the benefit. For example, the company could negotiate for lower premiums on healthcare insurance and shift some of the contribution toward the premium to the employee. The company could limit tuition reimbursement to specific degrees instead of any advanced degree. The company could also look at what parts of the wellness programs are utilized to determine if some could be cut. AACSB: Application of knowledge

10-20. If you had to eliminate benefits at Venta Care, what would you eliminate? Why? Student responses may vary. Most will respond that the company needs to keep the healthcare insurance and the retirement benefit in order to stay competitive. Further, paid time off should be a last resort to cut as this benefit usually does not create as significant of a direct expense to the company. If the employees are utilizing Employee Assistance Program, it is likely helping to lower overall healthcare costs. However, if it is not being utilized, it could be eliminated. The company may also want to consider eliminating the tuition reimbursement and wellness programs, as these are benefits their competitors may not be providing. Learning Objective: AACSB: Application of knowledge

CHAPTER 11 Compensating Executives Learning Objectives 11-1. 11-2. 11-3. 11-4. 11-5.

Explain the difference between executive pay and pay for nonexecutives. Define executive status. List the components of executive compensation packages. Discuss the principles and processes of setting executive compensation. Summarize the executive compensation disclosure rules and the reasons why they have been established. 11-6. Briefly explain the executive compensation controversy as it relates to whether U.S. executives are paid too much. Outline I. Contrasting Executive Pay with Pay for Nonexecutive Employees II. Defining Executive Status III. Executive Compensation Packages IV. Principles and Processes for Setting Executive Compensation V. Executive Compensation Disclosure Rules VI. Executive Compensation: Are U.S. Executives Paid Too Much? VII. Key Terms VIII. Discussion Questions and Suggested Answers IX. Preparing for My Career: Compensation in Action X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XI. Crunch the Numbers! Questions and Suggested Student Responses XII. Working Together: Team Exercise with Suggested Student Responses XIII. Assisted-Graded Questions XIV. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses

Lecture Outline I.

Contrasting Executive Pay with Pay for Nonexecutive Employees A. Overview 1. CEO is the seller of his/her services and the compensation committee is the buyer 2. Under classic economic theory reasonable price (of goods and services) is obtained through negotiations with an informed buyer and informed seller) that are “arm’s length apart” 173 Copyright © 2020 Pearson Education, Inc.

II.

III.

3. CEO hires a professional compensation consultant to determine own compensation, however, this can be a conflict of interest 4. Executive pay often contradicts an organizations performance-based pay strategy as executives are often rewarded even after they fail Defining Executive Status A. Who are executives? 1. The Internal Revenue Service (IRS) recognizes two groups of employees that play a major role in a company’s policy decisions a. Highly compensated employees b. Key employees 2. The IRS uses “key employees” to determine the necessity of top-heavy provisions in employer-sponsored qualified retirement plans that cover most nonexecutive employees 3. The IRS uses “highly compensated employees” for nondiscrimination rules in employer-sponsored health insurance benefits B. Key employees 1. At any time during the year must be a. An officer having annual pay of more than $175,000 b. An individual who for 2018 was either: i. A 5 percent owner of the company ii. A 1 percent owner whose annual pay is more than $150,000 2. U.S. Treasury defines the term officer in this definition of key employees: i. An administrative executive who is in regular and continued service ii. Implies continuity of service iii. The title of officer is not enough for the purpose of the key employee test C. Highly compensated employees 1. One of the following during the current or preceding year: a. 5 percent owner b. For the preceding year, had compensation from the employer in excess of $120,000 in 2018, and c. If the employer chooses, was in the top paid group of employees for the preceding year where top-paid employees are the top 20 percent most highly compensated Executive Compensation Packages A. Overview 1. Current or annual core compensation 2. Deferred core compensation: Equity agreements 3. Deferred core compensation: Separation agreements 4. Clawback provisions 5. Employee benefits enhanced protection programs and perquisites 174 Copyright © 2020 Pearson Education, Inc.

B. Components of Current Core Compensation 1. Base Pay a. The fixed element of annual cash compensation b. Companies that use formal salary structures may use pay grades and ranges for all employees, except for the CEO c. CEOs are not included in the pay structure because i. CEO’s work is highly complex and unpredictable and it is not possible to specify discrete responsibilities and duties ii. Setting CEO’s compensation differs dramatically from the rational processes compensation professionals use to build marketcompetitive pay structures d. Base pay represents only a small part of CEO’s total compensation because: i. It takes years before the fruits of the CEO’s strategic initiatives are realized ii. The IRS limits the amount of annual salary a company may exclude as a business expense 2. Bonuses a. Represent single-pay-for-performance payments used to reward employees for achievement of specific, exceptional goals b. Compensation professionals design bonuses for merit pay programs, gain sharing plans, referral plans, and sales incentive compensation programs c. Four common bonuses for executives i. Discretionary bonus ii. Performance-contingent bonus iii. Predetermined allocation bonus iv. Target plan bonus d. Discretionary bonuses are awarded on an elective basis with the amount based on four factors: i. Company profits ii. The financial condition of company iii. Business conditions iv. Future prospects e. Performance-contingent bonuses are based on attainment of specific performance criteria f. Predetermined allocation bonus has a bonus pool based on a fixedformula g. Target plan bonus ties bonuses to executive’s performance

3. Short-Term Incentive Compensation a. Used to recognize executives’ progress toward fulfilling competitive strategy goals b. Uses current profit sharing plans and gain sharing plans c. Designed to reward executives for meeting intermediate performance criteria that are dictated by competitive strategy, like: i. Change in company’s earnings per share over a one-year period ii. Growth in profits iii. Annual cost savings d. Usually applies to more than one executive because of the synergy that results from the efforts D. Components of Deferred Core Compensation 1. An agreement between an employee and a company to render payments to the executive at a future date 2. A hallmark of executive compensation packages designed to create a sense of ownership and align the interests of the executive with those of the owners or shareholders over the long term 3. Generally two types of plans a. Equity plans provide an executive with ownership stakes in the company through a variety of mechanisms, including various stock option plans and stock purchase plans b. Separation agreements guarantee that an executive will receive a lucrative compensation package upon employment termination E. Equity Agreements 1. Company stock and stock options provide the foundation for equity agreements 2. Stocks: a. Company stocks represent the total equity of the firm b. Company stock shares represent equity segments of equal value c. Equity interest increases positively with the number of stock shares 3. Stock options a. Incentive stock options entitle executives to purchase stock in the future at a predetermined price i. The predetermined price equals the price at the time an executive receives the stock option ii. Executives are generally purchasing the stock at a discounted price iii. Executives generally purchase the stock after the price increases dramatically b. Capital gains is the difference between the stock price at the time of purchase and the lower stock price at the time an executive receives the stock option 176 Copyright © 2020 Pearson Education, Inc.

c. A capital loss occurs if the stock price at the time of disposition were lower than at the price of the stock option grant d. Nonstatutory stock options do not qualify for favorable tax treatment i. Executives pay income taxes on the difference between the discounted price and the stock’s fair market value at the time of the stock grant ii. Executives do not pay taxes in the future when they choose to exercise their non-statutory stock options 4. Restricted stock plans, restricted stock units, and performance stock awards a. Restricted stock plans allow a company to grant executives with stock options at market value or discounted value, or they may provide stock b. Executives do not have any ownership control over the disposition of the stock for a vesting period c. Restricted stock units are shares of company stock that are awarded to executives at the end of the restriction period d. Under a performance plan a company chooses to add to the vesting period a performance criterion for determining whether to award stock options or stock units 5. Stock appreciation rights a. Provide executives income at the end of a designated period, like restricted stock options b. Executives never have to exercise their stock rights to receive income c. The company awards executives based on the difference in stock price between the time the company granted the stock rights at fair market value to the end of the designated period 6. Phantom stock a. Boards of directors promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time b. Can convert these into real shares, under two conditions: i. Executives must remain employed for a specific period ii. Executives must retire from the company 7. Employee stock purchase plans a. Allows participating employees to purchase stock after a designated period of time. b. The span of time over which employees are permitted to contribute to their accounts is referred to as the offering period

F. Separation Agreements 1. Golden parachutes a. Provide pay and benefits to executives following their termination resulting from a change in ownership or corporate takeover, that is, the merger or combining of two separate companies b. Boards of directors include these clauses for three reasons: i. They limit executives’ risks in the event of these events ii. They promote recruitment and retention of talented executives iii. To prevent a CEO from working against a takeover bid in order to save his or her job c. Companies can treat these as business expenses 2. Platinum parachutes a. Lucrative awards that compensate departing executives with severance pay, continuation of company benefits and even stock options b. Given in order to avoid legal battles or critical press reports c. Given in the event the CEO is terminated after a period of unsatisfactory performance as determined by the shareholders and other company executives G. Clawback provisions 1. Allow boards of directors to take back performance-based compensation if they were to subsequently learn that performance goals were not actually achieved 2. These provisions are becoming more common: a. Because of the increasing scrutiny of CEO compensation packages by the public and shareholders b. Particularly since the recent global financial crisis in the late 2000s H. Employee Benefits: Enhanced Protection Program Benefits and Perquisites 1. Executives receive discretionary benefits like other employees, however, they differ in two ways: a. Protection programs include supplemental coverage that provide enhanced benefit levels b. The services component contains benefits exclusively for executives called perquisites or perks 2. Enhanced protection program benefits a. Supplemental life insurance i. Pays additional monetary benefits ii. Provides executives favorable tax treatment b. Supplemental retirement plans i. Are designed to restore benefits restricted under qualified plans ii. Make up the monetary difference between IRS limits and desired compensation amounts 178 Copyright © 2020 Pearson Education, Inc.

IV.

3. Perquisites a. Also known as perks, are an integral part of executives’ compensation b. Four purposes i. Recognizes the status the executive has achieved ii. Use for personal comfort or as a business tool iii. Use of a corporate aircraft could be considered a security measure iv. Permit executives to have fewer distractions (services such as financial planning) c. Many companies have been scaling back offerings d. Stricter reporting requirements by the Securities and Exchange Commission could lead to companies providing cash in lieu of perquisites Principles and Processes for Setting Executive Compensation A. The Key Players in Setting Executive Compensation 1. Executive compensation consultants a. Propose several recommendations for alternative pay packages that are based on strategic analysis b Possible conflict of interest as consultants are hired by CEOs c. Recommending lucrative packages could bring the consultant or consulting company more business d. The Securities and Exchange Commission rulings require companies to include the identity of the consulting firm in public disclosure forms 2. Board of Directors a. Represent shareholders’ interests by weighing the pros and cons of top executives’ decisions b. Most boards contain fifteen members that generally include: i. CEOs and top executives of other companies ii. Distinguished community leaders iii. Well-regarded professionals like physicians or attorneys iv. Top-level executives of the company c. Give final approval of the compensation committee’s recommendations d. Possible conflict of interest as CEO’s recommend Board members and the Board members receive compensation for serving e. SEC rulings and the passage of the Dodd-Frank Act have increased the transparency of how executives are compensated as well as board members’ accountability for approving sound executive compensation packages—supportive of shareholders’ best interests 3. The compensation committee a. Is comprised by Board of Directors members b. Inside company board members c. Outside board members 179 Copyright © 2020 Pearson Education, Inc.

i. Help to minimize conflicts of interest ii. Make up the majority of most committees d. Perform three duties: i. Review consultants’ alternative recommendations ii. Discuss the assets and liabilities of each recommendation iii. Recommend the best proposal to the board of directors to consider B. Theoretical Explanations for Setting Executive Compensation 1. Agency theory a. Ownership is distributed among thousands of shareholders in large companies b. Shareholders delegate control to top executives c. Agency problem exists because executives may pursue activities that may benefit themselves instead of shareholders 2. Tournament theory a. Casts lucrative executive compensation as the prize in a series of tournaments among middle and top-level managers who aspire to become a CEO b. Winners at one level enter into the next level c. Chances of winning decrease dramatically as winners rise through the ranks 3. Social comparison theory a. Individuals compare themselves to individuals of similar or greater stature b. Demographics and occupation are common comparative bases c. CEOs on compensation committees might rely on their own compensation packages and those of other compensation CEOs of equal or greater stature to determine executive compensation Executive Compensation Disclosure Rules A. Securities and Exchange Act of 1934 1. The Securities and Exchange Commission (SEC) requires companies that sell and exchange securities (i.e., stocks, bonds) to file a wide variety of information including executive compensation practices 2. The Securities Exchange Act of 1934 applies to the disclosure of executive compensation a. Companies are required to file Form 10-K which contains a detailed picture of a company’s business, the risks it faces, and the operating and financial results for the fiscal year

VI.

b. Companies are required to complete a Definitive Proxy statement that reveals detailed information about the compensation of the CEO and Named Executive Officers (NEO) i. NEOs are generally the four most highly compensated officer after the CEO c. Compensation Discussion and Analysis (CD&SA) is the narrative report that presents and unambiguous explanation of all executive compensation information contained in the tables 3. In 2008, the SEC unveiled additional rules for disclosing executive compensation that require companies to reveal how much executives are paid making previously hard-to-find information as such as pension and estimated severance package totals, transparent 4. In 2009, the SEC Chairperson announced that the Commission would consider further changes in the disclosure of executive compensation in a company’s summary compensation table pertaining to the reported value of stock options and stock rewards B. Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) 1. Enacted to further enhance the transparency of executive compensation practices 2. Commonly referenced to as the Dodd-Frank Act, requires four provisions for companies that trade stock on public exchanges: a. Requires say on pay that gives company shareholders the right to vote yes or no on executive compensation proposals b. Details independence requirements for compensation committee members and their advisors (e.g., compensation consultants and legal counsel) c. Requires that companies disclose the circumstances under which an executive would benefit from a golden parachute agreement d. Requires companies to report the ratio of CEO compensation to the median compensation of its employees in SEC filings 3. Say on pay is not limited to U.S. companies Executive Compensation: Are U.S. Executives Paid Too Much? A. Comparison between Executive Compensation and Compensation for Other Worker Groups 1. Median annual earnings for all civilian U.S. workers was $49,630 in 2016 a. Least paid nonexecutive—food preparers at $20,460 b. Highest paid nonexecutive—anesthesiologists at $269,600 2. Wall Street Journal/Hay Group survey reports average annual total compensation amounts for CEO’s at $11.6 million

B. Strategic Questions: Is Pay for Performance? 1. A simple statement cannot be made about the relationship between CEO pay and company performance because of mixed evidence 2. Shareholder returns most often describe company performance, but there are complex forces beyond the control of CEOs that may influence shareholder returns C. Ethical Considerations: Is Executive Compensation Fair? 1. Attract and retain top executives a. The Board of Directors and compensation professionals believe lucrative compensation for top executives is vital b. Many CEOs are recruited from other organizations 2. Income disparities a. Typical CEO salaries are nearly 567 times greater than the typical food preparer’s pay, and approximately 43 times greater than the typical anesthesiologist’s annual pay b. Labor unions argue that substantial pay discrepancies are socially unjust and promote economic inequality 3. Layoffs borne by workers but not executives a. Between late 2008 and mid 2009 alone, more than two million employees lost their jobs while a scant few executives lost theirs D. International Competitiveness 1. Has forced companies to a. Become more productive b. Consider the competitive impact of the vast differences in compensation levels between the CEOs of US and foreign companies 2. International compensation comparisons a. Difficult to make comparisons because foreign countries do not require same disclosure rules as SEC b. However, research has shown that U.S. CEO’s earn the most c. Pay mix also differed substantially 3. Undermining U.S. companies’ ability to compete a. No evidence the high U.S. executive compensation practices have undermined efforts to compete internationally b. However, massive U.S. worker layoffs might i. Heightens workers’ job insecurities ii. Workers may lose faith in pay-for-performance system

End of Chapter VII.

Key Terms

Key employee: Defined by the Internal Revenue Code to determine the necessity of topheavy provisions in employer-sponsored qualified retirement plans that cover most nonexecutive employees Highly compensated employee: Defined by the Internal Revenue Code for nondiscrimination rules in employer-sponsored health insurance benefits Discretionary bonuses: Boards award these bonuses to executives on an elective basis Performance-contingent bonuses: Bonus paid based on the attainment of specific performance criteria Predetermined allocation bonus: The total bonus pool for the is based on a fixed formula Target plan bonus: Ties bonuses to executives’ performance Deferred compensation: An agreement between an employee and a company to render payments to an executive at a future date Equity plans: Provides an executive with ownership stakes in the company through a variety of mechanisms, including various stock option plans and stock purchase plans Separation agreements: Guarantee that an executive will receive a lucrative compensation package upon employment termination Company stock: Represents total equity of the firm Company stock shares: Represent equity segments of equal value Incentive stock options: Entitle executives to purchase their companies’ stock in the future at a predetermined price Capital gains: The difference between the stock price at the time of purchase and the lower stock price at the time an executive receives the stock option Capital loss: If the stock price at the time of disposition were lower than at the price of the stock option grant Nonstatutory stock options: Do not qualify for favorable tax treatment Restricted stock plans: Under these plans, the company may grant executives with stock options at market value or discounted value, or they may provide stock Restricted stock units: Shares of company stock that are awarded to executives at the end of the restriction period Performance plan: A vesting period that includes performance criterion for determining whether to award stock options or stock units Stock appreciation rights: Provide executives income at the end of a designated period, much like restricted stock options; however, executives never have to exercise their stock rights to receive income Phantom stock: A compensation arrangement whereby boards of directors promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time Offering period: The span of time over which employees are permitted to contribute to their accounts

Golden parachutes: Provide pay and benefits to executives after a termination that results from a change in ownership or corporate takeover, that is, the merger or combining of two separate companies Platinum parachutes: Lucrative awards that compensate departing executives with severance pay, continuation of company benefits, and even stock option Clawback provisions: Allow boards of directors to take back performance-based compensation if they were to subsequently learn that performance goals were not actually achieved Sarbanes-Oxley Act of 2002: Mandates a number of reforms to enhance corporate responsibility, enhance financial disclosures, and combat corporate and accounting fraud Perquisites: Exclusive executive benefits Perks: Exclusive executive benefits Supplemental life insurance: Plans that increase the benefit to designated beneficiaries upon death and provides executives with favorable tax treatments Supplemental retirement plans: Designed to restore benefits restricted under qualified plans Executive compensation consultants: Employed by large consulting firms that specialize in executive compensation or advise company management on a wide variety of business issues. Board of directors: Represents shareholders’ interests by weighing the pros and cons of top executives’ decisions Compensation committee: Made up of board of directors members within and outside the company Agency theory: Shareholders delegate control to top executives to represent their ownership interests Agency problem: Actions of executives on behalf of their own self-interest Tournament theory: Casts lucrative executive compensation as the prize in a series of tournaments or contests among middle and top-level managers who aspire to become CEOs Social comparison theory: Individuals need to evaluate their accomplishments, and they do so by comparing themselves to similar individuals Securities and Exchange Commission (SEC): A nonpartisan, quasi-judicial federal government agency with responsibility for administering federal securities laws Securities Exchange Act of 1934: Applies to the disclosure of important company financial information as well as information about executive compensation practices Definitive Proxy Statement: Reveals detailed information about the compensation of the CEO and Named Executive Officers (NEOs) Named Executive Officers (NEO): Generally are the four most highly compensated officers after the CEO Compensation Discussion and Analysis (CD&A): A required narrative that presents an unambiguous explanation of all executive information in tables in the Definitive Proxy Statement Wall Street Reform and Consumer Protection Act of 2010: Law to further enhance the transparency of executive compensation practices Dodd-Frank Act: What the Wall Street Reform and Consumer Protection Act of 2010 is commonly known as 184 Copyright © 2020 Pearson Education, Inc.

Say on pay: Gives company shareholders the right to vote yes or no on executive compensation proposals that are contained in proxy statements, including current and deferred components and golden parachute agreements VIII. Discussion Questions and Suggested Answers 11-1. What can be done to make the function of compensation committees consistent with shareholders’ interest? Explain. A compensation committee is made up of members within and outside the company, also known as the Board of Directors. The Board of Directors represent shareholders’ interests by weighing the pros and cons of top executive decisions. The Boards of Directors have members including CEOs and top executives of other successful companies, distinguished community leaders, well-regarded professionals, and possibly a few toplevel executives of the company. The best way for a compensation committee to be consistent with shareholder’s interest is to listen to shareholder pleas and reactions to certain decisions, as well as to perform the first three duties of being a compensation committee. These three duties are reviewing consultants alternate recommendations, discussing the assets and liabilities of the recommendations, then making recommendations of the best proposal to the Board of Directors for their consideration.

Learning Objective: 11-4. Discuss the principles and processes of setting executive compensation. AACSB: Analytical thinking 11-2. Which component of compensation is most essential to motivate executives to lead companies toward competitive advantage? Discuss your rationale. Students may suggest that bonuses represent a pay-for-performance strategy that will motivate executives to work toward specific goals that are aligned with the company’s strategic goals. Or, they may discuss programs that grant stock shares as these promote an executive’s sense of ownership of the company, which should influence the executive’s motivation to lead companies toward competitive advantage. Learning Objective: 11-3. List the components of executive compensation packages. AACSB: Analytical thinking

11-3. Do you believe that say on pay should be a binding vote rather than an advisory vote? Explain? Students could argue that say on pay should be a binding vote as it represents shareholders’ views on executive pay. Shareholders hold the expectation that the company respects their views. However, others may argue that the company’s board of directors may have more information and a better understanding of the compensation package that is necessary to attract and retain talented executives. Learning Objective: 11-5. Summarize the executive compensation disclosure rules and the reasons why they have been established. AACSB: Analytical thinking 11-4. What are the differences between enhanced benefits and perquisites? The main difference between enhanced benefits and perquisites is that in order to be eligible for perquisites one must be an executive. Enhanced benefits are a different matter, for although they are generally only accessible through protection programs that include supplementary coverage; they are not limited to executive ranking. Learning Objective: 11-3. List the components of executive compensation packages. AACSB: Analytical thinking

11-5. Do you feel that executive pay is fair or unfair? Explain. Student responses will vary depending on their views. Learning objective: 11-6. Briefly explain the executive compensation controversy as it relates to whether U.S. executives are paid too much. AACSB: Reflective thinking IX.

Preparing for My Career: Compensation in Action

Instructor Notes: This section outlines the role human resources professionals and line managers take in communicating to employees about the principles applied to executive compensation at the company. HR should monitor compensation and raise concerns about executive compensation practices. Line managers should make sure they understand and monitor the executive compensation the company offers. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager.

End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses

Case 1: Building an Executive Compensation Package Instructor Notes: After going public and starting to sell shares of stock in the stock market, Safeguard Insurance is considering the best approach to use the company’s stock value in the executive compensation plan. The value of the stock has been a key indicator of the overall success of the company and company executives are closely monitoring the company stock value. The company is considering offering the executives either annual incentive stock options or a phantom stock plan. Questions and Suggested Student Responses: 11-6. How does a stock option plan provide an incentive for executives? A stock option plan gives executives equity in a company, which creates an ownership stake in the company. This sense of ownership should motivate executives to strive for excellent performance as stock value generally increases with gains in company performance. Learning Objective: 11-3. List the components of executive compensation packages. AACSB: Analytical thinking 11-7. Which plan would be better for Safeguard Insurance, the incentive stock option plan or the phantom stock plan? Incentive stock options entitle executives to purchase their companies’ stock in the future at a predetermined price. The predetermined prices usually equals the stock price at the time an executive is granted the stock option, resulting in the executives essentially purchasing stock at a discounted prices. Executives receive income tax benefits by participating in incentive stock option plans. Under the phantom stock plan, executives are promised a bonus in the form of the equivalent of either the value of the company shares or the increase in that value over a period. Phantom stock also offers executives tax advantages. The phantom stock plan may be a better approach, as the company would not add to shareholders. Learning Objective: 11-3. List the components of executive compensation packages. AACSB: Analytical thinking Case 2: Ethics Dilemma: Resistance to Clawback CEO Severance Pay at United Airlines Instructor Notes: 187 Copyright © 2020 Pearson Education, Inc.

Shareholders filed a lawsuit against United Airlines for giving former CEO Jeffrey Smisek a generous severance package after learning that his decision to initiate an unprofitable route was in response to a threat by the Port Authority of New York and New Jersey. The board of directors refused a clawback arguing doing so would harm the company’s ability to recruit and retain talent. Questions and Suggested Student Responses: 11-8. As a compensation professional, what would you do? This dilemma is a good example of a reason to utilize a clawback provision for an executive. If the board knows that Smisek made this decision knowing there would be a loss to the company, they have reason to take back the severance. While there is a valid concern that it might make it difficult to recruit a future CEO, there is evidence that Smisek acted unethically, which is different than just making an ethical decision that did not go well. Therefore, utilizing the clawback provision would make it clear for future CEO’s that ethical behavior is essential. Learning Objective: 11-3. List the components of executive compensation packages. AACSB: Ethical understanding and reasoning 11-9. What factor(s) in this ethical dilemma might influence a person (or group) to make a less-than-ethical decision? Smisek’s decision to act unethically was likely influenced by the concerns for the business based on the threat from the Port Authority. The board’s decision to not clawback the severance package was influenced by the concern about recruiting future CEO’s. Learning Objective: 11-3. List the components of executive compensation packages. AACSB: Ethical understanding and reasoning XI.

Crunch the Numbers! Questions and Suggested Student Responses

11-10. By what percent does annual median pay differ between the oil and gas extraction industry and the retail trade industry for (a) chief executives, (b) human resources managers, (c) accountants and auditors, and (d) file clerks? a. b. c. d.

(187,199-180,360)/187,199 = 3.65% (118,730-95,020)/118,730 = 19.97% (71,780-64,920)/71,790 =9.56% (30,700-23,430)/30,700 = 23.68%

Learning Objective: 11-6. Briefly explain the executive compensation controversy as it relates to whether U.S. executives are paid too much. AACSB: Application of knowledge 11-11. In the oil and gas extraction industry relative to the retail trade industry, what are the pay ratios between (a) chief executives, (b) human resources managers, (c) accountants and auditors, and (d) file clerks? Ratio of Oil and Gas Extraction Industry to Retail Trade Industry a. 187,199/180,360 1.04:1 b. 118,730/95,020 1.25:1 c. 71,780/64,920 1.12:1 d. 30,700/23,430 1.21:1 Learning Objective: 11-6. Briefly explain the executive compensation controversy as it relates to whether U.S. executives are paid too much. AACSB: Application of knowledge 11-12. In the oil and gas extraction industry, what are the pay ratios for the chief executives job to (a) human resources managers, (b) accountants and auditors, and (c) file clerks? In the retail trade industry, what is the ratio of pay for chief executives to (d) human resources managers, (e) accountants and auditors, and (f) file clerks? Oil and Gas Extraction Industry Chief executives to HR managers: 187,199/118,730 Ratio = 1.58:1 Chief executives to Accountants and Auditors: 187,199/71,780 Ratio = 2.61:1 Chief executives to File Clerks: 187,199/30,700 Ratio = 6.1:1

Retail Industry Chief executives to HR managers: 180,360/95,020 1.89:1 Chief executives to Accountants and Auditors: 180,360/64,920 2.78:1 Chief executives to File Clerks: 180,360/23,430 7.7:1 Learning Objective: 11-6. Briefly explain the executive compensation controversy as it relates to whether U.S. executives are paid too much. AACSB: Application of knowledge XII.

Working Together: Team Exercise with Suggested Student Responses

Instructor’s Notes: Students should identify two companies and conduct internet research on them. Questions and Suggested Student Responses: 11-13. What are some of the issues you identified for each company? Describe them. Student responses will vary depending on the companies selected. Learning Objective: 11-6. Briefly explain the executive compensation controversy as it relates to whether U.S. executives are paid too much. AACSB: Analytical thinking 11-14. Based on your knowledge of these companies, do you believe the executive’s compensation in each company is justified? (Do not be concerned with the amount. Just assume that the compensation is lucrative.) Explain. Student responses will vary depending on the companies selected and the particular challenges of those companies. Learning Objective: 11-6. Briefly explain the executive compensation controversy as it relates to whether U.S. executives are paid too much. AACSB: Reflective thinking

XIII. Assisted-Graded Questions 11-15. Summarize three forms of deferred (stock) compensation. Answer to this question can be found in the MyLab Management 11-16. What are the objectives of the say-on-pay rule? Do you think that shareholders should be limited to taking an advisory vote or should shareholders be able to determine an executive’s compensation? Answer to this question can be found in the MyLab Management 11-17. MyLab Management Only—comprehensive writing assignment for this chapter. XIV. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses

Case Name: Cutting Costs at Elite Financial Services Instructor Notes: The rising cost of healthcare insurance is prompting many employers to take proactive steps to lower their costs. In addition to seeking better premiums through seeking alternate providers and looking at different coverage options, many employers are examining opportunities to improve the overall health of their workforce. Educating the workforce on wise usage of healthcare benefits can help keep experience ratings in check. Taking proactive steps to keep employees healthy and help them make wise decisions on healthcare can help keep costs under control.

Questions and Suggested Student Responses: 11-18. What can Elite do to lower their healthcare insurance costs? There are many opportunities for Elite to lower their healthcare insurance costs. First, they may want to consider examining alternate healthcare insurance options such as managed care plans, preferred provider organizations or point-of-service plans. These options will likely be less costly. Elite should also consider changing plan deductibles and coinsurance rates to help control costs. The company could also have employees contribute more toward premiums. Finally, Elite should consider opportunities to educate employees about their health so they make wiser choices on using healthcare. If the employees are contributing more to the cost, they may also make wiser choices as well. Wellness programs to improve the overall health of their employees may also improve healthcare usage rates. Learning Objective: 10-5. Discuss the main benefits and costs of legally required benefits AACSB: Application of knowledge 11-19. Will making changes to the company’s healthcare insurance benefit affect the company’s ability to recruit and retain employees? The company should be cautious about making drastic changes to healthcare insurance all at one time. If the employees believe the company is taking away a significant part of their benefit, they may become frustrated and consider leaving the company. The company may want to consider offering the employees options in their healthcare insurance so that the employees feel as if they have more control. For example, they could keep the fee-for-service indemnity plan as an option, with a higher employee contribution. Then, they could offer an option such as a preferred provider organization and require a much lower employee contribution, encouraging the employee to take the less costly option. Learning Objective: 10-5. Discuss the main benefits and costs of legally required benefits AACSB: Application of knowledge

CHAPTER 12 Compensating the Flexible Work Force: Contingent Employees and Flexible Work Schedules Learning Objectives Describe the four groups of contingent workers. Discuss pay and benefits issues for contingent workers. Summarize the three categories of flexible work schedules. Discuss the pay and employee benefits issues for flexible work schedules, compressed workweeks, and telecommuting arrangements. 12-5. Describe unions’ reactions to contingent work and flexible work schedule arrangements. 12-6. Identify strategic issues and choices companies face regarding the use of contingent workers. 12-1. 12-2. 12-3. 12-4.

Outline I. II. III.

The Contingent Workforce Pay and Employee Benefits for Contingent Workers Flexible Work Schedules: Flextime, Compressed Workweeks, and Telecommuting IV. Pay and Employee Benefits for Flexible Employees V. Unions’ Reactions to Contingent and Flexible Workers VI. Strategic Issues and Choices in Using Contingent and Flexible Workers VII. Key Terms VIII. Discussion Questions and Suggested Answers IX. Preparing for My Career: Compensation in Action X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XI. Crunch the Numbers!: Questions and Suggested Student Responses XII. Working Together: Team Exercise with Suggested Student Responses XIII. Assisted-Graded Questions XIV. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline I.

The Contingent Workforce A. Overview 1. Many companies employ core and contingent workforces a. Core employees work full-time and part-time jobs, and generally plan long-term or indefinite relationships with their employers b. Contingent workers are those that do not have an implicit or explicit contract for ongoing employment i. Some refer to contingent employment at ‘on-demand’ employment 193 Copyright © 2020 Pearson Education, Inc.

B. Groups of Contingent Workers 1. Four main groups: a. Part-time employees b. Temporary and on-call employees c. Leased employee arrangements d. Independent contractors, freelancers, and consultants 2. Part-time employees a. Voluntary part-time employees choose to work fewer than 35 hours per workweek i. To supplement full-time employment to meet financial obligations ii. Lifestyle choice for more free time for family, hobbies, or personal interests b. Involuntary part-time employees work fewer than 35 hours per workweek because they are unable to find full-time employment i. Often are skilled workers c. Advantages i. Cost savings on discretionary benefits ii. Considerable savings in the areas of paid leave, insurance, and legally required benefits iii. Cost savings on overtime expenses d. Job sharing i. Two or more part-time employees perform a single full-time job ii. May meet regularly to coordinate efforts iii. Represents a compromise between employees’ needs or desire not to work full-time and employers’ needs to staff jobs on a full-time basis 3. Temporary and on-call employees a. Reasons for hiring temporary workers i. To fill in for core employees on approved leave ii. To have an extra set of hands during busy business activities iii. Allows employers to determine need for more core employees iv. Allows employers to evaluate performance of workers for possible full-time employment, similar to a probationary period v. Save on discretionary benefits costs b. Temporary employment agency i. Most common source of temporary employees ii. Most agencies placed mainly clerical and administrative workers, now also auditors, computer systems analysts, and lawyers iii. Use based on reputation and fees iv. Are the legal employers of the workers v. Select, train, and provide compensation for employees 194 Copyright © 2020 Pearson Education, Inc.

c. Direct hire arrangements i. Companies hire temporary workers directly ii. Temporary employees usually work less than a year d. On-call arrangements i. Work sporadically throughout year as needed ii. Skilled trade union workers can be on-call when unable to find full-time employment 4. Leased employee arrangements a. Generally for long-term assignments b. Leasing company bills hiring company for costs including payroll, benefits, and payroll taxes c. Their placement fees that are either a percentage of the client’s payroll or a fixed fee per employee d. Responsible for all HR functions e. Differ from temporary agencies in that their placements generally remain in effect for the duration of the contract with the host company 5. Independent contractors, freelancers, consultants a. Establish working relationships directly with host companies b. Typically possess specialized skills that are in short supply in the labor market c. Independent contractors hired to complete particular projects that generally last for a year or less d. Not an employee, three tests to determine a worker’s status: i. Common-law test ii. Economic realities test iii. Hybrid test that incorporates elements of both tests C. Reasons for U.S. Employers’ Increased Reliance on Contingent Workers 1. Main reasons: a. Economic recessions b. International competition c. Shift from a manufacturing to a service economy 2. Economic recessions a. Reduction in core employees to control costs b. Contingent workers used to restore staffing until economy stability and need for more core employees is determined c. Hiring contingent employees represents a form of risk control d. Contingent workers are easier to terminate

II.

3. International competition a. Foreign businesses can manufacture goods more cheaply b. Forces U.S. businesses to streamline operations by lowering labor costs 4. Shift from a manufacturing to a service economy a. Six broad divisions of service industries: i. Transportation ii. Communication iii. Public utilities iv. Wholesale trade v. Retail trade (finance, insurance, real estate) vi. Government b. Manufacturing companies’ employment declined substantially in past several years Pay and Employee Benefits for Contingent Workers A. Legalities 1. All parties involved employing contingent workers possess liability under federal and state laws, including: a. Overtime and minimum wage guidelines under FLSA b. State workers’ compensation insurance premiums c. Nondiscriminatory compensation and employment practices under i. Employee Retirement Income Security Act of 1974 (ERISA) ii. National Labor Relations Act (NLRA) iii. Civil Rights Act of 1964 iv. Americans with Disabilities Act of 1990 (ADA) v. Age Discrimination in Employment Act (ADEA) d. Patient Protection and Affordable Care Act of 2010 (PPACA) B. Part-Time Employees 1. Challenges for employers a. Should companies pay part-time workers on an hourly basis or salary basis? b. Will equity problems arise between core employees and part-time employees? c. Should companies offer part-time workers benefits? 2. Pay a. Part-time workers generally earn less c. Companies often expect salaried part-time employees to do more than their fair share i. An explicit agreement can avoid this problem, or ii. The company can pay on an hourly basis 196 Copyright © 2020 Pearson Education, Inc.

3. Employee benefits a. Companies generally do not provide discretionary benefits to part-time employees but may depending on: i. The size of the company ii. Whether the employer is private or public b. Employers are not required to offer protective insurance, but must offer COBRA if employee receives health insurance c. Part-time employees may be eligible to participate in a company’s retirement plan if: i. They are age 21 or older ii. The work at least 1000 hours in 12 months (year of service) 4. Seasonal employees’ special considerations for retirement plan eligibility a. Generally do not meet annual service pension eligibility criterion b. Department of Labor defines 125 service days as the “year of service” c. Seasonal employees cannot be excluded from participation if they meet year of service criterion C. Temporary Employees 1. Temporary employment agencies are the legal employers and are responsible for complying with all federal employment legislation, except worker’s compensation 2. Possible compensation challenges a. Do equity problems arise between core employees and temporary employees? b. How do FLSA overtime provisions affect temporary employees? c. Do companies offer temporary workers benefits? d. Who is responsible for providing workers’ compensation protection: the temporary agency or the client company? 3. Pay a. Pay rates vary by occupation and worker qualifications b. Equity problems may arise where core and temporary employees work together c. Perceptions of inequity may intensify if temporary employees did not choose the temporary employment arrangement c. Differences between temporary and seasonal employees i. For determining minimum wage and overtime pay eligibility under FLSA ii. Temporary workers can work any time throughout year, seasonal workers work during regular periods iii. Seasonal workers, like life guards and summer camp counselors, are exempt unless the employer operates over seven months a year

4. Employee benefits a. Companies generally do not provide discretionary benefits b. Temporary employees are eligible to participate in qualified pension benefits if they meet ERISA’s minimum service requirement of 125 days of work. c. Dual employer common law doctrine establishes temporary workers’ rights to receive workers’ compensation since they are employees of both the temporary agency and the hiring company D. Leased Workers 1. Who the legal employer is is less clear than it is for temporary or part-time employees a. Leasing companies are legal employers regarding wage issues and legally required benefit b. Leasing companies and client companies are the legal employers regarding particular discretionary benefits 2. Pay a. In May 2017, they earned an average weekly wage of $322 for parttime and $1,077 for full-time b. Factors such as the changing skills composition of the leased workforce and economic recession may influence pay estimates 3. Employee benefits a. Leased employees are generally entitled to participation in the client companies’ qualified retirement programs b. Leasing companies become responsible for leased employees’ retirement benefits when the safe harbor rule requirements are met c. Under COBRA, the IRC requires employers to provide leased workers continued coverage of group medical and life insurance E. Independent Contractors, Freelancers, and Consultants 1. Bureau of Labor Statistics reported full-time independent contractors earned $851 weekly in 2017 2. Hiring companies not obligated to pay: a. Federal income tax withholding b. Overtime and minimum wages required under FLSA, however, employers are obligated to pay financially dependent workers overtime and minimum wages c. Insurance premiums required under state workers’ compensation laws, except where states explicitly require that companies maintain workers’ compensation coverage for all workers regardless of whether they are independent contractors

III.

d. Protection under i. ERISA ii. FMLA iii. NLRA iv. ADA v. Title VII of the Civil Rights Act of 1964 e. Common-law test i. Used to determine whether an individual is an employee or an independent contractor ii. Right to control based on IRC criteria looks at possessing the right to control work activities classifies individuals as employers rather than independent contractors iii. According to IRS the degree of control and independence falls into three categories of behavioral, financial, and type of relationship f. Economic realities test i. Used to determine if employees are financially dependent ii. Concerns FLSA coverage iii. Recently many protests and lawsuits by a variety of independent contractors over their status with companies Flexible Work Schedules: Flextime, Compressed Workweeks, and Telecommuting A. Flextime schedules 1. Employee can set work hours within specific limits 2. May be required to be on-site during core business hours a. When business activity is high b. When important business activity is conducted 3. Some incorporate banking hours feature that enables employees to vary number of work hours daily as long as they maintain the regular number of work hours on a weekly basis 4. Possible employer benefits a. Lower tardiness and absenteeism b. Higher productivity c. Extended business hours and better service 5. Possible drawbacks a. Increased overhead costs b. Coordination problems B. Compressed Workweek Schedules 1. Same work hours in fewer days per week like: a. Four 10-hour days b. Three 12-hour days 199 Copyright © 2020 Pearson Education, Inc.

IV.

2. Can promote recruitment and retention by a. Reducing commuting time b. Providing more family time C. Telecommuting 1. Employees perform work away from business at home or other location 2. Work time generally split between business and off-site locations 3. Possible employer benefit a. Increased productivity b. Lower overhead costs c. Effective recruiting and retention practices 4. Possible employee benefits a. More family time b. Minimize commuting time and expenses c. Separation from “office politics” d. Higher job performance 5. Possible disadvantages a. Fewer direct employee interactions b. Difficulty conducting accurate performance appraisals c. May disrupt personal life D. Flexible Work Schedules: Balancing the Demands of Work Life and Home Life 1. Flextime gives parents the opportunity to schedule work around special events at their children’s schools 2. Compressed workweeks enable parents on limited incomes to save on daycare costs by reducing the number of days at the office 3. Compressed workweeks and telecommuting reduce the time spouses have to spend away from each other Pay and Employee Benefits for Flexible Employees A. Pay a. The FLSA requires companies compensate nonexempt employees at overtime rate of 1 ½ times the normal hourly rate for each hour worked in excess of 40 per week i. Flexible employees weekly schedules may fluctuate frequently ii. Possible that companies may make inadequate or excessive overtime payments

b. Walling v. A.H. Belo Corporation i. Supreme Court ruling concerning employers’ guarantee of fixed weekly pay for flexible employees when employer typically cannot determine the number of hours employees will work each week ii. The workweek period fluctuates both above and below 40-hours per week c. Overtime for compressed workweek schedules may be different in some states B. Employee benefits a. Flexible workweek schedules have the greatest impact on paid timeoff benefits as many companies determine benefits based on numbers of hours worked each month b. Paid time-off for holidays another issue c. Working condition fringe benefits i. Provide telecommuters the necessary equipment to do work like computers, telex machines, copier, and sundry office supplies ii. The IRS treats equipment as taxable income when the use falls outside the established telecommuting relationship iii. The IRS treats the equipment as a working condition fringe benefit if it is within the telecommuting relationship Unions’ Reactions to Contingent and Flexible Workers A. Most do not support the use of contingent workers and flexible work schedules 1. They believe it might threaten job security and it may lead to unfair, inequitable treatment 2. Common concerns a. Employers exploit contingent workers by paying them lower wages and benefits b. Employer’s efforts to get cheap labor will lead to a poorly trained and less skilled workforce that will hamper competitiveness c. Part-time employees are difficult to organize because their interests are centered on activities outside the workplace d. Part-time employment erodes labor standards: often denied fringe benefits, job security, and promotion opportunities e. Temporary employees generally have little concern for improving the productivity of a company f. The union’s bargaining power becomes weak when companies demonstrate their ability to perform effectively with temporaries g. The long days of compressed workweeks for flextime could endanger workers’ safety and health, even if the workers choose these long days h. Other issues include concerns about employee isolation, uncompensated overtime, and company monitoring in the home 201 Copyright © 2020 Pearson Education, Inc.

VI.

3. Some unions are beginning to accept flexible work schedules, believing that doing so will strengthen their bargaining power Strategic Issues and Choices in Using Contingent and Flexible Workers A. Cost control objectives 1. Contingent employment allows for lower discretionary benefit costs and provides less generous amounts of such benefits 2. Well-trained contingent workers can reduce training costs 3. Company-specific training a. Represents a significant cost to companies b. Training short-term contingent workers undermines strategy because of: i. The cost of training materials and instructors’ fees ii. Downtime while employees participate in training iii. Inefficiencies that may result until employees master new skills 4. Training may increase long-term employees’ productivity and flexibility, outweighing the short-term costs 5. Overall, contingent workers demonstrate less absenteeism B. Product and service innovation objectives 1. Requires employees that are creative, open-minded, and risk-taking 2. Requires companies to take a longer-term focus to attain their preestablished objectives 3. Contingent employment could: a. Bring in an influx of new employees with new ideas b. Minimize groupthink, where employees agree on mistaken solutions because they share the same mindset and view issues through the lens of conformity C. Differentiation strategies 1. Flexible work schedules may: a. Enable employees to work when they are at their peak physical and mental best b. Allow employees to work with fewer distractions and worries about personal matters

End of Chapter VII.

Key Terms

Core employees: Have full-time jobs or part-time jobs, and they generally plan longterm or indefinite relationships with their employers Contingent workers: Those who do not have an implicit or explicit contract for ongoing employment Voluntary part-time employees: Someone who chooses to work fewer than 35 hours per regularly scheduled workweek Involuntary part-time employees: Work fewer than 35 hours per week because they are unable to find full-time employment Job sharing: A special kind of part-time employment agreement. Two or more part-time employees perform a single full-time job Temporary employment agency: Source of temporary workers Direct hire arrangements: When companies directly hire temporary employees who typically do not work for more than 1 year On-call arrangements: Employees work sporadically throughout the year when companies require their service Lease companies: Employ qualified individuals and place them in client companies on a long-term basis Independent contractors: Establish working relationships with companies on their own rather than through temporary employment agencies or lease companies Freelancers: Establish working relationships with companies on their own rather than through temporary employment agencies or lease companies Consultants: Establish working relationships with companies on their own rather than through temporary employment agencies or lease companies Dual employer common law doctrine: Establishes temporary workers’ rights to receive workers’ compensation Safe harbor rule: Rules that require companies to provide retirement benefits to leased employees Common law: Is developed by judges through court proceedings that decide individual cases Right to control: Test that helps companies determine whether their workers are employees or independent contractors Economic realities: Test that focuses on the determination of whether employees are financially dependent on the company Flextime schedules: Allow employees to modify their work schedules within specified limits set by the employer Core hours: Period when all workers must be present when business activity is regularly high Banking hours: Feature that enables employees to vary the number of work hours daily as long as they maintain the regular number of work hours on a weekly basis Compressed workweek schedules: Enable employees to perform their work in fewer days than a regular 5-day workweek

Telecommuting: Represents an alternative work arrangement in which employees work at home or at some other location besides the office Walling v. A. H. Belo Corp.: A Supreme Court ruling that requires employers to guarantee fixed weekly pay for employees whose work hours vary from week to week Working condition fringe benefits: When employers provide telecommuters with the necessary equipment to perform their jobs effectively while off-site: computers, modems, printers, photocopy machines, sundry office supplies, and Telex machines Groupthink: Occurs when all group members agree on mistaken solutions because they share the same mind-set and view issues through the lens of conformity VIII. Discussion Questions and Suggested Answers 12-1. What are some of the problems that companies are likely to face when both contingent workers and core employees work in the same location? Does it matter whether contingent workers and core employees are performing the same jobs? Explain your answer. Possible problems that may arise when companies put contingent workers and core employees in the same location are mentality differences, attitude differences, and work reliance conflicts. Mentality issues generally emerge when one type of employee may feel that the other is inferior or hardly worth their time due to the temporary versus longterm contract. Attitude differences such as one employee treating the other with disregard due to the fact that one may not be there for much longer is also a potential problem. Work reliance conflicts include situations in which a core employee becomes dependent on a contingent worker for substantial work or information and the contingent worker leaves forcing the core employee to put together the pieces. Learning Objective: 12-1. Describe the four groups of contingent workers. AACSB: Analytical thinking 12-2. What are some of the possible drawbacks for companies that employ temporary workers? Do you believe that these drawbacks outweigh the cost savings? Explain. There are a few possible drawbacks of using temporary employees. First, if using a temporary agency, the fees charged by the agency could affect the cost effectiveness of using temporary employees. Further, temporary employees may not have the same commitment to the company as core employees and therefore may not work as diligently, particularly if the employee is not working as a temporary employee by choice. As these workers move from one company to the next, they may not have a desire to work on building skills with a particular company. Learning Objective: 12-1. Describe the four groups of contingent workers. AACSB: Analytical thinking

12-3. What arguments can be made in favor of using compressed workweek schedules for companies that pursue lowest-cost strategies? What are the arguments against using compressed workweek schedules in such situations? Explain. Compressed workweek schedules are profitable for companies that pursue lowest-cost strategies because it reduces the number of times employees must commute between home and work as well as provides more time together for dual-career couples who live apart. However, compressed workweek schedules may cause problems for employers as their employees are not necessarily there when they need them to be. Learning Objective: 12-6. Identify strategic issues and choices companies face regarding the use of contingent workers AACSB: Analytical thinking 12-4. What impact will flexible work schedules have on employees’ commitment to their employers? On employee productivity? On company effectiveness? Explain. Some U.S. companies use flexible work schedules to help employees balance the demands of work and home life. Flextime, compressed workweeks, and telecommuting should provide single parents or dual-career parents the opportunity to schedule work around special events at their children’s schools. Compressed workweeks enable parents on limited incomes to save on daycare costs by reducing the number of days at the office. Parents can benefit from telecommuting in a similar fashion. Likewise, dual-career couples living apart also benefit from flexible work schedules. Compressed workweeks and telecommuting reduce the time spouses have to spend away from each other. As a result employees are potentially happier and at ease when they come to work, greatly increasing work productivity and overall company effectiveness. An employee’s commitment to their employer will also be relatively high as they are appreciative of the companies or employers policies and their regard to the employee’s life at home. Learning Objective: 12-6. Identify strategic issues and choices companies face regarding the use of contingent workers AACSB: Analytical thinking 12-5. Should companies limit telecommuting arrangements to some job groups rather than all job groups? Explain. A company may need to limit a telecommuting arrangement to some job groups rather than all job groups because of the differing nature of work in job groups. Telecommuting is appropriate for work that does not require regular direct interpersonal interactions with other workers. Further, the nature of the work must be conducive to telecommuting. For example, a company may be able to offer the telecommuting option to employees in the accounting department, but not to employees working on an assembly line. Learning objective: 12-3. Summarize the three categories of flexible work schedules. AACSB: Analytical thinking 205 Copyright © 2020 Pearson Education, Inc.

IX.

Preparing for My Career: Compensation in Action

Instructor Notes: This section outlines the role human resources professionals and line managers take in leveraging flexibility to address the changing needs of companies and employees. HR takes the lead in determining flexible options and ensuring compliant compensation and benefits. Line managers take the lead in determining the need for flexible options and communicating about successes to further promote flexibility. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager.

End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses

Case 1: Telecommuting at MedEx Instructor Notes: Telecommuting creates a flexible work arrangement that allows employees to work from home, for at least part of the standard workweek. This option can be considered a valuable benefit to employees, particularly if they are challenged with balancing their work and home life. Telecommuting is most appropriate for positions where employees work independently and do not need frequent interactions with co-workers. The Specialists in this case work in positions that are most likely appropriate for telecommuting as they work independently on their own accounts. Questions and Suggested Student Responses: 12-6. Would offering telecommuting as an option benefit MedEx? How? Offering the option for telecommuting could help improve employee satisfaction by giving employees more flexibility. The Specialists could save money on gas and parking and save time commuting. This extra time could help relieve some of the burden in trying to balance their lives. Improved employee satisfaction could lead to lower turnover rates. Offering telecommuting to employees could also offer some advantages in recruiting new employees if potential employees see the option as an attractive benefit. Further, MedEx may be able to lower their overhead expenses and improve overall employee productivity. Learning Objective: 12-3. Summarize the three categories of flexible work schedules. AACSB: Analytical thinking

12-7. Are there any disadvantages or challenges in offering telecommuting? Establishing a telecommuting option could be complex for MedEx as they determine how they will ensure that the employees have the equipment and supplies that they need. Further, telecommuting creates several management challenges due to the limited faceto-face contact, such as effectively assessing performance for the purpose of performance appraisals. Employees in telecommuting positions may also feel isolated as they do not have the daily interactions with their co-workers. Learning Objective: 12-3. Summarize the three categories of flexible work schedules. AACSB: Analytical thinking 12-8. What do you recommend MedEx do? Why? Students will most likely suggest that MedEx offers the telecommuting option. While it would take some effort to develop a thorough telecommuting policy, the company will most likely benefit from offering telecommuting. Learning Objective: 12-3. Summarize the three categories of flexible work schedules. AACSB: Analytical thinking Case 2: Ethics Dilemma: Cost Savings at the Expense of Employees Instructor Notes: A fast-paced work environment, quick hires, and a lack of safety training has resulted in several injured employees, raising costs in healthcare insurance premiums and paid time off. Melinda Carson, the HR Director at Walden’s Home Appliance store, is now under pressure to cut costs. She proposes a solution to limit employee working hours once they return to work after an injury. As a result, those employees will no longer be eligible for health care insurance, offering a cost savings for the company. She contracted with a temporary agency to fill the staffing gap, negotiating to require the agency to provide workers compensation and healthcare insurance.

Questions and Suggested Student Responses: 12-9. As a compensation professional, what would you do? Walden’s Home Appliance store clearly has a problem in managing the safety of its employees. The challenge to maintain costs is a valid concern for the company and the HR Director needs to take action to address. However, Melinda’s decision took a short term approach to control costs. It could be considered unethical as the employees who were injured will now be penalized by a reduced work schedule and a loss of healthcare insurance. A more long-term approach could resolve the problem. Safety training for new hires would be a first step in reducing injuries. The company should also examine its on-time delivery promise to determine if staffing levels are appropriate to meet those expectations. Learning objective: 12-6. Identify strategic issues and choices companies face regarding the use of contingent workers. AACSB: Ethical understanding and reasoning 12-10. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? The pressure to meet on-time delivery along with growing sales created a work environment that resulted in many injuries that led to the problem. While the rising costs created the problem that needed addressed, the threat of losing her job likely influenced Melinda to try to find a quick fix to the concern with rising costs. Learning objective: 12-6. Identify strategic issues and choices companies face regarding the use of contingent workers. AACSB: Ethical understanding and reasoning XI.

Crunch the Numbers! Questions and Suggested Student Responses

Calculating the Costs of Full-time and Part-time Employment 12-11. Based exclusively on employing full-time workers, (a) How many are needed to complete the project? (b) What is the estimated total cost of wages and benefits? a. 100,000 hours/ 5 workweeks = 20,000 hours per week 20,000 hours/ 40 hours per worker = 500 workers needed b. 100,000 hours x $12.72 per hour for benefits = $1,272,000 100,000 hours x $20 per hour wage = $2,000,000 Total = $3,272,000 208 Copyright © 2020 Pearson Education, Inc.

Learning Objective: 12-4. Discuss the pay and employee benefits issues for flexible work schedules, compressed workweeks, and telecommuting arrangements. AACSB: Application of knowledge 12-12. Based exclusively on employing part-time workers, (a) How many are needed to complete the project? (b) What is the estimated total cost of wages and benefits? a. 100,000 hours / 5 workweeks = 20,000 hours per workweek 20,000 / 20 hours per worker = 1,000 workers b. 100,000 hours x $3.72 per hour for benefits = $372,000 100,000 hours x $12 per hour wage = $1,200,000 Total = $1,572,000 Learning Objective: 12-4. Discuss the pay and employee benefits issues for flexible work schedules, compressed workweeks, and telecommuting arrangements. AACSB: Application of knowledge 12-13. Assume that your company has asked you to calculate the cost of staffing the project with a combination of full- and part-time workers. You’ve already hired 225full-time workers. (a) How many part-time workers should you hire? (b) What is the total cost of wages and benefits based on employing this mix of full- and part-time workers? a. 225 full-time workers x 40 hours per week x 5 weeks = 45,000 hours 100,000 hours – 45,000 hours = 55,000 hours needed by part-time workers 55,000/ 5 workweeks = 11,000 hours per week 11,000/ 20 hours per worker = 550 part-time workers needed b. Full-time wages and benefits: 45,000 hours x $12.72 per hour for benefits = $572,400 45,000 hours x $20 per hour wage = $900,000 Total = $1,473,400 Part-time wages and benefits: 11,000 hours x $3.72 per hour for benefits = $40,920 11,000 hours x $12 per hour wage = $132,000 Total = $172,920 209 Copyright © 2020 Pearson Education, Inc.

Total for full-time and part-time workers: $1,646,320 Learning Objective: 12-4. Discuss the pay and employee benefits issues for flexible work schedules, compressed workweeks, and telecommuting arrangements. AACSB: Application of knowledge XII.

Working Together: Team Exercise with Suggested Student Responses

Instructor’s Notes: Students should explore the websites Freelancer.com, Guru.com, and Monster.com and identify a job posting from each site for similar work. Questions and Suggested Student Responses: 12-14. What are some of the key features that you found on Freelancer.com, Guru.com, and Monster.com? Explain. Each website allows companies or individuals to post work available and also allows independent contractors or freelancers to search for work projects. The websites also include articles with advice on freelance work. Learning Objective: 12-1. Describe the four groups of contingent workers. AACSB: Application of knowledge 12-15. Which jobs did you choose? Explain. Student responses may vary. Learning Objective: 12-1. Describe the four groups of contingent workers. AACSB: Application of knowledge XIII.

Assisted-Graded Questions

12-16. Explain leased employee arrangements. Discuss employee benefits for leased workers. Answer to this question can be found in the MyLab Management 12-17. Provide your reactions to the following statement: Contingent workers should be compensated on a pay-for-knowledge system. Answer to this question can be found in the MyLab Management 12-18. MyLab Management Only—comprehensive writing assignment for this chapter 210 Copyright © 2020 Pearson Education, Inc.

XIV. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Communicating Benefits at JSJ Publishing Instructor Notes: Many employers mistakenly assume that employees know what benefits the company is required to provide by law, and which benefits they voluntarily provide. Understanding the benefits program is also important in order for employees to make appropriate decisions about their benefit selections. Further, benefit offerings often comprise a significant part of employees’ total compensation. As companies invest significantly in benefits, they do not get full value from that investment if the employees do not understand the benefits. Questions and Suggested Student Responses: 12-19. Why is it important to provide effective communication about employee benefits? Companies invest significantly in employee benefits and it is important for employees to understand the value of their benefits. Effective communication should help employees understand the value, but also should help employees understand their benefit options so that they can make wise decisions on their benefit selections. AACSB: Analytical thinking 12-20. What is your opinion of JSJ’s current communication about their benefit program? While JSJ provides thorough information to their employees, they have not made the information easily accessible. They may be providing employees with too much detail and as a result, the employees are not easily able to find the information they need. Further, because employees seem to view the benefits as an entitlement, it seems that JSJ has not communicated in a way that helps employees understand the value of their benefits. For example, they are not aware of what benefits are required by law, and what benefits JSJ provides voluntarily. AACSB: Analytical thinking 12-21. How can JSJ improve their benefits communication? Students may provide a variety of responses or creative ideas on how to improve benefits communications. A personal statement of benefits would be a useful tool to help summarize the value of each employee’s benefit selections. Further, instead of the bulky information packets that the company currently provides, they should consider some more concise summary communications, supplemented with the availability of more detailed information. For example, the company Intranet could be use to organize and store important documents that the employees can access as needed. Finally, employees should be given an opportunity for face-to-face meetings to learn more about their benefit options. Andrea could hold open meetings where employees can come and learn more about their benefits and also ask specific questions. AACSB: Analytical thinking 211 Copyright © 2020 Pearson Education, Inc.

CHAPTER 13 Compensating Expatriates Learning Objectives 13-1. Discuss competitive advantage and how international activities fit in. 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs. 13-3. List the main components of international compensation programs. 13-4. Discuss the balance sheet approach for U.S. expatriates’ compensation packages. 13-5. Describe repatriation issues. Outline I. II. III. IV. V. VI. VII. VIII. IX. X. XI.

Competitive Advantage and How International Activities Fit In Preliminary Considerations Components of International Compensation Programs Incentive Compensation for U.S. Expatriates Establishing Employee Benefits for U.S. Expatriates Balance Sheet Approach for U.S. Expatriates’ Compensation Packages Repatriation Pay Issues Key Terms Discussion Questions and Suggested Answers Preparing for My Career: Compensation in Action End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XII. Crunch the Numbers!: Questions and Suggested Student Responses XIII. Working Together: Team Exercise with Suggested Student Responses XIV. Assisted-Graded Questions XV. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline I.

Competitive Advantage and How International Activities Fit In A. Overview 1. Several factors have contributed to the expansion of the global market: a. Free trade agreements (such as NAFTA) b. Unification of the European markets c. Gradual weakening of the Communist influence in Easter Europe and Asia 212 Copyright © 2020 Pearson Education, Inc.

II.

B. Lowest-Cost Producers’ Relocations to Cheaper Production Areas 1. Many U.S. businesses have established manufacturing and production facilities in Asian countries and in Mexico because labor is significantly less expensive than it is in the United States 2. Two key reasons for the cost difference: a. Labor laws do not give employees bargaining power in Asian countries or in Mexico, where the governments possess extensive control over workplace affairs b. Asian and South American governments historically have not valued individual employee rights as much as does the U.S. government C. Differentiation and the Search for New Global Markets 1. Nestle has succeeded internationally through departing from their U.S. “business as usual” to meet local market needs in new international markets ahead of competitors D. How Globalization Is Affecting HR Departments 1. Employee selection a. Culturally sensitive? b. Are families willing to adjust? 2. Training a. Cross-cultural values b. Language proficiency 3. The use of international assignments is an important issue addressed by companies located in countries across the world E. Complexity of International Compensation Programs 1. Four main challenges: a. How to further corporate interests abroad and encourage employees to take foreign assignments b. How to minimize financial risks to employees and make their (and their families) experiences as pleasant as possible c. How to promote a smooth transition back to life in the United States after completing assignment overseas (repatriation) d. How to promote their lowest-cost and differentiation strategies in foreign markets Preliminary Considerations A. Overview 1. Distinguishing between employees a. Host Country Nationals (HCNs) b. Third Country Nationals (TCNs) c. Expatriates 2. Important compensation factors like: a. Terms of the assignment b. Staff mobility c. Pay equity 213 Copyright © 2020 Pearson Education, Inc.

B. Host Country Nationals, Third Country Nationals, and Expatriates: Definitions and Relevance for Compensation Issues 1. Three designations: a. Host Country Nationals (HCNs) b. Third Country Nationals (TCNs) c. Expatriates 2. HCNs are foreign national citizens who work in U.S. companies’ branch offices or manufacturing plants in their home country 3. TCNs are foreign citizens who work in a U.S. company’s branch in a foreign country other than the U.S. or their home country 4. Expatriates are U.S. citizens employed by a U.S. company in a foreign country 5. HR professionals construct international compensation packages based on three main factors: a. Term of international assignment b. Staff mobility c. Equity: pay referent groups 6. Term of international assignments a. Short term (less than one year) generally do not require major changes in domestic compensation packages b. Extended (long) term assignments necessitate changes to promote a sense of stability and comfort c. Compensation package changes may include: i. Housing allowances ii. Educational expenses for children iii. Adjustments to protect expatriates from paying “double” income taxes – to the United States and to the host country 7. Staff mobility a. Must consider if foreign assignments necessitate employees’ moving from one foreign location to another b. May require financial incentives to make moves as comfortable as possible 8. Equity: pay referent groups a. Expatriates are likely to evaluate compensation, in part, according to equity considerations b. Referent groups i. Domestic employees ii. Host country employees

III.

Components of International Compensation Programs A. Setting Base Pay for U.S. Expatriates 1. U.S. companies must determine method 2. Purchasing power important consideration influenced by: i. Stability of local currency ii. Inflation B. Methods for Setting Base Pay 1. Three main methods a. Home country-based b. Host country-based c. Headquarters-based 2. Home country-based method a. Expatriates receive amount they would get in the United States b. Job evaluation, based on compensable factors, used to compare jobs c. Most appropriate for expatriates d. Equity pay problems not an issue because expatriates are typically in short term assignments 3. Host country-based method a. Pay based on what employees in the host country receive b. Factors include market pricing, job evaluation techniques, or jobholder’s past relevant work experience c. Most suitable when assignments are extended term 4. Headquarters-based method a. All pay is set according to scales used at company headquarters b. Not based on home or host country pay levels c. Most suitable for expatriates who go from one foreign assignment to another d. Administratively simpler, since pay not based on assignment location C. Purchasing Power 1. Affects an employee’s standard of living 2. Diminished power undermines the strategic value of the compensation package to attract and maintain employees willing to work overseas 3. Currency stabilization a. Pay usually based on U.S. currency b. Many host countries do not accept U.S. currency as a legal tender c. Expatriates must exchange dollars for local currency based on current exchange rate, which is the price at which one country’s currency can be swapped for another

IV.

d. Rate fluctuations affected by: i. Government policies ii. Market forces 4. Inflation a. Defined as the increase in prices for consumer goods and services b. Increases in inflation diminish purchasing power Incentive Compensation for U.S. Expatriates A. Overview 1. International compensation plans to encourage expatriates to accept and remain on international assignments 2. Also compensates for willingness to tolerate less desirable living and working conditions B. Foreign Service Premiums 1. Monetary payments above and beyond regular base pay 2. Designed to encourage employees to accept expatriate assignments 3. Generally apply to assignments over a year in length 4. Calculated: a. As a percentage of base pay b. As a percentage generally between 10 percent to 30 percent c. Percentage increases with assignment length or because of a shortage 5. Possible drawbacks a. Employees might believe the premium is a regular, permanent increase b. May not have incentive value if given in several small installments c. Employees may worry that their standard of living will decrease after repatriation when they lose the premium C. Hardship Allowances 1. Designed to recognize exceptionally hard living and working conditions at foreign locations 2. Are disbursed in small amounts throughout the duration of assignment 3. The greater the hardship, the larger the allowance a. Range from 5 percent to 35 percent 4. Over 150 countries considered hardship locations D. Mobility Premiums 1. Designed to encourage employees to move from one assignment to another a. From a domestic position b. Between foreign assignments 2. Generally given in a one lump-sum payment

Establishing Employee Benefits for U.S. Expatriates A. Overview 1. Companies design benefits programs to attract and retain the best expatriates 2. Also promote a sense of security for expatriates and their families and help maintain contact with friends and family in the U.S. 3. International employee benefits plans include such protection programs as medical insurance and retirement programs 4. U.S. citizens working overseas continue to receive medical insurance and participate in their retirement programs 5. International and domestic plans are also similar in that they offer paid time off; however, international packages tend to incorporate more extensive benefits of this kind 6. Employers should take several considerations into account when designing international benefits programs, including: a. Total remuneration: What is included in the total employee pay structure (e.g., cash wages, benefits, mandated social programs, and other perquisites)? How much can the business afford? b. Benefit adequacy: To what extent must the employer enhance mandated programs to achieve desired staffing levels? Programs already in place and employees’ utilization of them should be critically examined before determining what supplementary programs are needed and desirable. c. Tax effectiveness: What is the tax deductibility of these programs for the employer and employee in each country, and how does U.S. tax law treat expenditures in this area? d. Recognition of local customs and practices: Companies often provide benefits and services to employees based on those extended by other businesses in the locality, independent of their own attitude toward these same benefits and services. B. Standard Benefits for U.S. Expatriates 1. Protection programs a. Two main types: i. Legally-required benefits ii. Discretionary benefits b. Laws that affect legally-required benefits i. Social Security Act of 1935 ii. Family and Medical Leave Act of 1993 iii. States’ workers’ compensation laws generally do not apply

c. Discretionary benefits provide family benefits, promote health, and guard against income loss caused by such catastrophic factors as unemployment, disability, or serious illness i. As a strategic response to workforce diversity ii. To retain the best-performing employees 2. Paid time off a. Benefits include: i. Annual vacations ii. Holidays iii. Emergency leave b. Expatriates typically receive the same annual vacation benefits as do their domestic counterparts c. U.S. companies must comply with foreign laws that govern the amount of vacation d. Expatriates generally receive paid time off for foreign national or local holidays e. Leave for personal or family emergencies C. Enhanced Benefits for U.S. Expatriates 1. Four main types: a. Relocation assistance b. Education reimbursements for expatriates’ children c. Home-leave benefits and travel reimbursements d. Rest and relaxation leave and allowance 2. Relocation assistance a. Covers expatriates’ expenses to relocate to foreign posts b. Payments based on three main factors: i. Distance ii. Length of assignment iii. Rank in the company 3. Education reimbursements for expatriates’ children a. Generally for private, English-speaking schools b. Tuition is generally higher than in U.S. private schools c. Done for two reasons: i. Some foreign schools are not comparable to U.S. public schools ii. Most U.S. children do not speak a foreign language fluently 4. Home leave benefits and travel reimbursements a. Home leave benefits enable expatriates to take paid time off in the U.S. b. Companies compensate expatriates while they are away on home leave and reimburse for expenses 218 Copyright © 2020 Pearson Education, Inc.

VI.

5. Rest and relaxation leave and allowance a. Expatriates who work in designated hardship foreign locations b. Companies can designate where the time can be spent c. Allowance to cover travel expenses between the foreign post and retreat locations, based on: i. Cost of transportation ii. Food iii. Lodging d. U.S. State Department publishes per diem schedules i. For various cities ii. Amounts set by location and family size Balance Sheet Approach for U.S. Expatriates’ Compensation Packages A. Overview 1. Provides expatriates the standard of living they normally enjoy in the United States 2. Strategic value for two reasons a. Protects expatriates’ standards of living b. Enables companies to control costs because it relies on objective indexes that measure cost differences between the United States and foreign countries 3. Most appropriate when: a. The home country is an appropriate reference point for economic comparisons b. Employees are likely to maintain psychological and cultural ties with the home or base country c. Employees prefer not to assimilate into the foreign culture d. The assignment is of limited duration e. The assignment following the international assignment will be in the home country f. The company promises employees that they will not lose financially while on foreign assignment 4. Major expenditures a. Housing and utilities b. Goods and services c. Discretionary income d. Taxes 5. Allowances a. Are given when the costs are more in the foreign assignment b. Vary according to the customary lifestyle of expatriate

6. Determining costs in foreign countries a. Through interviews with returning expatriates b. From private consulting or research companies c. U.S. State Department Indexes of Living Costs Abroad, Quarters Allowances, and Hardship Differentials B. Housing and Utilities 1. Employers provide to cover the difference between housing and utilities costs in the U.S. and in foreign posts a. U.S. Department of state uses the term quarters allowance 2. Quarters allowance table contains three main sections: a. Survey date is the month when the Office of Allowances received housing expenditure reports b. Exchange rate section includes effective date, foreign unit, and number per U.S. dollar c. Annual allowance for family status and salary range includes i. Family status: Single or Family ii. Family refers to a two-or-more-person group, larger families receive supplements C. Goods and Services 1. Expatriates receive when the cost of living is higher in that country than it is in the U.S. 2. Based on indexes of living costs abroad a. Place-to-place cost comparisons at specific times and currency exchange rates D. Discretionary Income 1. Covers a variety of financial obligations in the United States for which expatriates remain responsible while away 2. Usually long-term in nature E. Tax Considerations 1. Expatriates subject to a. FUTA b. Social Security c. Income taxes i. United States ii. Foreign country (where applicable) iii. Paying both is a form of double taxation

VII.

2. Employer considerations: Tax protection and tax equalization a. Under the balance sheet approach, companies choose between two approaches to help address concerns about double taxation: i. Tax protection ii. Tax equalization b. Hypothetical tax method is a key element of both tax protection and equalization i. Calculated as the U.S. income tax based on the same salary level, excluding all foreign allowances c. Under tax protection employers reimburse expatriates for the difference between the actual income tax amount and the hypothetical tax when the actual tax amount is greater d. Under tax equalization employers take the responsibility for paying income taxes to the United States and foreign governments on behalf of the expatriates i. Deduct income from the expatriates’ paychecks that totals the hypothetical tax amounts at year’s end ii. Reimburse expatriates for the difference between the hypothetical tax and the actual income tax whenever the actual income tax amount is less Repatriation Pay Issues A. Overview 1. Returning expatriates might initially view domestic assignments as a punishment because their total compensation decreases when they lose special pay incentives and leave allowances 2. Some returning expatriates perceive their value to the company heightens because of their overseas assignments, more so than the company does 3. Companies can prevent many of these problems by following two measures: a. Investing in career development programs to signal that the company values returnees b. Companies should capitalize on expatriates’ experiences to gain a better understanding of foreign business environments

End of Chapter VIII. Key Terms North American Free Trade Agreement (NAFTA): Free trade agreement between the U.S., Canada, and Mexico Repatriation: The process of making the transition from an international assignment and living abroad to a domestic assignment and living in the home country Host Country Nationals (HCN): Foreign national citizens who work in U.S. companies’ branch offices or manufacturing plants in their home countries Third Country Nationals (TCN): Foreign national citizens who work in U.S. companies’ branch offices or manufacturing plants in foreign countries—excluding the United States and their own home countries Expatriates: U.S. citizens employed in U.S. companies with work assignments outside the United States Home country-based pay method: Compensates expatriates the amount they would receive if they were performing similar work in the United States Host country-based method: Compensates expatriates based on the host countries’ pay scales Headquarters-based method: Compensates all employees according to the pay scales used at the headquarters Exchange rate: The price at which one country’s currency can be swapped for another Inflation: Is the increase in prices for consumer goods and services Foreign service premiums: Monetary payments above and beyond regular base pay Hardship allowance: Compensates expatriates for their sacrifices while on assignment Mobility premiums: Reward employees for moving from one assignment to another Relocation assistance payments: Cover expatriates’ expenses to relocate to foreign posts Home leave benefits: Enable expatriates to take paid time off in the United States Balance sheet approach: Provides expatriates the standard of living they normally enjoy in the United States Housing and utilities allowances: Cover the difference between housing and utilities costs in the United States and in the foreign post Quarters allowances: Term used in the U.S. to refer to housing and utilities allowances Goods and services allowances: Offered when the cost of living is higher in that country than it is in the United States Indexes of living costs abroad: Compare the costs (U.S. dollars) of representative goods and services (excluding education) expatriates purchase at the foreign location with the cost of comparable goods and services purchased in the Washington, DC, area Discretionary income: Covers a variety of financial obligations in the United States for which expatriates remain responsible Hypothetical tax: Employer calculation of the U.S. income tax based on the same salary level, excluding all foreign allowances Tax protection: Employers reimburse expatriates for the difference between the actual income tax amount and the hypothetical tax when the actual income tax amount—based on tax returns filed with the IRS—is greater 222 Copyright © 2020 Pearson Education, Inc.

Tax equalization: Employers take the responsibility for paying income taxes to the U.S. and foreign governments on behalf of the expatriates IX.

Discussion Questions and Suggested Answers

13-1. What are the strengths and weaknesses of the following methods for establishing base pay in international contexts: home country-based pay, headquarters-based pay, and host country-based pay. Explain. Home country-based pay: Equity problems are not very likely to arise because expatriates’ assignments are too short to establish local national employees as pay referents, instead will base pay comparisons on their home country standards. A weakness of this approach would be that it may not be appropriate for more long-term assignments because expatriates may then base comparisons on local norms, causing some concerns with perceptions of equity. Headquarters-based pay: This approach is appropriate for employees who move from one foreign assignment to another and rarely work in their home country. Administration of this approach is simple because it applies the pay standard of one country to all employees. However, this approach could cause concerns with perceptions of equity depending on the length of assignments for the expatriates. Host country-based method: Expatriates’ base pay is competitive with other employees’ base pay in the host countries reducing concerns with perceptions of equity, and companies may be seen as more legitimate employers by following local norms. However, this approach may not be appropriate for short-term assignments where expatriates may be comparing the equity of their pay to their home country. Learning objective: 13-3. List the main components of international compensation programs. AACSB: Analytical thinking 13-2. Do you believe pay-for-performance is appropriate for all countries? Explain. Pay-for-performance may not be appropriate for all countries. For example, if a U.S. company were to decide to locate in Japan, certain cultural norms may need to be used by employees in order to safely establish a strong relationship with the people. For instance, in most food consumption areas it is polite to burp, take off ones shoes before entering, and sit down on the floor when eating. Pay-for-performance compensation plans may be best as the company is first starting out so as to pay their employees based upon how well they cope with the cultural differences and/or their knowledge of the customs. In order to promote this compatibility it may be best to hire an expert in the cultural norms and acceptances of the Japanese people.

Learning Objective: 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs. AACSB: Analytical thinking 13-3. Should U.S. companies should increase base pay (beyond the level that would be paid in the United States) to motivate employees to accept foreign assignments? Explain. Increasing base pay in order to motivate employees to do anything is often a sound idea, however in terms of accepting foreign assignments it is not all together necessary. Many employees would be more than happy to try something new and even to be paid less for such adventurous assignments. Learning Objective: 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs. AACSB: Analytical thinking 13-4. Allowances and reimbursements for international assignments are costly. Should companies avoid international business activities? Explain. If you answer no, what can companies to do minimize cost? Whether or not a company should expand internationally depends on the completive strategy of the company. Successful international assignments can increase an organization’s global footprint, boost its sales and market presence, and grow its talent pool. The cost of the allowances and reimbursements for international assignments should be taken into consideration when deciding when international expansion makes sense for a company, but the cost alone should not prohibit a company from considering international business activities. In order to minimize costs, companies should make sure they conduct research to understand how to structure the expatriate compensation package to attract employees to international assignments, while minimizing the costs of those assignments. Learning objective: 12-1. Discuss competitive advantage and how international activities fit in. AACSB: Analytical thinking 13-5. Of the many reimbursements and allowances that U.S. companies make for employees who take foreign assignments, which one is the most essential? Discuss your reasons. The most essential reimbursement and allowance that U.S. companies make for employees who take foreign assignments is home-leave benefits and travel reimbursements. Under this allowance, companies offer home-leave benefits to help expatriates manage the adjustments to foreign cultures and to maintain direct personal contact with family and friends. As the name implies, home-leave benefits enable expatriates to take paid time-off in the United States. Most companies reimburse 224 Copyright © 2020 Pearson Education, Inc.

expatriates for expenses associated with travel between the foreign post and the United States. These reimbursements apply to expatriates and to reimburse the cost of round-trip airfare, ground transportation, and accommodations while traveling to and from the foreign post. Learning Objective: 13-3. List the main components of international compensation programs. AACSB: Analytical thinking X.

Preparing for My Career: Compensation in Action

Instructor Notes: This section outlines the role human resources professionals and line managers take in maximizing the experience of expatriate employees. HR takes the lead preparing the employee for the assignment and working to align the company’s compensation policies to individual employee needs. Line managers take the lead in identifying employees for international assignments, and working to make sure the international assignments are successful. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager. XI.

End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses Case 1: Jenkins Goes Abroad Instructor Notes: Many Human Resources practitioners face the new challenge of expanding operations globally. Even if a company is sending just a few employees abroad, if the duration is longer than a year, possible adjustments must be made to the individual’s compensation. Companies must consider not only the need to maintain employee’s standard of living as they move into a different economy, but also the need to encourage the acceptance of an international assignment. Questions and Suggested Student Responses: 13-6. How should Dale approach the determination of the consultant’s salaries as expatriates? Initially, Dale should consider the fact that the assignment is relatively long term. The consultants will be in the U.K. for a period of more than a year, and therefore, an adjustment to their pay is most likely appropriate. As the U.S. dollar is currently weak against the Pound, Dale should also consider the purchasing power of the consultants in the U.K. and the fact that the consultants’ current U.S. salary will likely lead to a lower standard of living. However, the assignment is not permanent and therefore the employees will need to eventually transition back into the U.S. culture. Therefore, 225 Copyright © 2020 Pearson Education, Inc.

maintaining purchasing power is a priority. Because of this, Jenkins should most likely take a balance sheet approach to determining the pay of the expatriates. Learning Objective: 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs. AACSB: Analytical thinking

13-7. Should Jenkins offer any incentive compensation or additional benefits to the expatriates? Why or why not? Based on Dale’s initial discussions with the consultants, it seems they may be hesitant to take the assignment because of their concerns with their long-term career growth. Therefore, an incentive such as a foreign service premium may be appropriate. Because the consultants will eventually transition back to the United States, Jenkins may also want to consider offering home leave benefits in order to help the consultants maintain contact with friends and colleagues. Learning Objective: 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs. AACSB: Analytical thinking Case 2: Ethics Dilemma: Request Approved, then Denied Instructor Notes: It is important for companies planning international expansion to invest time into conducting research to design the company’s expatriate compensation policies. As Get It to You planned international expansion, the company did not invest time to plan the compensation plan to attract employees to take on the international assignments. After being told she could get a better overall compensation plan than they originally offered, Jennifer moved to Caracas. However, after being angered by Jennifer’s request for more money, the CEO refuses to honor the agreement. Questions and Suggested Student Responses: 13-8. As a compensation professional, what would you do? While Steven was unable to get a written confirmation, Juanita made an oral promise to provide the requested compensation to Jennifer. Steven communicated this and Jennifer moved to Caracas with the understanding that she would receive the compensation. Steven should ask Juanita to honor her agreement and involve the board of directors if necessary. It would be helpful when making this request for Steven to conduct research to support Jennifer’s request for compensation. For any future international assignments, Steven should make sure the terms of the arrangement are decided before the employee relocates. 226 Copyright © 2020 Pearson Education, Inc.

Learning objective: 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs. AACSB: Ethical understanding and reasoning 13-9. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? The CEO’s lack of information on the expatriate compensation practices likely influenced her reaction to Jennifer’s request. Further, the pressure from the board of directors to expand internationally added stress to the situation. Learning objective: 13-2. Describe and explain preliminary considerations compensation professionals should take under advisement before designing international compensation programs. AACSB: Ethical understanding and reasoning XII.

Crunch the Numbers!: Questions and Suggested Student Responses

Calculating an Expatriate’s Base Pay and Incentives 13-10. Calculate your colleague’s new base pay rate. 5% increase in base pay = $3,750 New base pay rate = $78,750 Learning Objective: 13-4. Discuss the balance sheet approach for U.S. expatriates’ compensation packages. AACSB: Application of knowledge 13-11. Calculate the (a) foreign service premium, (b) hardship allowance, and (c) quarters allowance. a) 20% foreign service premium = $15,000 b) 15% hardship allowance = $11,250 c) quarters allowance = $58,200 Learning Objective: 13-4. Discuss the balance sheet approach for U.S. expatriates’ compensation packages. AACSB: Application of knowledge 13-12. Based on your calculations for the previous questions, how much will your colleague receive for her one-year assignment in Beijing, China? Total compensation = $78,750 + $15,000 + $11,250 + 58,200 = $163,200 227 Copyright © 2020 Pearson Education, Inc.

Learning Objective: 13-4. Discuss the balance sheet approach for U.S. expatriates’ compensation packages. AACSB: Application of knowledge XIII. Working Together: Team Exercise with Suggested Student Responses Instructor’s Notes: Teams must prepare a team of home-country workers to open a new customer service center in a country the students choose. Questions and Suggested Student Responses: 13-13. What are two important topics that you will address with the team? Explain the rationale for your choices. Students might address several topics such as explaining how the team will be compensated, benefits the team can expect, or specific training the team will need such as cross-cultural awareness or language proficiency. Learning Objective: 13-1. Discuss competitive advantage and how international activities fit in. AACSB: Application of knowledge 13-14. What did you find most unique about the destination country? Student responses will vary. Learning Objective: 13-1. Discuss competitive advantage and how international activities fit in. AACSB: Reflective thinking XIV. Assisted-Graded Questions 13-15. Describe the two choices available to companies to protect expatriates from double taxation. Which of the two approaches is most fair to expatriates and why? Answer to this question can be found in the MyLab Management 13-16. From the company’s standpoint, what are the pros and cons of following the balance sheet approach? Answer to this question can be found in the MyLab Management

13-17. MyLab Management Only – comprehensive writing assignment for this chapter. XV.

Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses

Case Name: A New Leader at Stylings Instructor Notes: The CEO is responsible for implementing an organization’s competitive strategies and in many cases, has the greatest impact on organizational success. As such, an attractive compensation package is essential to attract the right talent to lead a company. However, the perception of the front line employees is an important consideration in determining compensation. Noted disparities in executive and front line compensation are clearly an issue in the retail industry where many employees are paid close to minimum wage. This disparity should be kept in mind while designing a package that still attracts the right talent and provides incentives for performance. Questions and Suggested Student Responses: 13-18. What role does the compensation package play in attracting the right talent for the CEO position?

The CEO holds a significant responsibility in ensuring the success of an organization. A high level of risk comes with that responsibility. To attract a CEO willing to take on such risk, the compensation package must be attractive and provide the incentives to accomplish the goals of the organization. AACSB: Analytical thinking 13-19. What are some recommendations the consultant may provide to the Board for the compensation package? As base pay is typically a smaller part of a CEO’s compensation package, the recommendations are likely to focus on other aspects of compensation. With the questionable future of the organization, a bonus structure that is contingent on performance is important with a focus on improving revenues. To ensure that the new executive is vested in the future of the company, stock options are an important part of the compensation package. As there is some risk of an acquisition, a golden parachute clause is also likely important. Perquisites should be limited as those are likely to spark the most negative response from employees who are facing budget cuts in the stores. AACSB: Analytical thinking

CHAPTER 14 Pay and Benefits Outside the United States

Learning Objectives 14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside the United States. 14-2. For North America (Canada and Mexico), summarize key facts about wage and salary, paid time-off benefits, and protection programs. 14-3. For South America (Brazil), summarize key facts about wage and salary, paid time-off benefits, and protection programs. 14-4. For Europe (Germany), summarize key facts about wage and salary, paid time-off benefits, and protection programs. 14-5. For Asia (India and the People’s Republic of China), summarize key facts about wage and salary, paid time-off benefits, and protection programs. Outline I. II.

Introduction Pertinent Concepts for Quantifying Economic Elements in the Discussion of Pay and Benefits Outside the United States III. North America IV. South America V. Europe VI. Asia VII. Key Terms VIII. Discussion Questions and Suggested Answers IX. Preparing for My Career: Compensation in Action X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student XI. Crunch the Numbers! Questions and Suggested Student Responses XII. Working Together: Team Exercise with Suggested Student Responses XIII. Assisted-Graded Questions XIV. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses

Lecture Outline Introduction A. Overview 1. Globalization has resulted in a high level of interconnections between the economies of various parts of the world 2. U.S. employers will increasingly conduct business with entities in a variety of other countries as former underdeveloped parts of the world experience tremendous economic, trade, and standard of living growth

3. In addition, the move from traditional manufacturing to knowledge and service-based employment also means that jobs as well as markets are more likely to be dispersed geographically 4. Sometimes other countries impose stricter control over terms of compensation than the U.S. II. Pertinent Concepts for Quantifying Economic Elements in the Discussion of Pay and Benefits Outside the United States A. Overview 1. The gross domestic product (GDP) describes the size of a country’s economy, where size is expressed as the market value of all final goods and services produced within the country over a specified period 2. GDP per capita generally indicates the standard of living within a country, the larger the per capita GDP, presumably the better is the standard of living 3. Purchasing power parity exchange rate (PPP) is the worth of all goods and services produced in the country valued at prices prevailing in the United States 4. Per capita expenditure on health care is the sum of public health expenditure and private expenditure on health, helps compensation professionals understand the standard of health care 5. Methodological differences make cross-country comparisons of reported hourly compensation difficult III. North America A. Overview 1. Mexico, Canada, and the United States are part of a trade bloc known as NAFTA—the North Atlantic Free Trade Agreement 2. NAFTA called for the elimination of duties and the phasing out of tariffs over a period of 14 years 3. Trade restrictions were removed under NAFTA from such industries as motor vehicles and automotive parts, computers, textiles, and agriculture 4. The labor side of NAFTA is the North American Agreement on Labor Cooperation (NAALC) 5. Created to promote cooperation between trade unions and social organizations in order to champion improved labor conditions B. Canada 1. Constitutional monarchy that is also a parliamentary democracy and a federation consisting of ten provinces and three territories 2. Per capita GDP—$48,100 and labor force—19.5 million 3. The market-based Canadian economy is very similar to that of the United States’ 4. Canadian law holds that labor and employment law fall within the exclusive jurisdiction of the provinces 5. Federal legislation cannot override provincial laws, even when the industry or employer primarily conducts business overseas (except in the cases where the industries are expressly assigned to federal jurisdiction)

6. Wage and Salary a. Canada does possess a statutory minimum wage law b. At the federal level, there is an obligation placed upon provincial governments to establish minimum rates of pay by or under an act of the legislature 7. Paid time off benefits a. Canadian employment law holds that employees are entitled to between 6 and 10 annual paid holidays as well as two weeks paid vacation time along with a sum of money as vacation pay (increasing to three weeks after six years of employment) b. The amount of vacation pay is equal to two percent of the employee’s pay for the preceding year per week of vacation c. Employees are eligible for a total of 17 weeks of benefits during pregnancy and after childbirth 8. Protection benefits a. Pensions and retirement benefits i. Canada has two state pension plans ii. One for Quebec residents only and one for the rest of Canada iii. Both funded by matching contributions from employers and employees and fully portable upon employment changes, much like 401(k) plans in the United States b. Health and disability benefits i. Medical and basic hospital care in Canada is paid for by provincial medical insurance plans with compulsory coverage for all residents and funding revenue derived from both general federal taxation and from provincial taxes ii. Even though public health plans normally do not provide employed persons with prescription drugs except while they are hospitalized, additional benefits are provided by private supplementary insurance by employers, including dental and vision care Mexico 1. Mexican labor law is based on the Constitution of the United States of Mexico, adopted in 1917 2. Per capita GDP—$19,500 and labor force—52.9 million 3. Wage and salary a. The Mexican government requires that two minimum wage rates be applied: i. The first, general minimum wage, applies to all workers and the amount depends upon the region of the country ii. The second is the occupational minimum wages that are higher than the general minimum wages b. Occupations that require greater skill, knowledge, and experience are compensated at higher rates

4. Paid time off benefits a. Workers are entitled to paid time off during public holidays and workers required to work during a mandatory holiday are entitled to double pay b. Female employees are entitled to maternity leave—six weeks prior to giving birth and six weeks after birth on full salary c. Employees are entitled to six vacation days after being employed for one year and to two more days for each subsequent year, up to a maximum of twelve days 5. Protection benefits a. Social security i. Social security programs in Mexico are administered by the Mexican Social Security Institute ii. Protect employees in the matters of occupational accidents and illnesses, maternity, sicknesses, incapacitation, old age, retirement, and survivor pensions, daycare for children of insured workers, and social services iii. The system is financed by contributions from workers, employers, and the government iv. Workers with at least 52 weeks worth of payments into the system who withdraw are entitled to continue making voluntary payments b. Pension and retirement benefits i. Effective July 1, 1997, all workers must join the mandatory individual account system, which is slowly replacing the former social insurance system ii. At retirement, employees covered by the social insurance system before 1997 can choose to receive benefits from either the social insurance system or from the mandatory individual account system c. Health benefits i. Medical services are normally provided directly to patients (including old-age pensioners covered by the 1997 law) through the health facilities of the Mexican Social Security Institute ii. Benefits include general and specialist care, surgery, maternity care, hospitalization or care in a convalescent home, medicines, laboratory services, dental care, and appliances, and are payable for 52 weeks, but may in some cases be extended to 104 weeks d. Other benefits i. A national system of worker housing exists paid for by employer contributions in the form of payroll tax fixed at five percent and helps workers obtain sufficient credit for the acquisition of housing

IV. South America A. Overview 1. Brazil, Argentina, Colombia, and Chile are the largest economies in South America 2. The biggest trade bloc in South America used to be Mercosur, or the Southern Common Market, comprised of Argentina, Brazil, Paraguay, Uruguay, and Venezuela as the main members and Bolivia, Chile, Colombia, Ecuador, and Peru as associate states 3. The second-biggest trade bloc was the Andean Community of Nations made up of Bolivia, Colombia, Ecuador, Peru, Venezuela, and Chile B. Brazil 1. The Consolidation of Labor Laws (Consolidacao das Leis do Trabalho) accords many employee benefits the status of fundamental constitutional rights and in general the employment relationship in Brazil is highly regulated by statute 2. Per capita GDP—$15,500 and labor force—111.6 million 3. Wage and salary a. Minimum wage imposed b. In accordance with the Federal Constitution, the minimum wage rate is nationally uniform and set by law 4. Protection benefits a. Social Security i. The social security system that went into effect in 1991 details various benefits for workers in Brazil ii. Comprehensive social security benefits are provided by law to all workers regarding retirement for illness, old age, or length of service; death benefit pensions; assistance during imprisonment of worker; savings fund; social services; professional rehabilitation assistance; work accident payments; maternity leave payments; family salary support; accident insurance; and sick leave benefits b. Pensions i. Social insurance is provided to employed persons in industry, commerce, and agriculture, domestic servants, some categories of casual workers, elected civil servants, and the self-employed ii. The monthly benefit is equal to 70 percent of average earnings plus 1 percent of average earnings for each year of contributions, up to a maximum of 100 percent iii. Employees contribute 8 to 11 percent of gross earnings, and voluntary contributors and members of cooperatives contribute 20 percent of declared earnings c. Health benefits i. Medical services are provided directly to patients in rural and urban areas through the Unified Health System and include such benefits as general, specialist, maternity, and dental care; hospitalization; medicines (some cost sharing is required); and necessary transportation 234 Copyright © 2020 Pearson Education, Inc.

Europe A. Overview 1. The European Union (EU) is a unique international organization that aims at becoming an economic superpower while still retaining quintessential European practices such as high levels of employment, social welfare protection, and strong trade unions 2. Under the laws of all Member States, employers must provide employees with a written document about the terms of the employment contract 3. The concept of “employment at will” does not exist in the EU as in the United States 4. All member states either have specific legislation or unfair dismissal or general civil code provisions that apply to termination of employment contracts 5. The EU Website reports that community labor law was designed with the aim of ensuring that the creation of the Single Market did not result in a lowering of labor standards or distortions in competition 6. On the basis of article 137 of the treaty, the Community shall support and complement the activities of the Member States in the area of social policy, particularly minimum requirements at the EU level in the fields of working and employment conditions, and with regard to the information and consultation of workers B. Germany 1. The integration of the former East German economy is a strain on the overall economy of unified Germany, leading to high unemployment rates 2. Per capita GDP—$50,200 and labor force—45.9S million 3. Germany’s labor laws provide considerable voice to labor and job security to employees 4. Wage and salary a. Minimum wage in Germany is not mandated by the government, and is established through the collective bargaining process b. Two types of collective agreements: i. Association agreements are made between trade unions and employers’ associations ii. Company agreements are made between trade unions and individual employers c. An extension of either type of agreement to other sectors or employers may be granted upon the request of at least one party to the collective agreement 5. Paid time off benefits a. The statutory minimum vacation has been set at 24 working days (or four weeks since Saturdays are counted) b. Younger workers have a right to a vacation of 25 to 30 working days; disabled workers have an additional five days of vacation c. Expectant mothers can take 6 weeks’ leave before the due date and 8 weeks after giving birth

6. Protection benefits a. Pensions i. Germany has a statutory pension system analogous to the Social Security system in the United States ii. Employers offer the company pension plan and a tax-favored investment plan b. Health insurance i. German laws stipulate guidelines for the minimal health welfare of workers ii. For blue collar workers (and some white collar workers) mandatory state health insurance premiums are shared equally by the insured and by the employer iii. Employees whose income exceeds a certain amount can opt out of the state plan and purchase private health insurance VI. Asia A. Overview 1. Asia has several trade blocs including the Asia-Pacific Economic Cooperation, the Asia-Europe Economic Meeting, the Association of Southeast Asian Nations, and the South Asian Association for Regional Cooperation 2. Another bloc not examined here but worth mentioning are those in Southeast Asia: Thailand, Vietnam, Singapore, Malaysia, Philippines, Cambodia, and Laos. B. India 1. Indian economy is growing steadily, but is plagued with income disparity and developmental challenges 2. Per capita GDP—$7,200 and labor force—521.7 million 3. The Directive Principle of State Policy has statutes that affect various aspects of the employment relationship such as working conditions and participation in management 4. There are wide variations between the public and private sectors, with the Ministry of Labour and labor laws governing employment relationships in the public sector and more employer discretion allowed in the private sector 5. Wage and salary a. Minimum wage is fixed by an authority dual system b. Minimum wage rates are determined by the government for certain sectors, and a collective agreement determines others c. Minimum wage rates for occupations that are largely nonunionized or have little bargaining power may be set in accordance with the Minimum Wages Act, 1948 6. Paid time off benefits a. Workers in privately owned factories, mines, and plantations are entitled to one day off for every 20 days worked the previous year b. Paid leave policies are usually determined by states and governments in government-owned factories or railroads 236 Copyright © 2020 Pearson Education, Inc.

c. Local governments determine paid holidays, varying between 15 and 20 days d. Leave is calculated based on number of days worked in previous year and workers can roll over up to 30 days of unused leave each year e. No statutory paternity leave, but maternity leave is allowed in paid time off and possible medical bonus 7. Protection benefits a. Pensions i. First and current laws regarding pensions were passed in 1952 (employees’ provident funds), with amendments in 1972 (payment of gratuity), 1976 (employees’ deposit-linked insurance), 1995 (employees’ pension scheme), and 1995 (national social assistance program) ii. In 2004, a voluntary old age, disability, and survivors’ benefits scheme was enacted iii. Voluntary coverage exists for employees of covered establishments with monthly earnings of more than 6,500 rupees, with the agreement of the employer and for establishments with less than 20 employees if the employer and a majority of the employees agree to contribute iv. Provident fund contributions include 12 percent of basic wages (10 percent of basic wages in five specified categories of industry) in covered establishments with less than 20 employees and some other specific cases b. Health Benefits i. State governments arrange for the provision of medical care on behalf of the Employees’ State Insurance Corporation ii. Services are provided in different states through social insurance dispensaries and hospitals, state government services, or private doctors under contract People’s Republic of China 1. The PRC monist state characterized by a fast-growing economy that has shifted from a centrally planned system to a more market-oriented one. 2. Per capita GDP—$16,600 and labor force—806.7 million 3. The PRC Labor Law was established in 1995, resulting in a break from the traditional “iron rice bowl” system of employment, with a shift from stateowned enterprises to private ones, a move which has given rise to new employment relationship issues 4. Since the introduction of the PRC Labor Law the employment relationship is now defined by individual contracts 5. Wage and salary a. According to China’s Labor Act, 1994, the State possesses the responsibility to implement a system of guaranteed minimum wages b. There is no national minimum wage rate in China; instead, minimum wage rates are set by region

c. Separate standards are stipulated by provincial, regional, and municipal peoples’ governments for their respective regions and reported to the State Council for consent d. The provisions concerning minimum wages apply to enterprises, private non-enterprise entities, individual industrial and commercial households with employees (the employing entities), and the laborers who have formed a labor relationship with them 6. Paid time off benefits a. The length of an employer-approved medical treatment period generally depends on employee age and period of service and can range from 3 to 24 months b. Employees who have worked for 1 to 10 years are entitled to annual paid leave of 5 days, 10 days for those who have worked 10 to 20 years, and 15 days for those who have worked 20 or more years c. Employees who have worked for more than one year are entitled to “home leave” if they do not live in the same place as their spouse or parents d. Women are entitled to no less than 90 days of maternity leave starting 15 days prior to birth 7. Protection benefits a. Pensions i. There has been a new law to decouple the employment relationship from the social insurance system, setting up a unified basic pension system with social insurance and mandatory individual accounts ii. Coverage includes employees in urban enterprises and urban institutions managed as enterprises and the urban self-employed iii. Employees of government and communist party organizations and of cultural, educational, and scientific institutions (except for institutions financed off-budget) are covered under a governmentfunded, employer-administered system iv. An employee contribution to mandatory individual accounts is 8 percent of gross insured earnings v. The minimum earnings for employee contribution and benefit purposes are equal to 60 percent of the local average wage for the previous year vi. The maximum earnings for employee contribution and benefit purposes vary b. Health insurance i. A unified medical insurance system exists with all employers and workers participating in this system; employers contribute six percent of payroll employees contribute two percent of their salary. ii. Health insurance is based on Basic Medical Insurance Fund consisting of a Pooled Fund and Personal Accounts iii. Employees’ contributions go directly to their Personal Accounts and 30 percent of employer contributions are paid into this account

iv. The social insurance fund reimburses the cost of the medical benefit from 10 percent up to 400 percent of the local average annual wage End of Chapter VII. Key Terms

Gross domestic product (GDP): The size of a country’s economy expressed as the market value of all final goods and services produced within the country over a specified period GDP per capita: Generally indicates the standard of living within a country Purchasing power parity exchange rate (PPP): The worth of all goods and services produced in the country valued at prices prevailing in the United States Per capita expenditure on health care: The sum of public health expenditure and private expenditure on health VIII. Discussion Questions and Suggested Answers 14-1. What are the main differences between the minimum pay regulations in the United States (Chapter 2) and one other country’s practices discussed in this chapter? How do these differences affect companies’ ability to compete with other companies worldwide? The answer may vary depending on the country chosen by students. The U.S. Congress passed an increase in the federal minimum wage from $5.15 in increments to $7.25 in 2009 and the minimum wage has not been increased since. Currently, approximately 29 states have minimum wage laws that specify higher minimum wage rates than federal level specified in the FLSA. Specific FLSA exemptions permit employers to pay some workers less than the minimum wage such as students employed in retail or service businesses, on farms, and etc. (with the consent of the DOL). In some countries governments establish nationally uniform minimum wage rates, while in other countries minimum wage rates are established depending on regions or occupations. For example, in Brazil, the minimum wage rate is nationally uniform. In Canada, the jurisdiction defined by province determines the minimum hourly rate. Learning Objective: Could apply to objectives 2, 3, 4 or 5 depending on the country selected. AACSB: Analytical thinking

14-2. What are the main differences between retirement systems in the United States (considering legally required and discretionary programs) and one other country discussed in this chapter? Does it appear that the costs of retirement programs are creating burdens for competitive advantage? The answer may vary depending on the country chosen by students. In the United States, individuals may receive retirement benefits from three sources: 1) employer-sponsored retirement plans provide employees with income after they have met a minimum retirement age and have left the company, 2) OASDI program provides governmentmandated retirement income to employees who have made sufficient contributions through payroll taxes, 3) individuals may use their initiative to take advantage of tax regulations that have created such retirement programs as individual retirement accounts (IRAs) and Roth IRAs. Countries have differences and similarities in terms of retirement systems. For example, Mexico’s former social insurance system has been transforming into mandatory individual account system. In addition to social insurance, in Brazil, there is also voluntary coverage for housewives, students, the unemployed and other categories. The cost of retirement programs may create burdens for competitive advantage for companies operating in countries where government contributions are lower and mandated employer/employee contributions are higher. Learning Objective: Could apply to Objectives 2, 3, 4 or 5 depending on the country selected. AACSB: Analytical thinking 14-3. What are the main differences between paid time-off practices in the United States and one other country discussed in this chapter. Student responses will vary depending on what country they select. However, one of the main differences between the United States and many of the other countries discussed in this chapter is that United States does not have any federal requirements for paid time off. Some states and local governments require paid family or sick leave. But, there are no requirements for other paid time off such as holidays and vacation. Learning Objective: Could apply to Objectives 2, 3, 4 or 5 depending on the country selected. AACSB: Analytical thinking

14-4. What are the main differences between health care systems in the United States (Chapter 10) and one other country discussed in this chapter? Does it appear that the costs of health care programs are creating burdens for competitive advantage? In the United States the health care system is privately run, however, most employers provide health care insurance as a benefit. Companies with more than 50 employees are required to provide this benefit under the Patient Protection and Affordable Care Act. Compared to other countries, the cost of health care insurance on employers could create a financial burden that affects competitive advantage. In many countries, the burden of health care costs is on the government. For example, in Canada medical and basic hospital care is paid for by provincial medical insurance plans with compulsory coverage for all residents and funding revenue derived from both general federal taxation and from provincial taxes. Learning Objective: Could apply to Objectives 2, 3, 4 or 5 depending on the country selected. AACSB: Analytical thinking 14-5. What is the purchasing power exchange rate and indicate how it is helpful to compensation professionals whose work spans multiple countries?

Purchasing power parity exchange rate (PPP) is the worth of all goods and services produced in the country valued at prices prevailing in the United States. This is an important economic measure when comparing compensation practices in different countries. Because it compares to prices prevailing in the United States, it provides compensation professionals a common base when comparing different countries. Learning Objective: 14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside the United States. AACSB: Analytical thinking IX.

Preparing for My Career: Compensation in Action

Instructor Notes: This section outlines the role human resources professionals and line managers take in creating seamless and sensitive strategies to compensate a global workforce. HR takes the lead understanding local labor laws and preparing a company to expand into different countries through research on local norms and practices. Line managers take the lead in working with geographically dispersed direct reports and partnering with HR to prepare managers working in other countries. This section can help students understand the importance of understanding compensation practices whether they pursue a career as a human resources professional or a line manager.

End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses

Case 1: Expanding Internationally at Suds Microbrewery Instructor Notes: Suds Microbrewery ships beer only to local restaurants and retail outlets. Therefore, to expand the company’s geographic reach, the company must open new brewing locations. The company now plans to expand internationally, starting with Toronto, Canada and London, United Kingdom. The company offers benefits to its’ U.S. employees including healthcare insurance, a 401(k) plan and paid vacations and holidays. HR director Ellie Gomez must now decide what benefits the new locations should offer to attract and retain local nationals. Questions and Suggested Student Responses: 14-6. What are some challenges Ellie is going to face in creating the new benefits packages for the international locations? Ellie must learn what the legally required benefits are in each of the locations where Suds plans to open a new microbrewery. For example, in Canada, healthcare is provided by provincial medical insurance plans, but employers may supplement with additional benefits such as dental and vision insurance. Canada also provides a public pension plans that employers supplement. Paid holidays and vacation time are also regulated by the government. Therefore, it is important for Ellie to understand what benefits the company should offer in addition to those provided by or required by the local government in order to attract local nationals. Learning Objective: Both learning objective 14.2 and 14.4 apply to this case. AACSB: Analytical thinking 14-7. What are some general recommendations for Ellie as she plans these benefit offerings? Ellie should begin by understanding the legal requirements for each local geographic location. She should then learn about what benefits local competing companies offer. Finally, if Suds plans to have U.S. employees work abroad, she should consider how the benefit offerings compare with those benefits offered in the U.S. locations. Learning Objective: Both learning objective 14.2 and 14.4 apply to this case. AACSB: Analytical thinking

Case 2: Ethics Dilemma: Underpaying Workers at Serenity Resorts Instructor Notes: Serenity Resorts started international expansion through building a resort in a small island nation off the coast of France. Construction exceeded budget and the company was under the threat of not being able to make a profit. In return for a bribe, local officials agreed to look the other way if Serenity paid below minimum wage in order to save on labor costs. Questions and Suggested Student Responses: 14-8. As a compensation professional, what would you do? Doing business internationally can create ethical challenges for companies when local norms are in conflict with home country norms. In this case, the company leadership needs to consider the long-term consequences of offering this bribe. While there might be short-term cost savings, this act would set a precedent the company may not want to follow. Further, by paying workers at lower than the local minimum wage, the workers may not provide the level of customer service that the company expects. Learning Objective: 14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside the United States. AACSB: Ethical understanding and reasoning 14-9. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? As the first international location, company leaders likely feel pressured to assure profitability. The budget overruns created the financial challenges that put more pressure on company leaders to achieve profitability. Learning Objective: 14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside the United States. AACSB: Ethical understanding and reasoning XI.

Crunch the Numbers! Questions and Suggested Student Responses

Comparing the Rates of Change in GDP Per Capita for Select Countries

14-10. What is the 5-year change in GDP per capita (2007-2011) for (a) the United States, (b) Australia, (c) Singapore, (d) Denmark, and (e) Italy? Country a) United States b) Australia c) Singapore d) Denmark e) Italy

2007 48,061 40,991 39,223 58,487 37,698

2011 49,790 62,245 53,166 61,753 38,334

Difference 1,729 21,254 13,953 3,266 646

Learning Objective: 14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside the United States. AACSB: Application of knowledge 14-11. What is the 5-year change in GDP per capita (2012–2016) for (a) the United States, (b) Australia, (c) Singapore, (d) Denmark, and (e) Italy? Country a) United States b) Australia c) Singapore d) Denmark e) Italy

2012 51,450 67,635 54,431 58,507 38,814

2016 57,638 49,775 52.962 53,578 30,661

Difference 6,188 -17,869 -1,469 -4,929 -8,153

Learning Objective: 14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside the United States. AACSB: Application of knowledge 14-12. State whether the rate of change for the more recent 5-year period (20122016) was lower than or higher than the rate of change for the earlier 5-year period (2007–2011) in each country: (a) the United States, (b) Australia, (c) Singapore, (d) Denmark, and (e) Italy. Country

(2012-2016)

(2007-2011)

a) United States b) Australia c) Singapore d) Denmark e) Italy

6,188 -17,869 -1,469 -4,929 -8,153

1,729 21,254 13,953 3,266 646

More recent period higher or lower? Higher Lower Lower Lower Lower

Learning Objective: 14-1. Explain the pertinent concepts for quantifying important economic elements in the discussion of pay and benefits outside the United States. AACSB: Application of knowledge

XII.

Working Together: Team Exercise with Suggested Student Responses

Instructor’s Notes: Students should select a country that is not discussed in the chapter and conduct online research about the country. Questions and Suggested Student Responses: 14-13. For your chosen country, what have you learned about the structure of the government? How does the governmental structure compare to another country of your choice (any country discussed in this chapter)? Explain. Student responses will vary depending on the country selected. Learning Objective: May apply to objective 14-2., 14-3., 14-4., or 14-5. depending on the country selected. AACSB: Application of knowledge 14-14. For your chosen country, what have you learned about the minimum wage and benefits requirements? How do these practices compare to the country (of the same country within this chapter that you considered in question 1413)? Explain.

Student responses will vary depending on the country selected. Learning Objective: May apply to objective 14-2., 14-3., 14-4., or 14-5. depending on the country selected. AACSB: Application of knowledge

XIII.

Assisted-Graded Questions

14-15. Why is it important for HR and compensation professionals to learn about compensation practices in other parts of the world? Discuss. Answer to this question can be found in the MyLab Management 14-16. Which factor do you think is most important when deciding whether to establish business operations in another country? Explain your rationale. Answer to this question can be found in the MyLab Management 14-13. MyLab Management Only – comprehensive writing assignment for this chapter.

XIV. Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Case Name: Independent Contractor or Part-time Employee? Instructor Notes: Uncertainty and the need for flexibility lead many employers to engage contingent workers as part of their workforce. Independent contractors are often hired for their specialized skills to complete specific projects or perform a job for a designated amount of time. Often a company will prefer to hire someone as an independent contractor in order to have more flexibility and also to contain benefit costs as the company does not provide benefits to an independent contractor. However, as an employer does not have certain obligations to an independent contractor, it is important that they are properly classified under state and federal employment laws. Questions and Suggested Student Responses: 14-14. Why would EcoSafe prefer to engage Laney as an independent contractor? EcoSafe would have fewer obligations to Laney as an independent contractor. They would not be obligated to pay Federal income tax withholding, overtime pay, insurance premiums for worker’s compensation, or provide protection under several employment laws. Further, Laney would not be eligible to participate in company sponsored benefit programs such as paid time off and health plan insurance. Finally, should EcoSafe at some point no longer need Laney’s services, it is easier to end the relationship. AACSB: Analytical thinking 14-15. Based on the information provided, do you think Laney should be engaged as an independent contractor? Because of the legal implications of the classification as an independent contractor, it is important to properly classify an employee. Under the IRS’s 20-factor test to determine if a person is an employee or an independent contractor, there are several considerations for Laney’s case. Most indicate that Laney cannot be classified as an independent contractor. For example, EcoSafe intends to have control over when and how she will work. She will be integrated into the firm with an office, equipment and the use of the administrative staff. They have implied an ongoing relationship including discussions about eventually transitioning into a full-time position. Finally, Laney intends to cease her work with other clients, making EcoSafe her only relationship. All of these factors suggest that Laney must be hired as an employee. AACSB: Application of knowledge

Epilogue Challenges Facing Compensation Professionals

Learning Objectives E-1. E-2. E-3. E-4. E-5.

I. II. III. IV. V. VI. VII. VIII. IX. X.

II.

Explain the issues associated with a possible increase to the federal minimum wage rate. Summarize the trends in performance appraisal and the relationship to compensation practices. Describe the compensation-productivity gap issues. Discuss the gender pay gap. Explain the issue of pay transparency. Outline Overview Possible Increase to the Federal Minimum Wage Rate Trends in Performance Appraisal The Compensation-Productivity Gap Gender Pay Gap Pay Transparency Key Terms Discussion Questions and Suggested Answers Assisted-Graded Questions Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline Overview A. Five key issues among many more have created persistent challenges for compensation and HR professionals: 1. Possible increase to the federal minimum wage rate 2. Performance appraisal trends 3. Compensation-productivity gap 4. Gender pay gap 5. Pay transparency Possible Increase to the Federal Minimum Wage Rate A. Raising the Minimum Wage 1. Many public campaigns have called for increasing minimum wage 2. Many states plus D.C. enacted minimum wage laws and pushes for increases have taken hold in some states 3. Some argue that increasing minimum wage could lead to lay-offs and have negative ripple effects throughout the U.S. economy 4. Another study suggest that raising the minimum wage will bring nearly 1 million workers above poverty levels 247 Copyright © 2020 Pearson Education, Inc.

5. Different minimum wage levels is challenging for compensation professionals with employees in different states 6. Many retailers have chosen to raise their minimum starting wage as they are finding it difficult to hire well-qualified workers 7. Creates challenges for companies with employees distributed across state lines, and also could compress pay structures 8. Raising minimum wage may lead to some companies needing to reduce benefits, resulting in no change to total compensation III. Trends in Performance Appraisal A. Overview 1. In recent years many have questioned the value of traditional annual performance appraisals 2. Some have transitioned to ongoing reviews that entail more frequent, developmental feedback, making pay and promotion decisions separately 3. Some companies are using technology to facilitate more frequent feedback 4. Despite these shifts, many companies still utilize traditional methods a. Rely on as a factor in pay raise decisions b. Concerns with managers’ skills in performance discussions IV. The Compensation-Productivity Gap A. Overview 1. The compensation-productivity gap refers to the difference between real hourly compensation and labor productivity 2. Labor productivity is the real output per hour worked, or how efficiently labor is used in producing goods and services 3. Increases in productivity growth indicate companies’ investments in capital equipment and information technology 4. Since the 1970’s, real hourly compensation has lagged behind labor productivity growth 5. An important determinant in the gap is labor share of income, which refers to the part of economic output that goes to workers as compensation in return for their labor 6. A widening compensation-productivity gap undermines intent of pay-forperformance V. Gender Pay Gap A. Overview 1. The gender pay gap refers to the proportion of women’s earnings relative to men’s earnings 2. A gender-based pay gap has endured for over 150 years 3. Although it has decreased in recent decades, it is still substantial a. In 2016 women earned about 81.9 cents for every $1 earned by men 4. Comparable growth debate a. An important question in this debate is, why are jobs that are typically held by women paid substantially less than comparable jobs that men tend to occupy?

b. Many comparable worth advocates argue that discrimination against women explains the pay differential, contextual factors that contribute: i. Increase in employment among women ii. Segregation of women from men in the work place based on jobs and industry c. Job evaluation that uses different systems to evaluate male-dominated jobs and female-dominated jobs can impact d. Asking job candidates about salary history has been implicated in perpetuating the gender pay gap e. Some companies prohibit salary negotiations to attempt to reduce the pay gap VI. Pay Transparency A. Overview 1. Pay transparency refers to the extent to which companies make available information about one or more elements of the compensation system including: a. All employees pay or the formula for all pay decisions b. Pay grades and ranges c. The process and criteria for setting base pay and pay increase amounts 2. Transparent pay policies can promote motivation and higher performance over the long run 3. Partial pay transparency could compromise motivation and performance as it could lead to questions and concerns about unfair treatment 4. A downside is individuals often believe their contributions are higher than they actually are 5. Pay transparency could help address the gender pay gap

End of Chapter VII.

Key Terms

Compensation-productivity gap: The difference between real hourly compensation and labor productivity Labor productivity: The real output per hour worked, or how efficiently labor is used in producing goods and services Labor share of income: The part of economic output that goes to workers as compensation in return for their labor Gender pay gap: The proportion of women’s earnings relative to men’s earnings Comparable worth: A proposed remedy to address the gender pay gap that involves providing comparable pay for jobs with comparable worth Pay transparency: The extent to which companies make available information about one or more elements of the compensation system

VIII. Discussion Questions and Suggested Answers E-1.

Discuss at least one advantage and one disadvantage of increasing the minimum wage. Consider this action’s impact on the company.

While increasing the minimum wage mostly benefits the worker, it could also help reduce employee turnover with companies. However, some economists believe that raising the minimum wage could result in increased prices on goods and services and also potential lay-offs due to the increased financial burden on companies. Companies may also need to reconsider their total compensation offerings, determining what benefits to offer given the increased payroll costs. Learning Objective: E-1. Explain the issues associated with a possible increase to the federal minimum wage rate. AACSB: Analytical thinking E-2.

What are some of the considerations associated with changing from the use of employee ratings to continuous discussions in appraising employee performance?

Many companies are transitioning to providing continuous feedback to employees instead of traditional annual performance appraisals. This practice helps address performance concerns in a timely manner and has benefits for employees in receiving ongoing feedback. It also reduces the time managers spend on reviews. However, this approach can create challenges for companies in their compensation practices. Many companies rely upon the qualitative and quantitative approaches of traditional performance appraisals as a basis for pay raises. Learning Objective: E-2. Summarize the trends in performance appraisal and the relationship to compensation practices. AACSB: Analytical thinking E-3.

From a total compensation perspective, what can companies do toward minimizing the negative impact of the compensation-productivity gap? (Note: Please think of something other than providing permanent pay increases.)

To address the negative impact of the compensation-productivity gap, compensation professionals should develop and implement pay-for-performance systems. Merit pay in particular can help companies increase compensation in line with the increased productivity of employees. Compensation professionals should make sure that merit pay increases are also substantial enough to exceed rises in the cost of living to offset the growing gap. Learning Objective: E-3. Describe the compensation-productivity gap issues. AACSB: Analytical thinking

E-4.

Do you agree or disagree with comparable worth advocates’ perspectives on the gender wage gap? Explain.

Student responses will vary depending on their views. Those that agree may state that there are several reasons for the pay differential between men and women. It could be based upon discrimination against women, as well as job segregation based on gender. Many jobs traditionally held by women have been devalued. Those who advocate for comparable worth believe that job evaluation and compensation surveys have impacted the pay differential. Those who disagree with comparable worth advocates views may not see the differences in pay between men and women. Or, they may believe that focusing on equal pay for equal work should address the gender pay gap. Learning Objective: E-4. Discuss the gender pay gap. AACSB: Analytical thinking E-5.

Should companies make their pay systems transparent? Explain.

Pay transparency refers to the extent to which companies make available information about one or more elements of the compensation system. Sharing information about the process or formulas used to determine pay and pay increases can promote motivation and higher performance over the long run. More pay transparency could also help address the gender pay gap, as the gender pay differential will be more closely scrutinized. However, as many individuals believe that their performance or contributions are higher than they are, pay transparency may lead to unrealistic expectations that they be paid more. Learning Objective: E-5. Explain the issue of pay transparency. AACSB: Analytical thinking E-6.

This chapter discusses five important issues that will shape compensation professionals’ work for years to come. Which of these issues stands to create the greatest uncertainty for compensation professionals? Explain your answer.

The possible increase of the minimum wage could create uncertainty for compensation professionals because they do not have control over government regulations and therefore they are unable to determine if a raise to the federal minimum wage will occur. While the concerns with performance appraisal trends, the compensation-productivity gap, the gender pay gap, and pay transparency are important issues for compensation professionals, these are all concerns that the compensation professional can have more control over as their impact can be influenced by decision-making within the company. Learning Objective: All of the learning objectives for this chapter apply. AACSB: Analytical thinking

IX.

Assisted-Graded Questions

E-7.

Concisely summarize the five challenges discussed in this chapter.

Answer to this question can be found in the MyLab Management E-8.

As minimum wage continues to rise, how might companies adjust staffing to minimize increased costs?

Answer to this question can be found in the MyLab Management E-9.

MyLab Management Only – comprehensive writing assignment for this chapter.

Additional Cases from the MyLab Management Website; Instructor Notes, and Questions and Suggested Student Responses

Case: Expatriate Problems at Global Appliance Instructor Notes: There are many human resource management practices that affect the success of international assignments including the selection and training of expatriates. The design of the compensation package also has a significant effect on the success of international assignments. There must be incentives for employees to take international assignments and also financial risk to the employee should be minimized. In ensuring the success of expatriates, careful attention should be paid to the pay and benefits given to those asked to work in an international assignment. In this case, the Human Resources Director most likely needs to speak with more employees and current expatriates to understand their concerns, but initially examining their compensation program is a good first step.

Questions and Suggested Student Responses: E-10. How can compensation practices affect the willingness of executives at Global Appliance to take international assignments? Easing financial concerns helps make an international assignment more attractive. Often, an employee may respond positively to incentives, but at a minimum does not want an international assignment to affect him or her negatively from a financial aspect. Employers must also consider the effects on the employee’s family while on an international assignment. As Global’s expatriate compensation program has changed over the years, it is reasonable to suspect that those changes may have impacted satisfaction with international assignments. AACSB: Analytical thinking 252 Copyright © 2020 Pearson Education, Inc.

E-11. What are some aspects of Global’s compensation practices that Jackson should examine? Jackson should first examine the base pay of the expatriates and ensure that their process for setting base pay at least allows the expatriates to maintain their same purchasing power. He should also examine incentives in place. If they do not currently offer a foreign service premium, they may want to consider doing so. He should also examine benefits such as rest and relaxation leave allowances and benefits to support the education of children. Further, Jackson should examine some of the unique incentives offered to some individuals over the years to ensure that such incentives are determined for appropriate business reasons and that they are fairly distributed. Finally, since some employees are indicating that it “isn’t worth it” to take on the assignments, Jackson should look at the repatriation practices of the company. AACSB: Analytical thinking

Strategic Compensation: A Human Resource Management Approach 10th Ed Joseph | SOLUTIONS MANUAL

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