HRMN 395-Report on Organization

Please see the attached documents.

Assignment 1: Report on Organization (MS PowerPoint Presentation)

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This assignment allows you to demonstrate mastery of the course outcomes:

1. Determine core requisite competencies for the organization and differentiate a total rewards program to attract, retain, and motivate employees possessing the organization’s required competencies

In this assignment, you will design and share a MS PowerPoint presentation that
describes the organization for which you work, its current and future challenges, its capabilities, and the requisite competencies needed for its success. You will look for and report on examples of the existing total rewards programs to include monetary, non-monetary, and the work environment (including values and culture). The MS PowerPoint presentation will include a report on existing metrics (organizational or HR) if any are present. If citations or Web site materials are used, in-text citations and sources presented on a References page using American Psychological Association (APA) format are expected. This information can be used in the final paper (the final assessment which is a plan to change the organization’s total rewards programs). It is expected that at least three references from the course materials will be used.

At the least, this MS PowerPoint Presentation will include:

1. Academic Title Slide

2. Introduction and Purpose for the Paper

3. Description of the Organization

4. Capabilities of the Organization and Requisite Competencies of the Employees

5. Current and Future Challenges

6. Academic Definition of Total Rewards Programs

7. Description of Existing Total Rewards Program (Monetary, Non-Monetary and Work Environment)

8. Existing Metrics that Evaluate the Success of the Total Rewards Program OR

Suggested Metrics
from the attached list. NOTE: Actual metrics are not required. You may suggest metrics

9. Conclusions

10. References Page (With a minimum of three References from course materials)

=====================================================================================

· FYI, You can use
WesBanco as my employer/organization, Or you can use any org that you feel comfortable with.

HR performance metrics

1 Revenue per employee Total revenue / total number of employees

More information

2 Revenue per FTE Total revenue / total number of FTE More information

3 Profit per employee Total profit / total number of employees More information

4 Profit per FTE Total profit / total number of FTE More information

5 Overtime per employee Hours of overtime / total number of hours (contractual hours + overtime) per
period

More information

6 Labor cost per employee Total labor cost / total number of employees More information

7 Labor cost per FTE Total labor cost / FTE More information

8 Labor cost percentage of revenue Total labor cost / organizational revenue More information

9 Labor cost percentage of total expenses Total labor cost / total organizational expenses More information

10 Absence rate Number of absence days / total number of working days More information

11 Absence rate per manager/department Number of absence days per unit / total number of working days per unit More information

12 Overtime expense per period Overtime pay / total pay per period More information

13 Training expenses per employee Training expenses / total expenses More information

14 Training efficiency Training expenses per employee / training effectiveness More information

15 Voluntary turnover rate Employees who left the organization voluntarily / headcount More information

16 Involuntary turnover rate Employees who left the organization involuntarily / headcount More information

17 Turnover rate of talent Employees who left the organizations and are qualify as high potentials /
headcount

More information

18 Turnover rate Employees who left the organization / headcount More information

19 Turnover rate per manager/department Employees who left the organization per unit / headcount per unit More information

20 Cost of absenteeism Total cost of absenteeism =
Total employee hours lost to absenteeism * hourly pay (including benefits) +
Supervisor hours lost in dealing with absenteeism * hourly pay supervisor
(including benefits) + other costs (including temporary staff, training, loss of
productivity, quality loss, overtime, etc.)

Houtzagers
formula

https://www.analyticsinhr.com/blog/employee-performance-metrics/

https://www.analyticsinhr.com/blog/11-key-hr-metrics/

https://www.analyticsinhr.com/blog/14-hr-metrics-examples/

https://www.rtwmatters.org/tcpdf/pdf/calculating-absenteeism-costs

21 Cost of turnover Total cost of turnover, see Excel (by SHRM) SHRM Excel sheet

22 HR to employee ratio FTE working in HR / total number of FTE More information

23 HR cost per FTE Total HR cost / total number of FTE More information

24 Time until promotion Average time (in months or years) until promotion More information

25 Promotion rate Number of employees promoted / headcount More information

General workforce metrics

26 Average age Average age More information

27 Average length of service Average length of service More information

28 Retirement rate Number of employees retired / total number of employees More information

29 Average distance from home Average distance in miles (or km) from home More information

30 Engagement rate Number of people who report being engaged / total number of people More information

31 Satisfaction rate Number of people who report being satisfied in their job / total number of
people

More information

32 Salary hike since last year (New salary – salary previous year) / salary previous year More information

Recruitment metrics

33 Time to fill Number of days between publishing a job opening and hiring the candidate More information

34 Time to hire Number of days between the moment a candidate is approached and the
moment the candidate accepts the job

More information

35 Cost per hire Total cost of hiring/the number of new hires More information

36 Source of hire Sourcing channel used to attract the hire More information

37 First-year resignation rate Employees who left the organization within 1 year / headcount
This number should be 0, just like 38, 39 and 40. A percentage higher than zero
will be very costly and indicates a bad fit with new recruits and the
organization. Organizations should use better selection tools and procedures to
prevent this.

More information

38 First-year turnover rate Employees who left the organization within 1 year / total number of recruits More information

39 First-month turnover rate Employees who left the organization within 1 month / headcount More information

https://www.analyticsinhr.com/blog/14-hr-metrics-examples/

https://www.analyticsinhr.com/blog/hr-reporting-hr-report-hr-dashboard/

https://www.analyticsinhr.com/blog/recruiting-metrics/

40 First-month turnover rate Employees who left the organization within 1 month / total number of recruits More information

41 Hiring manager satisfaction Number of hires who perform well / total number of hires More information

42 Candidate job satisfaction Number of hires who rate themselves as satisfied in their new job / total
number of hires

More information

43 Applicants per opening Total number of applicants / number of job openings More information

44 Selection ratio Number of hired candidates / total number of candidates More information

45 Cost per hire (Total internal cost + total external cost) / total number of hires More information

46 Offer acceptance rate Number of applicants presented with a job offer / number of applicants who
accepted a job offer

More information

47 Vacancy rate Total number of open positions / total number of positions in organization More information

48 Application completion rate Total number of people who completed the application / total number of
people who started with the application

More information

49 Yield ratio Number of applicants who successfully completed the stage / total number of
applicants who entered the stage. For example:

• 15:1 (750 applicants apply, 50 CVs are screened)
• 5:1 (50 screened CVs lead to 10 candidates submitted to the hiring

manager)
• 2:1 (10 candidate submissions lead to 5 hiring manager acceptances)
• 5:2 (5 first interviews lead to 2 final interviews)
• 2:1 (2 final interviews lead to 1 offer)
• 1:1 (1 offer to 1 hire)

More information

50 Sourcing channel effectiveness Total number of impressions of the channel / number of applications of the
channel

More information

51 Sourcing channel cost Advertisement spending per channel / number of successful applicants per
platform

More information

Qualitative performance metrics

Qualitative performance metrics are best quantified on a case by case basis. For more information, click here.

https://www.analyticsinhr.com/blog/recruiting-metrics/

https://www.analyticsinhr.com/blog/employee-performance-metrics/

Assignment Two
HRMN 395 Total Rewards

Metrics for Evaluating the Effectiveness

of Total Rewards in an Organization

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-NC

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Deliverables for
Assignment Two

Design and share a
PowerPoint presentation that:

Describes and justifies three
metrics that evaluate the
effectiveness of the total
rewards for the organization
used in the first assignment

Provides a “script” in the
notes section articulating the
bullet points as if you are
making a presentation to the
class

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http://miguelangelmartin.blogspot.com/2010/02/buenas-practicas-basicas-en-las-redes.html

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Metrics are a Core Element of the Total
Rewards Philosophy

Source for definition: UMUC Course Module 1 Commentary

Why measure?

Organizations measure what
matters for the success of their
organization. What gets measured,
gets managed.

With the right measurements in
place, an organization can gauge
the effectiveness of their Total
Rewards programs and make
changes, if necessary.

Metrics answer questions – so the
right questions need to be asked.

Source: UMUC Course Module 5 Commentary

This Photo by Unknown Author is licensed under CC BY-NC-ND

http://completeinnovator.com/tag/metrics/

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The Language of Business is Numbers – Numbers that
Communicate Success or Failure of Initiatives

This Photo by Unknown Author is licensed under CC BY-SA

Sales are up by 10% Market share has increased by 20%

Profits have eroded by 3%
Stock price is up by 2 points

Our brand has 50%
name recognition

Customer satisfaction has
Increased by 12 percentage
points

http://commons.wikimedia.org/wiki/file:comunicaci%C3%83%C2%B3n_interna

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HR Professionals Must Communicate in the
Language of the Business (Numbers) in Order to be

Credible, Heard, and Understood

Intent to leave due to the
rewards offered is down by
10%

Market comparison of compensation
shows our organization in the
upper 1/4th

Skills training of employees has
resulted in 100% availability of
requisite competencies for
expansion of production

Exit interviews report that 80%
of the employees leaving is due to
rewards offered and 20% is due to
negative culture of the organization

What is a Metric?
• Metrics, also known as measures or key

performance indicators, are tools that assess and
report the impact of a particular project or
activity.

• Metrics may be quantitative or numeric in nature
such as increased in retention because of rewards
by 20 percent. Metrics may also be qualitative
such as improved staff satisfaction levels with
rewards from 55% to 75%.

• Both quantitative and qualitative metrics are
typically reported in numbers such as percentages
or indexes.

• Metrics answer questions – such as – is the
organization meeting its goal to offer rewards that
attract, retain, and engage employees?

Source for definition: UMUC Course Module 5 Commentary

This Photo by
Unknown Author
is licensed under
CC BY-SA

Introducción a la Estadística con Excel

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Metrics Need to Matter to the Organization
• What Human Resources assesses and

reports to the organization should be
important to the organization or else it is
ignored or marginalizes the work of HR

• CEOs report that Human Resource
professionals do not share metrics that
matter. Instead they report useless ones.

• How do we determine if our metrics are
important? Ask, do they link or align with:
• Organizational capabilities
• Requisite employee competencies
• Challenges of the organization
• Strategic plan for the organization

• Recall that these 4 items were presented
in Presentation One

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Tourism Metrics That Matter / DMO Benchmarking Project from Troy Thompson

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Metrics are key performance
indications of the successful

achievement of goals

Metrics are important key performance
indications for organizational goals; they track
success related to financials, customers, and
business processes and can be used for Total
Rewards

Metrics need to measure the outcome in a
direct, not indirect manner

The direct linkage between rewards and
customer satisfaction, employee satisfaction,
revenue, profits, and productivity are hard to
prove

What are the Right Questions Metrics
Should Ask About Total Rewards?

• Are we offering rewards that attract, retain,
and engage employees?

• Are we offering the right rewards?
• Are our rewards competitive?
• Are we communicating our rewards to the

employees effectively?
• Are our rewards such as training and

promotions preparing the organization for
tomorrow?

• Are our rewards retaining our key essential
employees?

• Do our rewards allow us to distinguish
between the top and lower performers?

• Is the cost of the rewards offered worth the
price?

• Are our rewards helping the organization
achieve it’s major objectives or
organizational capabilities?

Evaluate the Metric – Does it Matter?
Does It Answer the Right Question?

The right metric will directly assess Total
Rewards (monetary, non-monetary, or the
work environment such as training, promoting,
or the work itself)

Total Reward Metric Example 1:

Percentage of employees who intend to leave
the organization because of rewards

Total Reward Metric Example 2:

Percentage of employees in key positions rating
rewards as satisfactory or above

Total Reward Metric Example 3:

Comparison of compensation for key positions
to the competition for same potential
applicants

The right metric will be linked to the
organizational capabilities, requisite
competencies, challenges, or strategic plan

If a core capability is to be mission ready, retention
of employees is critical

Employees must be retained and if the rewards are
not attractive, they may leave

With unemployment low and wages not increasing
significantly over the past 5 years, employees may
leave if they can receive higher compensation
elsewhere

Metrics Answer the General Question: Are our Rewards Effective for
Attracting, Retaining, and Engaging Employees with the Requisite

Competencies our Organization Requires?

This Photo by Unknown Author is licensed under CC BYThis graphic found at https://www.helioshr.com/2015/07/compensation-vs-total-rewards-whats-the-difference-really/

Fake metrics and how to spot them by Jenny Neophytou

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Before finalizing your metrics, ask yourself if
each metric …

• Specifically measures total rewards and not another organizational outcome such as
customer satisfaction, revenue, or profit that is only indirectly related? Does it prove
that the rewards are worth the cost?

• Reports on a specific outcome related to total rewards rather than a broader, albeit
important, HR metric such as turnover, retention, time to hire, cost of benefits, or
employee satisfaction?

• Matters for achieving any of the following?
• Organizational capabilities
• Requisite employee competencies
• Challenges of the organization
• Strategic plan for the organization

• Can be calculated (does data exist that can be used for this metric)?

• Is void of incorrect terms such as using the term matrix rather than metric, metric
system rather than metrics, and incorrect grammar such as metrics is or metric are.

Have Questions about Assignment Two or the
Term/Tool of Metrics?

Please place the questions in the Questions Forum

so all will benefit.

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Module 1: The Total Rewards Model

Topics

Topic 1: What is the Total Rewards Model to Compensation Management?

Topic 2: The Change to Total Rewards

Topic 3: The Critical Link of Strategic Objectives and Rewards

Topic 4: Why is the Total Rewards Model Successful?

Topic 5: Conclusions

Topic 1: What is the Total Rewards Model to Compensation Management?

Think about what might attract you to work for a particular organization. Why would you choose one organization over another, if given the opportunity? Which organization offers you the elements surrounding your work experience that you value most? Your answer probably is not salary alone, but many other elements in addition.

The elements you consider of value when you compare different organizations’ offerings are unique to you. They are holistic and comprehensive. It is not merely the pay and a few basic benefits that attract potential employees, but a wide array of rewards known as
total rewards.

Take a look at the following list of items that most influence employees’ commitment and motivation. While the study, conducted by Mercer (2007), surfaced some similarities, there were certainly also many differences. For example, the global study found that while workers in Asia valued base pay above anything else, workers in the United States valued other factors, including work-life balance, being treated with respect, and benefits, more highly than money alone. There were also differences among the generations. While employees of at least 60 years of age (known as the Traditionalists) value security and company loyalty most highly, employees between 18 and 29 (the Millennials) tend to value their contributions and learning opportunities, and thus are more willing to change jobs repeatedly, while those between the ages of 30 and 42 (Generation Xers) tend to value the work-life balance most highly (Mercer, 2007, p. 3).

Table 1.1 What Employees Value

· Being treated with respect

· The type of work that you do

· Work-life balance

· Benefits

· Working in an environment in which you can provide good service to others

· Base pay

· The quality of the people you work with

· Long-term career potential

· Having flexible working arrangements

· Learning or training opportunities

· Promotion opportunities

· Variable bonus/incentive bonus

Source: Mercer’s What’s Working Global Employee Survey (2007)

As you reflect on what motivates you to choose one organization over another as your place of employment, which of the items from this list would you rank as the most important? Be prepared to answer this question if your professor asks it.

This discussion of why individuals select one organization over another is at the core of our discussion of the total rewards approach to compensation management. In order for organizations to attract, retain, and motivate employees with the requisite knowledge, skills, and abilities (KSAs) needed for organizational success, a satisfying mix of the monetary, non-monetary, and the overall work experience must be offered. Of course, what we have just shown, as you thought about what satisfies you, is that it is imperative to know which segment of the population desires what mix of rewards. Without this data, there cannot be targeted marketing.

Definitions of the Total Rewards Model

For the purposes of this course, we will use the following model and definition of the total rewards model to compensation management. Imagine the total rewards philosophy for the organization in the middle of a circle, with the following shown as elements around it.

Figure 1.1
Total Rewards Model

The graphic depicts the relationship among the organization’s objectives; the requisite knowledge, skills, and abilities; the pool of potential or current employees; the individual elements that can be offered, including monetary, non-monetary and other work experience elements; and the feedback system of total reward metrics in order to determine the total rewards philosophy for the organization. The total rewards approach to compensation management is strategically planning a targeted reward package to successfully attract, retain, and motivate segmented populations of employees who possess the requisite knowledge, skills, and abilities (KSAs) needed to achieve the organization’s business objectives.

If we look at some of the individual elements of the monetary rewards, the non-monetary rewards, and the work experience of value to employees, we see that there are a large number of them. Take a look at table 1.2:

Table 1.2 Rewards and Experience Employees Value

Monetary Rewards

Non-monetary Rewards

Work Experience

Base Pay

Income Protection Benefits

Values of the Organization

Variable Pay Hourly/Salaried/Executive

Medical Insurance

Community (Individual & Organizational)

Deferred Compensation

Vision, dental

Recognition

Merit and Cost of Living Increases

Disability

Training and Development

Performance Feedback

Life Insurance

Promotions

Retirement

Paid Time Off

Sense of Accomplishment

Day Care

Employee Assistance Program

Health-related Programs

Tuition Assistance

This chart depicts the many rewards that are included in the total rewards approach to compensation management. Later modules will explain each of these individually and how they align holistically and comprehensively to attract, retain, and motivate employees.

Because total rewards is a fairly new and still emerging perspective, a review of what exactly is meant by total rewards is helpful to the overall understanding of the larger process of strategically planning our total rewards. We also acknowledge that the total rewards concept is also sometimes known by other names, such as the employer/employee value proposition, the psychological contract, the employer brand, total remuneration, and total value. However, the term
total rewards seems to be the name most commonly used, according to a survey taken by Mercer (Salopek, 2008).

We begin with a definition by Stacey Kaplan (2007), who states that “total rewards encompass everything that an employee values in their employment relationship: compensation, benefits, development, and the work environment” (p. 4). Kaplan finds that while effective total reward systems offer both current and potential employees the holistic intrinsic and extrinsic rewards they want, those rewards must also be aligned with the objectives of the organization in order to justify the offerings. This means that human resources staffs that are designing the total rewards package must be familiar with the strategies of the organization and the requisite KSAs to fulfill those objectives. Furthermore, they must identify and understand the unique wants, needs, and desires of the people they are trying to recruit. They need to know in detail what rewards would attract, retain, and motivate those who possess the needed KSAs.

Other contemporary authors continue this review of the general view of total rewards. For example, Richard Kantor and Tina Kao, in an article titled
Total Rewards: Clarity from the Confusion and Chaos (2004, p. 9) share the broad definition of total rewards as rewards that “encompass everything that is rewarding about working for a particular employer or everything employees get as a result of their employment.” In an article titled
Retention Buzz, Jennifer J. Salopek recognizes that employees are viewing employment from a “what’s in it for me?” perspective. It is no longer merely, “show me the money!” as was the case in the popular
Jerry Maguire movie, but show me everything and anything that is going to satisfy ME!

Manas and Graham (2003) also touch on the plethora of offerings approach when they state that total rewards are analogous to offering
31 flavors in order to satisfy all tastes! They explain that “the more broadly rewards are defined, the more likely you are to touch upon what motivates the broad constituencies represented by your employees” (p. 1). In this course, however, you will see how we take the view that we cannot offer the “31 flavors,” but will rather determine what flavors are desired by the individuals with the requisite KSAs, and will offer those flavors. Manas and Graham (2003) go on to define total rewards as beginning with total remuneration, which includes all the elements of rewards that can be valued in dollar terms; non-cash rewards that are part of the employment compact that they define as “an agreement or covenant … that reflects the unwritten contract that exists between an employer and an employee for the exchange of value” (p. 3). The non-cash rewards that make up the compact include affiliation, quality of work and life, training, and development.

Ann Black (2007) touches on the value relationship of the rewards offered when she shares that “the concept of total rewards goes beyond the traditional view of benefits to include everything the employee perceives to be of value that results from the employment relationship. These total rewards packages include not only compensation and benefits but also work/life programs, employee recognition programs, and developmental and career opportunities” (p. 33).

Mercer sums up the current thinking about total rewards and its significance for the future well. The quote is from a white paper shared on Mercer’s web site (October, 2007, www.mercer.com). Mercer states that “the companies that succeed in the future will be the ones that are able to attract, engage, and retain the people they need in a way that is sustainable from a cost perspective.” They assert that organizations must develop “a total rewards strategy that acknowledges a broader interpretation of rewards with differing appeal to employees,” including compensation (base pay, short- and long-term incentives, and recognition awards); benefits (health and other group benefits, retirement plans, work-life programs, and perquisites); and careers (performance management, career pathing, training and development, talent review, and succession planning).

Before the focus of this module changes to how we evolved to the holistic and comprehensive offering of total rewards, it is enlightening to look at what as early as the 1970s, Ed Lawler, III, found to “suit the needs of a model for the importance of pay” (1971. p. 25). Lawler stated that it was not pay that satisfied the needs, but rather what the pay manifested; for example, variable pay might allow an employee to be recognized before others (leading to positive self esteem) or team incentives to allow a person more identification with a group. The list of needs published by Abraham Maslow (1954) as a hierarchy of needs was what Lawler used as his context and is still a model used today by many organizations to help them identify rewards that satisfy all the needs of the employees they seek.

Organizations are able to link their rewards to each level of Maslow’s hierarchy of needs described below. In an article written for WorldatWork, Kanter and Kao (2004, p. 12) explain how each need can be satisfied by a reward offering. Starting at the top of the hierarchy, for example, advancement/growth/ affirmation links to self-actualization, interesting and challenging work to aesthetic needs, learning and development to cognitive needs, recognition to esteem needs, and affiliation and coworkers to belonging and love. Financial security and health and welfare benefits are related to safety and security needs. At the bottom of Maslow’s hierarchy, hourly wage or base salary relates to psychological needs.

Figure 1.2
Maslow’s Hierarchy of Needs

Topic 2: The Change to Total Rewards

According to Henderson, “in 1936, a steelworker received $4.32 per day” for a hard day of work (2008, p. 30). This base rate of pay was with no time-and-a-half for overtime, no hospitalization insurance, no paid leave time, and no pension. The philosophy at the time was to offer the least amount of money for the skills needed and if the employees did not produce, there were plenty more where they came from.

Today, organizations carefully craft their rewards philosophy to be competitive, to stand out, and to hire the employees that possess the needed knowledge, skills, and abilities to make their organization competitive and to achieve its objectives. It is commonly recognized that “the outdated reward system that recognizes basic pay and common benefits is not enough in today’s approach for attracting, retaining, and motivating the requisite talent needed for organizations to succeed” (Kaplan, 2007). We know we are in a new era of compensation management, but what has caused this dramatic change in rewards philosophy? Like so many changes in business in general, and the human resources practice specifically, four trends are leading factors for the move.

Factors Influencing the Evolution to Total Rewards

Now that we have taken a brief look back at how rewards were once regarded, we will look at the trends that moved the United States toward a total rewards model. While we will not discuss all of the factors that influenced the change, we are including some of the major ones that moved employers to move from mere pay to attract, retain, and motivate employees. These factors influencing the evolution to total rewards include demographic shifts, globalization, technology, and competitive factors. Of course, there are other factors we are not mentioning here, including increased governmental regulation, policies, and programs, as well as the increase of union influence in employment practices.

1.
Demographic shifts include “declining workforce growth, increasing age of the workforce, changing gender balance, increasing ethic diversity, and deteriorating family economic health” (Ulrich & Brockbank, 2005, p. 36). These changes result in a diverse population, and where there is diversity there are different needs, desires, and wants. What an organization offers will attract some segments of the diverse population, but not others. For example, older workers will likely prefer health care insurance and retirement benefits, whereas younger workers will likely prefer alternative work arrangements, training, and upward mobility. The need for organizations to think strategically about population segments and how to attract the segments with the needed KSAs is clear.

2.
Globalization is another important factor driving the need for the shift to a total rewards model. Not only is competition global today, but the labor market is as well. When human resources professionals design their reward offerings, it is no longer enough to offer rewards and practices traditional to employees in the United States; they must consider the cultural differences that will drive what is attractive and competitive to employees in other countries as well.

3.
Technology is “the application of knowledge to the transformation of things into other things (and it) drives almost every aspect of the changing business environment” (Ulrich & Brockbank, 2005, p. 22). Technology has made information and production move faster, improving efficiency, increasing connectivity, and making customization possible. For our discussion of total rewards, technology allows employees to be much more informed not only about their own organization’s offerings, but also the offerings of global competitors. Technology makes it easy for someone to apply for positions. Technology supports an organization’s communication plan about its rewards to both current and potential employees. Technology has made it possible for organizations to give what many want, such as alternative work arrangements. Technology is not only one of leading factors driving the need for a total rewards model to compensation management, but is also a key factor that allows the total rewards model to be successful since the labor market is now global.

4.
Competitive forces are present today and economic pressures see no likelihood of diminishing, so costs are always examined closely. As competition increases in the United States, companies realize that it is easy to move production into other countries. Whether it is products they are producing or services they are providing, there are workers in other countries ready and able to take on the activities. One impact of the increased competitive forces is that organizations must be prudent in their total rewards budget; there is not room for offering rewards with no value in recruiting, hiring, or motivating employees. There is no reason to waste money on offerings that do not help the organization attract, retain, and motivate the talent needed to achieve the organization’s objectives.

Topic 3: The Critical Link of Strategic Objectives and Rewards

Loree Griffith, a principal at Mercer, is quoted in Salopek (2008) saying alignment (of rewards to business objectives) is “making sure what you are doing on the people side (of your business) is important to satisfying your business goals, motivating and driving your employee population to do certain things.” We know that competition for employees is increasing because of the shifts in demographics and competition is increasing due to global economic concerns, therefore the money spent on rewards must lead toward the success of the organization or it is monies ill spent.” Mercer (2006, p. 1) shares that “it’s a matter of focus. With finite resources to spend on compensation, organizations need to invest these resources in a way that makes sense for the business and drives future success.”

Two organizations that use the total rewards approach to compensation management successfully are depicted in the
Company Spotlights below. We feature Exxon Mobil and Google, both of which are on the 2007
Fortune 100 Best Places to Work, with Google being ranked first. Both companies demonstrate how they have made the critical link of their organization’s business objectives and the rewards they offer in order to attract, retain, and motivate the employees they need.

Company Spotlight: Google

In her article,
Business Strategy, People Strategy and Total Rewards – Connecting the Dots, Stacey Kaplan (2007) shares how Google takes a total rewards approach and achieved Fortune magazine’s top ranking on their list of the best companies to work for in 2007. She describes the offerings to Google’s employees as an “incredible mix of quirky and traditional employee perquisites … to drive productivity by attracting high achievers who are willing to spend most of their time at work.” The partial list includes company-paid gourmet meals, a 24-hour gym, an in-house doctor, and concierge services such as dry cleaning and on-site massages. Kaplan goes on to state that Google’s strategy makes the employees feel valued, which helps with attracting and retaining the talent needed to achieve Google’s business strategy.

Company Spotlight: Exxon Mobil

In his book,
Employee Benefits: A Primer for Human Resource Professionals, Joseph Martocchio (2008) shares how Exxon Mobil aligns its business strategy, its human resource strategy, and its strategic benefits plans. See if you can find the link in the following descriptions:

Business Strategy: The Exxon Mobil Corporation is committed to being the world’s premier petroleum and petrochemical company. To that end, we must continuously achieve superior financial and operating results while adhering to the highest standards of business conduct. These unwavering expectations provide the foundation for our commitments to those with whom we interact.

Human Resource Strategy: Exxon Mobil is a dynamic, exciting place to work. We hire exceptional people, and every one of them is empowered to think independently, to take initiative, and be innovative. Our employees thrive on change, new technology, and synergistic partnerships both inside and outside our company. And while the work is exciting and ever-changing, we know there’s a time when work ends and life kicks in.

Strategic Benefits Plans: In return for your intelligence, ingenuity, and passion, here are the rewards that await you at Exxon Mobil: outstanding compensation, benefits, and employee programs, as well as a satisfying balance between career pursuits and personal interests outside of work. We also offer resources and support for ongoing development, growth, and success.

The strategic imperative of the total rewards model is the focus on the business objectives and linking rewards that target the population possessing the requisite KSAs. How to design total rewards through this strategic process is the subject of a later module.

Topic 4: Why is the Total Rewards Model Successful?

Most of the employers on
Fortune magazine’s annual list of the best companies to work for in the United States have designed total rewards strategies rich in non-monetary rewards, such as flexible working arrangements, developmental opportunities, and fun office perks. By being included in the well-publicized list and by offering the total rewards they do, the organizations are afforded a heightened visibility as a preferred employer, which assists them in recruiting, retaining, and motivating the talented people they want. Kaplan (2007) states that research shows that higher- rated employers tend to receive more employment applications, thus making recruitment easier. Kaplan also states that these higher ratings often translate into improved retention and enhanced profitability, because engaging employees typically provide the best customer service.

The case for organizations to design and implement a total rewards model is evident. The total rewards model provides the strategies needed to address diversity shifts, globalization, increased competition, and technological advances. Total rewards provides for the needed change from the limited view of rewards to the expanded view.

Total rewards help to manage costs and to ensure that money spent is used effectively on the right offerings. Previously organizations would often respond to retention issues with cash rather than including some of the non-monetary rewards that are less costly but valued by employees (such as flexible schedules). Total rewards supports identifying and moving away from ineffective programs to those that help drive the business forward.

The total rewards model assists organizations in addressing the diversity of the population by first understanding the needs and then offering elements in the work experience that fit the needs. For example, there is stronger emphasis on job enrichment, flexible work schedules, and the overall work environment. A total rewards approach better addresses many of these varying employee needs.

The most compelling reason the model works, however, is because the monetary and non-monetary offerings, which were once perhaps randomly decided, are strategically determined to help the organization achieve its business goals in the total rewards model. Also beneficial to success is the marketing approach that identifies what customers want. It is several elements together that make the model the success that it is. As Kaplan (2007, p. 1) states in her article titled “Business Strategy, People Strategy, and Total Rewards: Connecting the Dots,” many executives are quick to introduce a new type of compensation or benefit program because they’ve heard about it in the news or through a colleague. However, this program may just be the latest
plan du jour, not fitting within their organization’s strategic direction. It is important to identify and implement programs that bring an organization further along its strategic plan.

There is no surprise in that the top employers on
Fortune’s Top 100 Best Places to Work list use a total rewards model. They use it because it works to attract, retain, and motivate the talent needed to allow them to hold a competitive advantage. The two spotlight companies we looked at (Exxon Mobil and Google) demonstrate this.

Topic 5: Conclusions

For purposes of this course, the definition of the total rewards model to compensation management is: strategically planning a targeted reward package to successfully attract, retain, and motivate segmented populations of employees who possess the right knowledge, skills, and abilities (KSAs) needed for accomplishing the organization’s business objectives. The total reward package is one that is not only monetary rewards, but also includes non-monetary rewards and other important elements of the work experience. Together they make up the holistic experience of working in a given organization. The trends of increased diversity, globalization, technology, and competition requiring a more sophisticated planning process for employment will continue to drive the need for human resource professionals to apply the marketing approach to their offerings. The application of the total rewards model to compensation management will continue to benefit those organizations that use it effectively.

References

Black, A. (2007). Total rewards,
Benefits & Compensation Digest, November, pp. 32-36.

Henderson, R.I. (2008).
Compensation management in a knowledge-based world. New Jersey: Pearson Prentice Hall.

Kantor, R., and Kao, T. (2004). Total rewards: Clarity from the confusion and chaos,
WorldatWork Journal. Third quarter, http://www.worldatwork.org

Kaplan, S. (2007). “Business strategy, people strategy and total rewards: Connecting the dots,”
Benefits & Compensation Digest. Brookfield: Vol. 44, Issue 9, p1, 13.

Lawler, E. E. III (1971).
Pay and Organizational Effectiveness: A Psychological View. U.S.: McGraw-Hill.

Manas, Todd M., and Graham, M.D. (2003).
Creating a total rewards strategy: A toolkit for designing business-based plans. New York: AMACOM.

Martocchio, J. J. (2008).
Employee Benefits: A Primer for Human Resource Professionals. McGraw-Hill Irwin.

Maslow, A. H. (1954).
Motivation and personality. New York: Harper.

Mercer. (2007). “Compensation trends of the future: Designing a sustainable global total rewards strategy.” White paper. Retrieved March 1, 2008, from http://www.mercer.com

Salopek, J. (2008). Retention buzz,
Training and Development. Alexandria: January, Vol 62, Issue 1, pp. 23-25.

The WorldatWork (2007).
The WorldatWork handbook of compensation, benefits & total rewards: A comprehensive guide for HR professionals. New Jersey: John Wiley and Sons.

Ulrich, D., and Brockbank, W. (2005).
The HR value proposition. Boston, MA: Harvard Business School Press.

image1

image2

The Power of Total Rewards

Sixty-five years ago, when a group of visionary professionals formed what
was to become WorldatWork, the world of work and the world of pay were
much simpler than they are today. Compensation was the primary “reward”
and benefits, still in their infancy, were a separate and seemingly low-cost
supplement for employees. The concept of combining these things – let alone
using them with still other “rewards” to influence employee behavior on the
job – was decades away.

Today we are only partially through an evolution from a largely industri-
alized business environment to a far more virtual, knowledge- and service-
based environment, at least in North America and Europe. Among some
major shifts:

• Business increasingly operates as a global village, with work moving to
different parts of the world to take advantage of lower-cost labor and
address skill gaps.

• Technology continues to revolutionize work, not only in terms of auto-
mating more jobs, but also in enabling the virtual workplace as profes-
sionals increasingly conduct business in home offices or remote locations.

• Women are equally represented in the overall workforce, if not yet fully
in the ranks of senior management.

• Traditional hierarchical distinctions have eroded in the name of faster
decision-making and speed to market. Teamwork is one of the most
common behaviors rated in performance reviews.

• More businesses and business units in the United States are owned by
European or Asian parents, which expect their practices and norms to
be followed and respected in the workplace.

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AN: 2734783 ; WorldatWork, Dan Cafaro.; The WorldatWork Handbook of Total Rewards : A Comprehensive Guide to Compensation, Benefits, HR & Employee Engagement
Account: s4264928.main.eds

2 The Power of Total Rewards

• Job mobility is taken for granted. According to the Bureau of Labor
Statistics, the average worker in 2020 currently holds 10 different
jobs before age 40, and this number is projected to grow. Forrester
Research predicts that today’s youngest workers will hold 12–15 jobs in
their lifetime.

• Gender, race, and religious differences are a common part of most
work environments. Diversity has become a respected value, demon-
strated through a range of specific programs.

• Business leaders increasingly regard employees as drivers of productiv-
ity, rather than as relatively interchangeable cogs in a larger wheel.

Along with these changes have come dramatically different views about
the nature of rewards. In the shift toward a more knowledge- and service-
based economy, the relationship, or deal, between employer and employee
began to evolve as well. Viewing employees as performance drivers meant
thinking differently about what it would take to attract, keep, and engage
them in giving discretionary effort on the job. And so total rewards entered
the lexicon to address these needs.

BROADENING THE DEFINITION OF TOTAL REWARDS

The definition of total rewards always sparks debate. For example, Figure 1.1
includes a comprehensive list of items that have shown up at one time or
another in one organization’s definition of total rewards. From this, it is easy
to see how people can use the term in conversation only to find that they are
referring to very different notions.

Generally speaking, there are two prevailing camps of definitions:

• Narrow definitions. These virtually always comprise compensation and
benefits, and sometimes they include other tangible elements (e.g.,
development). This sometimes is referred to as total compensation or
total remuneration.

• Broad definitions. These can expand to encompass everything that is
“ rewarding” about working for a particular employer or everything
employees get as a result of their employment. Sometimes terms such
as value proposition total value are used interchangeably with total rewards.

While the narrower definitions have been around for a long time, it is the
broader notion that is generating buzz. Indeed, much of the current activity
in total rewards involves organizations moving to a broader definition. There
are several reasons for this:

• Erosion of the “core” elements of the package. The traditional elements of
rewards – pay, benefits, and stock awards – are no longer differentiating
factors for organizations. The competitive position for pay is trending
toward median or mean. Benefits costs continue to rise. Stock programs,
such as the distribution of options, do not offer the appeal they once did.

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Broadening the Definition of Total Rewards 3

Direct Financial
Base Salary
Bonus
Cash Profit Sharing
Employee Referral Pro-

gram (Cash)
Stock Programs
Suggestions Programs

(Cash for Ideas)

Indirect Financial
Adoption Assistance
College Savings Plan
College Tuition and

Fees
Commuter Reimburse-

ment (Pretax)
Company Cafeteria
Company Store
Dependent Care
Dependent Scholarships
Discount Tickets
Educational Assistance
Fitness F acilities

Dis counts
Health and Welfare

Benefits

Incremental Dependent

Care (Travel)
Insurance (Auto/Home)

via Payroll Deduction
Long-Term Care

Insurance
Matching Gifts
Relocation Program
Retirement Plan(s)
Saving Bonds via Payroll

Deductions
Scholarships
Stock Purchase Program
Student Loans
Tuition Reimbursement

Work
Autonomy
Casual Dress Policy
Challenging Work
Constructive Feedback
Covered Parking
Ergonomics/Comfortable

Workstations
Flexible Work Schedules
Free Parking
Interesting Work
Job Skills Training
Modern, Well-Maintained

Workspace
Open Communication
Performance

Manage ment
Promotion

Opportunities
Safe Work Environment
Suggestion Program

(No Cash)
Telecommuting

Opportunities
Uniforms/Uniform

Allowance
Workshops

Career
360º Skills Assessment
Career Advancement
Coaching
Lunch and Learn Series
Management

Development

Mentoring Program
Open Job Posting
Preretirement

Counseling
Service Awards
Training and

Development

Affiliation
Athletic Leagues
Community
Involvement
Diversity Programs
Employee Celebrations
Employee Clubs
Professional Associations
Seminars
Spring and Holiday
Parties
Support Groups
Volunteer Connection

Other/Convenience
ATMs Onsite
Carpooling/Van

Pooling/Shuttles
Car Seat Vouchers

(for Newborns)
Child Care Resources
Credit Union
Employee

Assistance

Program
Employee Card and Gift

Shop
Expectant Parent

Program
Legal Services
Medical Center
Military Deployment

Support
Online Services
Onsite Dry-Cleaning

Pickup
Onsite Flu Shots
Onsite Food Services
Onsite Post Office
Personal Travel Agency
Wellness Program
Worldwide Travel

Assistance

FIGURE 1.1 Total rewards: different things to different employers.

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4 The Power of Total Rewards

Given all of this, a logical response is to broaden what organizations
provide for the overall employment package.

• Pressure for operational efficiency and effectiveness. Total rewards can rep-
resent a major cost element. As organizations seek to manage costs
tightly, there is more emphasis on ensuring that all costs are counted
and managed. By redefining rewards more broadly and focusing on
those elements that achieve the biggest payoff, organizations can drive
toward efficiency.

• Catering to diverse needs. Organizations today are managing a much more
heterogeneous population. For the diverse workforce, no single com-
ponent becomes a value driver. Employees have choices to make and
a need for greater flexibility. A broad definition of total rewards helps
employers show how their slate of rewards responds to the broad needs
of today’s global workforce.

• Need to more strongly reinforce business strategy. Organizations are concerned
about sending clear business messages to employees. A properly struc-
tured total rewards package sends a key message. By aligning all the
components of total rewards with the overall business vision, a company
ensures its workforce is on the same page.

Given these factors, it is not surprising that a broader definition is gaining
favor in the marketplace. Organizations still need to decide how broadly
they want to define total rewards, based on what they can adequately meas-
ure and manage.

What Is Total Rewards?

Total rewards encompasses the elements – compensation, well-being, benefits,
development, and recognition – that, in concert, lead to optimal organiza-
tional performance. When designed strategically and executed in alignment
with business goals, total rewards programs fuel motivated and productive
workforces that feel appreciated and rewarded for their contributions,
driving the organization to ever greater success.

The Total Rewards Model

Initially introduced in 2000, the WorldatWork Total Rewards Model
continually evolves to reflect changes in organizations’ needs, workforce
expectations, workforce demographics, and the total rewards profession.

The practice of total rewards requires in-depth knowledge, specialized
skills, and up-to-the-minute insight into the most critical issues facing today’s
workforce. The model captures the broad influence that total rewards
practices and its practitioners have on organizational strategy and work-
force outcomes.

The 2020 Total Rewards Model encompasses five components, each of
which includes programs, practices, and nuanced dimensions that collectively

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Broadening the Definition of Total Rewards 5

define an organization’s strategy to build a productive, inspired, and
committed workforce.

Compensation

Pay provided by an employer to workers in exchange for services such as
time, effort, and talent. This includes both fixed and variable pay tied to
overall contributions.

Well-Being

The state of a workforce that is productive, comfortable, happy, and healthy,
considering physical, emotional/mental, financial, and environmental
factors. Total rewards professionals influence this state through organizational
strategic influence and building programs that support workforce success
inside and outside of work.

Benefits

Programs focused on health and welfare, income protection, financial
preparedness, retirement and time off, including leaves of absence, aimed
to provide holistic well-being and security for the workforce and their families.

Development

Encompasses the rewards and opportunities that employers offer their
workers to advance their skills, competencies, responsibilities, and
contributions – in both their short- and long-term careers.

Recognition

Formal or informal programs that thank, validate, recognize, and celebrate
workforce contributions while aligning and strengthening organiza-
tional culture.

Internal Influences

A TR program must also align with overall business strategy, be championed
by leaders and fit within the organizational culture. Other workforce
elements, such as the business implications of inclusiveness, are crucial for
program success.

In these challenging and hyper-accelerated times, diversity and inclusion
(D&I) is a strategy area that requires TR practitioner competency. No longer
in a support function alone, TR pros are now expected to be the strongest
advocates of cultural intelligence and behavioral change. Organizations are
relying on them to understand, influence, and reflect D&I principles in the
design and delivery of their TR programs.

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6 The Power of Total Rewards

The internal influences that inform the design and implementation of
total rewards initiatives and programs include business strategy, culture,
workforce, inclusion, and leadership.

Strategy

Total rewards strategies are a mechanism to make a strong business strategy
come to life. Whether the goal is operational excellence, product/service
leadership, or customer engagement – rewards programs help communicate
expectations, align efforts, and motivate the behaviors required to
deliver results.

Culture

Simply stated, organizational culture refers to a set of shared values and
beliefs that form over time as people interact and work together. It
encompasses an organization’s vision, values, norms, and ultimately
influences workforce experiences and outcomes. Total rewards offerings
can help transform and re-enforce desired cultural norms, and significantly
influence how work is performed and recognized in the organization.

The Workforce

Rewards must be tailored to meet the needs of an increasingly diverse pool
of employees that is defined by geopolitical trends, tech advances, and talent
demographics, including today’s up-to-five-generation workforce. Savvy total
rewards pros see this as an opportunity to attract the highest performers and
“best” the competition.

Inclusion

In these hyper-accelerated times, diversity and inclusion strategies provide
organizations with a competitive advantage in talent attraction and work-
force productivity. Total rewards leaders can help organizations achieve
greater diversity while building an inclusive culture by developing clear
approaches for pay equity and transparency, career development, inclusive
benefits, and more.

Leadership

Total rewards programs are only effective when leaders play an active role
to promote understanding and appreciation of the rewards programs.
Total rewards practitioners must work with organizational leaders to
ensure that total rewards initiatives align with business goals and that
they are well-understood, used, and appreciated by workers for maxi-
mum impact.

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Why the Total Rewards Approach Works 7

External Influences

The fundamentals of designing an optimal TR design strategy have remained
relatively steady for 20 years. Organizations must be cognizant of several
external factors, such as the competitive (product and labor) markets, the
regulatory environment and the social and cultural norms affecting each
area. A deep understanding of these factors will provide TR pros the context
needed to build effective TR programs that drive performance outcomes.

Outcomes

While total rewards plays a leading role in the employee experience, it does
not exist in a vacuum. Initiatives must be completely woven into the
enterprise’s HR strategy, considering the human capital and societal influ-
ences that affect program design and strategy. Upskilling, the gig economy,
regulatory changes, AI’s impact, data analytics, pay equity, and other HR
factors all influence the total rewards strategy.

Alignment of strategy, culture, and TR elements result in a differentiated
value proposition for workers and the organization: an inclusive environ-
ment where engagement is enhanced and performance (individual/team/
business) is elevated. Key performance indicators in this area may include
pay equity, perception of fairness, strength of employment brand, financial
performance, overall productivity, employee engagement, and satisfaction.

WHY THE TOTAL REWARDS APPROACH WORKS

Throughout the decades, there has been compelling evidence showing that
the best way to attract, engage, and retain employees is to focus on total
rewards, not just pay and benefits.

In the 1950s, Frederick Hertzberg conducted his famous study of factors
affecting job attitudes. He identified 16 factors and categorized them into
10 “hygiene factors” and 6 motivators (growth, advancement, responsibility,
work itself, recognition, and achievement). Note that the motivators do not
include pay and benefits – these are hygiene factors. To motivate, a total
rewards approach must be taken.

Since the 1960s, psychologists (including Abraham Maslow) have stressed
how fewer tangible needs, such as growth and self-actualization, were equally
important to individuals’ sense of worth. Figure 1.2 illustrates how total
rewards maps to Maslow’s famous hierarchy. This message has been rein-
forced over the years by other leading thinkers and management gurus,
including Maslow, Ed Lawler, Peter Drucker, and Edward Demming.

Most data show that work and career opportunities, leadership, and
recognition are leading drivers in employee engagement and retention –
not pay.

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8 The Power of Total Rewards

What do you do when you get a job offer? Take a sheet of paper, draw
a vertical line down the middle, label one column “stay” and the other
“take the offer.” Then fill in the columns with a list of the total rewards
associated with each opportunity. If a total rewards mindset is used to
make this individual decision, shouldn’t the same mindset be applied
when thinking about how to attract, retain, and motivate the broader
workforce?

In today’s environment, the case for a total rewards approach is stronger
than ever:

• Total rewards addresses today’s business needs for managing costs and growth.
Research suggests that a more limited view of rewards can be more
costly because organizations tend to respond to every situation with
cash. Total rewards supports moving away from ineffective programs
toward those that help drive the business forward.

• Total rewards meets the evolving needs of today’s employees. As the workforce
continues to diversify, employees’ expectations change. For example,
there is stronger emphasis on job enrichment, flexible work schedules,
and the overall work environment. A total rewards approach better
addresses many of these varying employee needs.

Transactional Rewards

Self-Actualization
(Reaching Full Potential)

Advancement/Growth/
Affiliation

Interesting,
Challenging Work

Learning and
Development

Recognition, Promotion,
Performance Feedback

Affiliation and
Coworkers

Financial Security,
Health and Welfare

Hourly Wage,
Base Salary

Aesthetic Needs
(Order and Beauty)

Cognitive Needs
(Knowledge and Understanding)

Esteem Needs
(Positive Self-Image)

Belonging and Love
(Affection, Identification with a Group)

Safety and Security Needs
(Long-Term Survival)

Physiological Needs
(Short-Term Survival)

FIGURE 1.2 Transactional rewards and Maslow’s hierarchy.

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The Top Five Advantages of a Total Rewards Approach 9

• Total rewards fits with a movement away from cash and stock. As the role of
stock becomes deemphasized in most companies, the hunt is on for
other items that help redefine a compelling and differentiated offer in
the market for talent. Total rewards can help do this.

THE TOP FIVE ADVANTAGES OF A TOTAL
REWARDS APPROACH

1. Increased Flexibility

With the one-size-fits-all approach essentially gone, the twenty-first century is
well on its way to becoming the “rewards your way” era. Just as companies
create niche products and services to cater to small consumer segments
(micromarketing), employers need to start creating different blends of
rewards packages for different workforce segments. This is particularly true
in a global labor market where workforce diversity is the rule, not the excep-
tion, and when specific skills are in short supply.

A total rewards approach – which combines transactional and relational
awards – offers tremendous flexibility because it allows awards to be mixed
and remixed to meet the different emotional and motivational needs of
employees. Indeed, flexibility is a two-way street. Both employers and
employees want more of it.

As the importance of flexibility has become more understood, more com-
panies are allowing employees to determine when they work, where they
work, and how they work. Total rewards recognizes that employees want,
and in many instances demand, the ability to integrate their lifestyle and
their work.

2. Improved Recruitment and Retention

Organizations are facing key shortages of best-in-class workers (top perform-
ers), information technology (IT) workers with hot skills, and workers for
entry-level, unskilled jobs. The classic initial solution to a recruitment and
retention dilemma is to throw money at the problem. But because this solu-
tion is so overused, it does not offer a competitive advantage. Furthermore,
it immediately raises costs.

A total rewards strategy is critical to addressing the issues created by
recruitment and retention. It can help create a work experience that meets
the needs of employees and encourages them to contribute extra
effort – developing a deal that addresses a broad range of issues and spend-
ing rewards dollars where they will be most effective in addressing workers’
shifting values.

Indeed, today’s workers are looking beyond the “big picture” in deciding
where they want to work. Work and personal life should be seen as

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10 The Power of Total Rewards

complementary priorities, not competing ones. When a company helps its
employees effectively run both their personal and work lives, the employees
feel a stronger commitment to the organization. In addition, numerous
studies show that employees look at the total rewards package when decid-
ing whether to join or stay with an organization.

An actual summary statement can be prepared for potential employees,
enabling them to see the whole value of being employed by a company. As
such, as highly desirable job candidates explore their options with various
companies, companies with total rewards have a competitive advantage
because they are able to show the “total value” of their employment packages.

3. Reduced Labor Costs/Cost of Turnover

The cost of turnover – often the driver of recruitment and retention – is
sometimes invisible and far from cheap. According to Work Institute, the
estimated costs of employee turnover ranges from 33 percent to 200 percent
of the departing employee’s salary. Willis Towers Watson research shows that
the cost of salesforce labor, for example, during the notice, vacancy, and
transition periods is significant. To replace a direct channel industrial sales-
person, soft-dollar costs can range from 25 percent to 100 percent of the
actual out-of-pocket costs.

In addition, the cost of turnover includes indirect costs such as losses
from customers and sales, as well as decreased efficiencies as productive
employees leave, and the remaining workers are distracted.

4. Heightened Visibility in a Tight

Labor Market

Talent shortages have become a chronic condition of business life, and
experts agree that the tight labor market is going to get tighter. As a result,
employers can no longer afford to simply view their employees as inter-
changeable parts. Organizations quickly are realizing that every employee
matters even more when there are not enough employees to fill the
available jobs.

In addition, demographic shifts (e.g., the increasing number of women in
the workforce) coupled with new economic forces (e.g., global competi-
tion) have changed the employment landscape, creating an unprecedented
need for committed employees at a time when loyalty is low. If people can
find an environment that’s more in sync with their needs, they will make
changes for that. Likewise, they will stay put when they feel their needs are
being met.

By gaining a clear understanding of what employees value, and mixing
and matching rewards within a comprehensive framework, companies can
reallocate their investment dollars to match what employees say they value
most, and can communicate the total package versus a patchwork of indi-
vidual components.

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Developing a Total Rewards Strategy 11

5. Enhanced Profitability

Aside from the high costs of technology, HR professionals also are saddled
with escalating benefits costs and changes in health care coverage and
medical protocols. Employees want a “new deal” at the same time that
companies – struggling to deliver their financial targets – are readily cutting
programs to trim costs. How to balance these two realities? Change the mix.

A big misconception about total rewards packages is that they are more
expensive. That’s because a number of companies equate the notion of
rewards with “more” – more pay, more benefits, and more combinations of
rewards. What companies need to realize is that by remixing their rewards in
a more cost-effective way, they can strengthen their programs and improve
employees’ perception of value without necessarily increasing their overall
investment. It’s largely a matter of reallocating dollars rather than finding
more dollars.

Indeed, as companies discover the power of targeted reallocation of
rewards and begin promoting the total value of their programs, they are
abandoning the practice of setting pay, benefits, and other budgets in isola-
tion, without reference to broad strategic and cost objectives. As they begin
understanding their true aggregate costs – often for the first time – they are
positioned to measure the extent to which their expenditures are in line
with, over, or under competitive practice. And they can then measure
whether they’re getting a reasonable return on their overall investment.

In addition, today’s workforce includes several distinct generations, each
with a different perspective of the employer–employee relationship. Most
employee research indicates that younger employees place a far higher
priority on work environment and learning and development than on the
traditional rewards components. In contrast, older workers put more emphasis
on pay and benefits. All employees are concerned with health care, wealth
accumulation, career development, and time off. It simply is no longer possible
to create a set of rewards that is universally appealing to all employees or to
address a series of complex business issues through a single set of solutions.

The challenge is to develop and implement a flexible program that
capitalizes on this diverse workforce (Figure 1.3). Valuing each employee
includes understanding that everyone does not want to work the same way
or be rewarded the same way. To achieve excellence, employers need a
portfolio of total rewards plans.

DEVELOPING A TOTAL REWARDS STRATEGY

While many organizations agree with the idea of total rewards, they often
don’t actually put a total rewards strategy into practice. The compensation
department may design a sales compensation program separately from the
benefits department that revises the 401(k) program. This piecemeal
approach is common, but it’s akin to building a state-of-the-art skyscraper on

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12 The Power of Total Rewards

top of the foundation of a 30-year-old, mid-rise office building. That skyscraper
isn’t going to be structurally sound using a base that wasn’t designed to sup-
port it. The same thing can happen when new or revised benefits are built
without regard to the overall compensation and benefits structure.

The Total Rewards Blueprint

Starting a total rewards program on the right foot is a matter of taking a
complete inventory of the programs already in place, ranking each program’s
effectiveness, and finding the linkages between the rewards and the
business strategy.

• Inventory. Find out what’s already in the mix – every program, plan, and
perk, even those not currently in use.

• Rank. Determine the effectiveness of each program and how close it
is to being a best practice in the industry. Effectiveness can be defined
several ways. For instance, low participation can mean low interest, or
possibly low understanding of a particular program. Ask line managers
to list the top five and bottom five programs in the current package.

• Link. This is a difficult but important step. Look at the company
business strategy and map where rewards complement or help to drive
the specifics of the strategy.

For example, consider an organization that developed a business strat-
egy that focused on providing an integrated customer service experience
to its clients. If the company tried to blend 10 separate products and 3
different sales groups into one seamless offering, the structure of the
company’s sales force and the compensation programs likely would not
support this collaborative approach. In fact, the pay structure for the sales
force, customer service reps, and sales support team could be inconsistent
and actually motivate people not to work together. Good compensation
programs are important, but linking total rewards to business strategy is
essential.

Strategy
Culture

Workforce
Inclusion

Leadership

Social Norms
INFLUENCES………. HR STRATEGY

Regulatory
AI & Technology
Product Market

Labor Market

Compensation

Well-Being

Benefits

Development

Recognition

WORKFORCE
EXPERIENCES

ORGANIZATION
PERFORMANCE

P
R

U
C

TI
V

OTA
L REWARDS STRATEGY IN

S
P

IR
E

COMMITTED

FIGURE 1.3 Total rewards strategy.

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Crystallizing the Spirit of Your Total Rewards Plan 13

Five Common Ways a Total Rewards Strategy Can Go Astray

1. Trying to reengineer programs in pieces. When moving to a total rewards
approach, review and reengineer the entire program. Don’t reengineer the
short-term variable pay programs this year and take on base salary pro-
grams next year. This defeats the purpose of making sure all the programs
are working together to deliver the business results necessary for success.

2. Trying to implement changes all at once. Yes, reengineering the entire pro-
gram is essential; however, implementing the changes all at once can
have a detrimental effect. It’s much better to phase in new rules and
new programs over time. There’s only so much change that employees
can absorb and adapt to at once. In addition, it is necessary to build in
time for managers and employees alike to move through the learning
curve. When planning to implement radical changes to a total rewards
program, it’s advisable to allow a two- to five-year timeline.

3. Limiting the number of people involved. A broad coalition of people should
be involved in a total rewards effort. All stakeholders need a place at
the table – human resources, executives, finance, employees, board of
directors, customers. While it may be easier to exclude some groups for
the sake of simplicity, it’s far too easy to overlook key elements without
input of every group that will be impacted by the programs.

4. Not doing a thorough impact analysis. Before implementing any piece of
the total rewards program, do a thorough analysis of the financial,
organizational, employee, and customer impact of the plans. View
these impacts both today and into the future. Don’t forget to look at
the full range of outcomes. What happens to the total rewards program
if company profits drop by 50 percent, or sales and revenues increase
threefold? It’s a huge disservice not to know how the program elements
will behave at different points in the company’s life cycle.

5. Not communicating effectively. Many times when companies make these
kinds of large-scale changes to their compensation and benefits pro-
grams, they communicate too much, too early, to employees, creating
a workforce that gets full on hype and expectations. The flipside, com-
municating too little, too late, also is a problem because employees
don’t understand the business reasons for the changes or how these
changes will impact their individual situations. Proper communication
of total rewards changes is essential to success. Determine the right
amount of information, the right time to deliver it, and the right for-
mat to use for delivery.

CRYSTALLIZING THE SPIRIT OF YOUR TOTAL
REWARDS PLAN

When carefully evaluated, developed, and woven into a comprehensive total
rewards strategy, the elements of the total rewards puzzle work together to
produce an impact on employee attraction and retention that is greater

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14 The Power of Total Rewards

than any of the elements considered individually. It is truly a strategy whose
whole is greater than the sum of its parts.

In addition, a total rewards strategy maximizes the organization’s return
on compensation, benefits, and other rewards dollars invested; provides
managers with multiple tools for encouraging employee development and
rewarding performance; and creates a rewards package that meets or
exceeds the value of a competitor’s total rewards offerings. As with any effec-
tive, competitive HR program or initiative, a total rewards strategy should
not be created in a vacuum. It should provide specific, motivating direction
when choosing what to focus on (and choosing what not to focus on).
Rewards strategies should follow two primary aims:

1. Articulate a distinctive value proposition for current and prospective
employees that attracts and retains employees who have the capabili-
ties and values the employer needs.

2. Provide a framework from which the employer designs, administers,
and communicates rewards programs with the maximum motivational
impact to drive desired behaviors.

The total rewards strategy should ensure that the rewards framework
matches the strategic needs of the business, and that the mechanics of the
total rewards structure reinforce the desired corporate culture and manage-
ment style. Also, it should help structure the components of the rewards
system to influence and motivate employee behavior in the right direction.

Issues That a Total Rewards Strategy Should Address

A well-conceived TR strategy should address several elements:

• Strategic perspective. A total rewards strategy begins with an articulation
of the company’s values and business strategies. The link to business
needs and aims should be spelled out right up front. The total rewards
strategy is the place to be clear about where, when, and how the links
between business goals and rewards should and should not be made.

• Statement of overall objectives. The strategy should include statements that
describe how the rewards system will support the needs of the business
and the company’s customers, employees, shareholders, and other key
stakeholders. This typically includes a delineation of the role of each
reward element. If you cannot clearly define a role for any given element
of total rewards, then you should question why it is being offered at all.

• Prominence. The strategy should describe the overall importance of
rewards relative to other tools that can focus and affect actions and
decisions (e.g., shared values, cool products, inspiring leadership,
etc.). One way to think about prominence is to imagine an employee
talking to a friend about working for the company. As the employee
relates what is great about the company, prominence involves two key
questions:

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Crystallizing the Spirit of Your Total Rewards Plan 15

1. At what stage in the conversation would you like the employee to
mention the rewards package (as opposed to things such as the cul-
ture, quality of leadership, focus on customers, etc.)? This helps
define the importance of total rewards in the context of the total
employee experience. Do you lead with total rewards, or is it a sup-
porting component?

2. Which elements of the package would you like to hear mentioned
first, and which should be mentioned last – or not at all? What does
your company want to be famous for? What is the signature pro-
gram? These questions are aimed at culling the handful of reward
elements that deserve 80 percent or 90 percent of your attention in
design, administration, and communication.

• Performance measures. The strategy should clearly identify the performance
criteria to be rewarded, the appropriate level of measurement for each
(e.g., corporate, business unit, region, work group, individual, etc.) and
which reward elements will be linked to which measures. Also, the strat-
egy should describe the degree to which rewards are expected to drive
employee actions and decisions through variability, influence over out-
comes (controllability), and the explicitness of the pay-performance link.

• Competitive market reference points. The total rewards strategy should
describe the types of companies, industries, or other reference points
that will be used as the basis for determining the competitiveness of
the rewards package. What are the comparators? Do they differ among
business units? Why?

A common response to the question about comparators is that they should
be composed of companies against which we compete for talent. It’s a sound
approach, usually resulting in a list dominated by companies in the same
industry or geography. Another angle to consider is what you want the com-
pany to be famous for. Perhaps benchmark the company’s signature pro-
gram against companies that already are famous in that area, even if it means
looking beyond the industry or geography.

• Competitive positioning. The strategy should clearly describe the desired
competitive position relative to the competitive reference points in the
labor market. Ideally, it should define how the competitive positioning
is expected to vary with performance or other criteria.

It is worth noting that many companies define the median as the desired
competitive benchmark for all components of rewards with increasing fre-
quency. This raises a question: If you position all elements at the median,
how will you differentiate? Defining a “signature” program is one way to
avoid the creation of a plain set of rewards that looks like what every other
company offers:

• Degree of internal equity and consistency. The statement should address
the extent to which the total rewards strategy will be applied uniformly
throughout the company, both horizontally and vertically. To take the

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16 The Power of Total Rewards

view that both internal and external relativities are important is fine,
but defining a strategy is about making choices. A good strategy clearly
defines which is more important when the two are in conflict.

• Communication and involvement. The strategy should define how
much information about the rewards programs will be disclosed and
explained to employees. It also should outline the degree of participa-
tion that employees will have in the design and ongoing administration
of the rewards programs. This includes a clear delineation of where
HR’s responsibility for designing and managing rewards ends and man-
agement’s accountability begins. It also should include the company’s
policy toward employee unions, works councils, and other representa-
tive or collective bargaining units.

• Governance. While core principles governing the rewards program
should remain fairly constant, the underlying programs need to be
revised and refreshed periodically to ensure that they are competitive
and compelling. The rewards strategy should delineate how frequently
such reviews will occur, and who plays which roles in carrying out the
review and redesign.

• Data and information management. The rewards strategy should specify
guidelines for data management, information sources, collection and
reporting methodologies, and processes for using data for decision sup-
port. The strategy also should include an overall process for measuring
the efficacy of the total rewards program, and the supporting data.

The Bottom Line

Effectively executing an appropriate total rewards strategy can increase a
company’s market premium. Unfortunately, weak execution means many
companies are leaving at least some of this money on the table.

Problems with execution are understandable. Many rewards and benefits
programs evolved in a fragmented way, without consideration for how the
parts fit together or whether they reinforce business goals. Even in organizations
with truly integrated designs, effective delivery depends on successful
implementation of performance management, change management, com-
munication, and the use of technology.

Every organization can develop and execute a superior total rewards solu-
tion. By taking a step back and analyzing the design and delivery of each
component of their total rewards strategy, companies can identify the steps
they need to take to maximize its effectiveness (see Sidebar 1.1).

WFA: REEVALUATING THE TOTAL REWARDS EQUATION

Total rewards has typically focused on compensation, well-being, benefits
and, more recently, career development and recognition. With the recent
demonstrated success of remote work, organizations are realizing that work

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WFA: Reevaluating the Total Rewards Equation 17

location is also an important consideration, possibly on par with these other
elements of the total rewards matrix. Work from Anywhere (WFA) is an
important evolution, as it means companies have another powerful new
lever to use in driving their talent strategy. Companies that recognize this
and thoughtfully invoke work location in their employee value proposition
could significantly benefit by:

• Attracting talent. Many times, the available talent we need/want cannot
be sourced in the location in which we operate. Consequently, we either
settle for candidates in our current market or we employ mobility to
move talent to the job location. Both are costly solutions. As organiza-
tions are able to facilitate effective remote work, they will be able to
attract new types of talent that prefer their current location or prefer a
remote work environment. In other words, that key software developer
who didn’t want to leave Austin, Texas, is now in reach.

• Retaining talent. Every organization has lost talent due to personal
needs. Maybe a key employee’s spouse gets a new job across the country
or needs to move to take care of an aging relative. The amount of
institutional knowledge these employees take with them is staggering,
and companies spend significant time and monies replacing that staff

Sidebar 1.1: Reevaluating Total Rewards Strategies
for the Growing Remote Workforce

By Steve Brink

Before the 2020 global pandemic, a 2018 study by Global Work-
placeAnalytics.com highlighted that just 3.6 percent of the United
States labor force worked remotely 50 percent or more of the time.

The same report tells us that 56 percent of employees have jobs that
could be accomplished remotely. As quarantine/social distancing was
implemented, most of the workforce performed their tasks from home,
with the exception of certain sectors (e.g., service, manufacturing, etc.).

The remote work experiment forced by COVID-19 has been viewed
by most as a success. But this has raised HR policy questions about
WFH (Work from Home) and, taking a step further, working where
you want to live versus living close to the work office. The value of
on-premise/co-location working has come into question, and this
experience brought those questions to the forefront.

If proximity and ease of commute are no longer issues, what factors
drive our preferred work/live location? Is it being close to family
members, or a location that aligns with your hobbies and passions?
Whatever the answer, what we’re really discussing here is the role of
location in the total rewards matrix.

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Global Workplace Analytics – Home

18 The Power of Total Rewards

and training new workers. By investing in distributed work, companies
may save that talent and organizational knowledge, thus minimizing
disruptions and saving on costs and time. One would also think that
if employees are able to live where they want, they will be happier and
want to stay with an organization that facilitates that lifestyle.

• Enhancing talent. By now, we all know the benefit of diverse and inclusive
teams. Diversity means a lot of things, and one definition could include
work location. People who live in San Antonio see the world quite dif-
ferently than people in San Francisco – and that’s a good thing. Diversi-
ty provides a unique blend of ideas and different perspectives that fuel
creativity and performance in our business. By no means does location
replace other diversity – and inclusion-related efforts, but it can play a
role in enhancing an organization’s D&I strategy.

Companies that hit the mark here will provide additional benefits to their
employees, including:

• Less time spent commuting
• Reduced transportation expenses
• Lower day-to-day costs (such as wardrobe costs and restaurant meals)
• Increased productivity
• Improved quality of life
• Ease of family care arrangements
• Enhanced flexibility to work in their preferred style/hours/etc.

Work from Anywhere

There are many, many resources discussing the tools and technology needed
to facilitate remote work, but thus far, there has been little conversation
around the compensation-related aspects of this WFA strategy.

COVID-19 skyrocketed WFA to a top-of-mind priority for leaders in the
mobility industry. Facebook made a big announcement in May 2020 that it
expected 50 percent of its workforce of 48,000 to work remotely in 5–10 years.
Facebook saw remote working as a way to retain talent that wanted to leave the
Bay Area and to attract talent that might already be remote and prefer not to
move. This was a major shift of philosophy for Facebook, which once provided
a $10,000 bonus if you lived within 10 miles of the office. While not as public,
many other companies (both within and outside of the tech industry)
announced similar plans on increasing their remote worker mix.

There’s an important caveat to this strategy. Facebook agreed to this
WFA approach but indicated that salaries would be adjusted based on the
cost of living in the location in which the employee resides. There are
myriad ways to accomplish this salary localization, and this section will
provide a view on different strategies to employ to set pay for those working
from anywhere.

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WFA: Reevaluating the Total Rewards Equation 19

Understanding Cost of Living and Cost of Labor

First, as a reminder, there is a difference between cost of labor and cost
of living.

Cost of living is the cost to live in a specific location and is based on the
price of goods and services, housing, and tax rates. Cost of labor is typically
the predominant pay for a particular role in a specific location given criteria
such as industry, years of experience, and/or seniority/responsibility. It’s a
supply/demand-based approach, which has been used to set pay for years.

FIGURE 1.4 Work where you live.

Source: “Reevaluating Total Rewards Strategies for the Growing Remote Workforce” by Steve
Brink, President & CEO of AIRINC. AIRSHARE, Aug 4, 2020. © 2020, AIRINC U.S.A.,
https://www.air-inc.com/ Reprinted with permission from AIRINC.

With the choice of working from home on the rise, what is the value of salary
in different cities across the world? This inforgraphic helps understand the

equivalent value of USD 100,000 salary across major city centers, desirable
towns, and countries. Salaries have been adjusted for cost of living and

income tax differences.

$100,000

Equivalent Salary in 26 Cities Across the World

ABOVE $100K

BERLIN, GERMANY

LONDON, U.K.

LIBSON, PORTUGAL

BRIDGETOWN, BARBADOS

ATLANTA, GA, U.S.A.SAN FRANCISCO, CA, U.S.A.

HOUSTON, TX, U.S.A.

MEXICO CITY, MEXICO

PANAMA CITY, PANAMA

CANCUN, MEXICO

SAO PAULO, BRAZIL

CAPE TOWN, S.A.
GABORONE, BOTSWANA

PORT LOUIS, MAURITIUS

DENPASAR, INDONESIA

PENANG, MALAYSIA

BANGKOK, THAILAND

MONROVIA, LIBERIA

RIYADH, SAUDI ARABIA

BUDAPEST, HUNGARY DUBAI, U.A.E.

SYDNEY, AUSTRALIA

PARIS, FRANCE

AIX-EN-PROVENCE, FRANCE

TOKYO, JAPAN

HONG KONG, HONG KONG

BELOW $100K

$102,975

$185,428

$130,546

$123,984

$123,981

$118,971

$104,602

$100,000

$93,989

$70,674

$77,457

$57,149

$64,514

$62,430

$76,961

$91,973 $87,945

$81,159

$59,871
$54,567

$64,114

$74,083

$66,509

$133,881

$124,515

$114,391

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Home

20 The Power of Total Rewards

But with the rise of WFA, that supply-demand equation is being turned on
its head. From a cost-of-labor perspective, the supply and demand of labor
has been historically contained within a particular market. But now that we
are able to acquire and employ talent across the world, our labor market is
now global, which makes for a very different supply–demand equation.

In a perfect world, we would create a new mechanism to determine cost
of labor (i.e., international pay scales based on global supply/demand or
skills-based pay). But those capabilities do not exist (yet).

In the mid-term, some companies are looking to cost of living as a way to
take their current compensation approach and weave it into this WFA world.

In the cost-of-living example, we consider a position in Atlanta that earns
$100,000. The graphic illustrates an equivalent salary for a sample of
locations across the United States, given differences in cost of goods and
services, housing, and tax rates. At these pay levels, a person would have
similar purchasing power to that which they enjoyed in Atlanta. You can see
that variations in the cost of living may warrant a significant difference in the
required salary to maintain this purchasing power.

Setting the Pay Level

Your total rewards philosophy will determine the best way to pay remote work-
ers. As mentioned, in the past, salaries were typically based on office location. As
employees increasingly WFA, there is no office location by which to set salaries.

In this new environment, work follows the employee, not the other way
around. Therefore, a strategically aligned rewards philosophy is important
so that your pay methodology is clear for in-office and WFA workers. It is
imperative to establish a process for setting pay, as it will assist in ensuring
pay equity and fairness relative to others.

Below are the four major ways to set compensation levels for WFA workers.
Again, the appropriate approach should be dictated by your total rewards
philosophy and organizational approach to WFA.

1. Align All Compensation with Company HQ

In this approach, pay, no matter if in-office or distributed, is based on the
HQ location and each employee’s role.

A remote worker in a low-cost-of-living location might receive a “windfall,”
or an increased purchasing power, due to the difference in cost of labor at
the HQ location and cost of living in the worker’s location. Conversely, a
remote employee who lives in a high cost-of-living location might experi-
ence lower purchasing power.

The fundamental philosophy is that a given role has a certain value to the
organization, and it does not matter where the role is located.

Companies that employ this strategy might pay a national rate for a posi-
tion, as opposed to a location-specific market rate. This could be helpful if
you have multiple offices or no major office.

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WFA: Reevaluating the Total Rewards Equation 21

2. Current Market-Level Pay for Their Location

This approach assesses the market-pay rate for the position in the location
of the remote worker. This means organizations would pay for the position
based upon how other organizations in the remote worker’s location pay for
a similar position (i.e., market competitive pay for that role at that location).

It takes significant time and survey vendor fees to understand what the
market pay rate is in a particular location. Companies will need to subscribe
to a compensation survey database so they can get the best market informa-
tion possible. Unfortunately, there may be some locations where market pay
data does not exist or is insufficient.

Discussions around pay (including a reduction in pay for WFA employees
because a role might have a lower cost of labor in one location versus
another) can be challenging. This approach is not always transparent, and
there may be questions about the criteria used when evaluating market pay.

The philosophy here is that you are maintaining a competitive pay offering
in a location for every remote worker. This focus on each labor market makes
sense if your philosophy is to pay the going rate in each geographic location.

As stated previously, it should be noted that market pay is misaligned with
WFA. The idea of market pay is a supply/demand argument specific to a
location (because in the past, the supply could only come from that loca-
tion). Since WFA supply/demand is nationwide/global, it doesn’t really “fit”
to base pay on a particular market because that doesn’t match the true “sup-
ply” for the remote position. For this reason, companies should think care-
fully about the application of this approach in a WFA compensation strategy.

3. Develop Geographic Differentials Structure

The prior two approaches provide two extremes; the first is a one-size-fits-all
approach while the second applies differentiated, individualized salaries for
each remote worker. This third option is a middle approach to provide some
differences in pay but not by every individual/location. For larger compa-
nies with diverse work locations, this is already a popular approach.

In this approach, organizations define a salary structure that is for HQ or
a specified base location. Based on estimated competitive pay, you establish
a geographically differentiated salary structure. You can have as many as you
want. In the above example, we have as many geographic differences as
there are remote workers, but usually a company will have 3–10 different
structures, depending on how many work locations there are.

For example, you might have five different structures (A through E).
Structure A is for high wage locations, while Structure E is for low wage
ones. Structure C could be the structure that is the base level (100 percent).
Structure A and B would be set higher (110 percent and 105 percent, respec-
tively). Levels D and E would have their structures at 95 percent and
90 percent. These figures are for illustrative purposes only.

Each remote worker location would be slotted into one of these five sam-
ple salary structures. The philosophy in this approach is market-based but
simplifies to a few salary structures versus each remote worker having their

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22 The Power of Total Rewards

own salary structure. This third approach is easier than approach No. 2, as it
is more manageable over time and recognizes that there are pay differences
across locations versus approach No. 1.

A corollary to this approach is to use cost of living information to set geo-
graphical differences instead of assessing competitive pay based on each
marketplace. The geographic differentiated salary structures would be set in
a similar way but using cost of living data to create the various salary struc-
tures (A through E in our example).

The cost-of-living data are usually easy to find. Having access to this infor-
mation significantly reduces the complexity of the pay approach (i.e., we
don’t need to consider role, experience, or other market pay criteria).
Transparency to workers is also improved, because remote workers “feel”
the difference in paying for goods and services, housing, etc. When basing
salaries on market pay, transparency is diminished because there are a vari-
ety of factors considered that aren’t typically communicated to employees,
such as peer group, selected roles, or sample size.

Many companies use this cost-based approach, as it is defensible, easy to
communicate, and easily understood by employees.

4. Pay Based on Cost of Living

This next approach is a newer concept and might be best aligned with an
increasingly distributed workforce. In this approach, companies set com-
petitive pay based on the HQ location, and then use a cost of living approach
to adjust the compensation up or down based on where the employee
lives/works.

This approach is similar to the cost-of-living option in approach No. 3, but
more specific to an individual situation (as we see in approach No. 2).
However, unlike approach No. 2, cost-of-living data is much easier to obtain
than competitive pay data in each location, and it’s simpler and more
straightforward for employees to understand. Consequently, this is much
easier to maintain, and also optimizes the compensation for each person
based on the location that they have chosen to live. By assessing competitive
compensation at HQ and translating it to remote workers using cost of liv-
ing, companies ensure that everyone across the organization – no matter
where you work – enjoys similar purchasing power. This is an excellent way
to preserve internal equity across an organization.

There is a variation of this approach, which might be beneficial to both
the employee and the company, as some organizations explore a type of
gainsharing. In this scenario, companies split any gains between the differ-
ence in HQ salary and the cost of living-based salary in the remote worker’s
location. For example, if the HQ salary is set at $100,000 and the remote
worker’s cost of living adjusted salary is $90,000, the gainsharing salary would
be $95,000 (splitting the difference of $100,000 and $90,000). The company
receives an ongoing savings on pay given the $5,000 reduction, and the
remote worker benefits by having more purchasing power than they would
under a different approach. Win–win.

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WFA: Reevaluating the Total Rewards Equation 23

Personalizing Rewards

In closing, there is a continued trend toward WFA/remote work. Distributed
work and location as a total rewards component continues the well-
established HR trend of personalization of rewards. Personalization grows
through cafeteria-style benefit plans and multiple career paths. WFA is just
another step in aligning individual personal preference and perceived value
to create happier, more productive employees.

Work location has always been a key element of the compensation pillar.
Now, WFA will allow employees to choose their own work location, which
will further drive perceived value and allow for trade-offs in other areas of
the total rewards matrix.

Companies should recognize this trend and develop a clear rewards phi-
losophy and an approach to setting pay for remote workers that is consistent
with their talent strategy and goals.

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196

8 Benefits Basics

Benefits are a core element of the WorldatWork total rewards model. (See
Figure 1.3 in Chapter 1.) Benefits include health and welfare plans and
retirement plans designed to help protect and ensure employees’ finan-
cial security, as well as programs providing pay for time not worked. Over a
period of time, employee benefits have evolved from basic “fringe benefits”
of insurance coverage and a few perquisites to a comprehensive range of ben-
efits that strike a balance between employees’ personal and professional lives.

The ever-growing package of offerings has evolved, along with some com-
pensation programs, into a separate element of the total rewards model,
well-being. Can some programs of well-being be considered benefits? Yes,
many organizations still consider them benefits. The total rewards model
takes into account the fluidity of the relationship between compensation,
benefits, and well-being. It will be up to each individual organization to de-
fine precisely where the various programs will be categorized.

HISTORICAL PERSPECTIVE OF BENEFITS

The world of employee benefits is drastically different than just five years
ago, let alone 15 to 20 years ago. What is not new is that employees need
benefits and companies need employees. However, due to the escalation of
benefit costs, employers have started to re-examine the employees’ role in
the selection, payment, and management of benefits.

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AN: 2734783 ; WorldatWork, Dan Cafaro.; The WorldatWork Handbook of Total Rewards : A Comprehensive Guide to Compensation, Benefits, HR & Employee Engagement
Account: s4264928.main.eds

WorldatWork, & Dan Cafaro. (2020). The WorldatWork handbook of total
rewards : A comprehensive guide to compensation, benefits, HR & employee
engagement. Wiley.

Book Title:

Chapter 8: Benefits Basics

Historical Perspective of Benefits 197

Historically, employers handled all aspects of benefits. This was the era of
providing “cradle to grave” benefits. Employers selected and paid for bene-
fits. Employees had minimal to no input in any benefit-related decision.
Benefits were considered “fringe” and employees viewed benefits as “entitle-
ments.” (See Figure 8.1.)

Late Nineteenth Century
• US economy changed from agricultural to industrial
• First pension plan established in 1875 by the American Express Company

1900s: World War I
• New workers entering United States
• Social safety nets; no financial safety nets
• Department of Labor (DOL) formed by Congress in 1913
• Homogeneous workforce (male, sole wage earner)

1920s: Riding High until Stock Market Crash
• Few disability benefits available to workers retired, injured, or killed

on the job
• First Blue Cross plan established at Baylor University Hospital
• Kaiser Health Maintenance Organization (HMO) established
• Revenue Acts of 1921, 1926, and 1928 encouraged private, employer-

sponsored re

tirement plans

1930s: Depression

• Public safety net began to develop
•

Workers’ Compensation

• Unemployment insurance
• Social Security (1935)

• National Labor Relations Act (NLRA)
• Collective bargaining for pay and benefits

1940s: World War II
• National Labor Relations Board (NLRB) formed in 1948
• Huge growth in unions – unions demanded more for employees
• Women entered the workforce – “Rosie the Riveter”
• Family care issues emerged
• Private pension plans grew significantly

1950s: Post–World War II
• Fringe benefits emerging
• Employers began competing with benefits to address the wage freeze
• Simple benefits packages met the needs of the traditional family: major

medical, life, disability, pension plan
• Low costs

FIGURE 8.1 Historical influences – the benefits timeline.

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198 Benefits Basics

1960s: Decade of Assassinations; Vietnam
• Changing demographics

• Divorce became more common; break-up of families
• Working mothers (sole income) unsupported with benefits
• More transient workforce

• Medicare and Medicaid established
• Title VII of the Civil Rights Act of 1964

1970s: Watergate; Oil Crisis
• Economic downturn – high inflation, slow economic growth
• More than 20 major pieces of legislation affecting benefits plans –

specifically the Employee Retirement Income Security Act of 1974
(ERISA), IRC Section 125, 401(k), HMO Act

• Initial corporate response to changing workforce
• Working mother issues began to take force
• Single fathers became an issue

1980s: Computer Commonplace; Space Shuttle Challenger Explosion
• Benefit costs skyrocketed
• Gradual development of flexible benefits
• Announcement: Social Security is broke
• Cost shift to employees
• Consumer education
• Employers moving to “self-insurance” of health plans
• Beginnings of managed care (utilization management)

1990s: Information Technology; Internet
• Focus on benefit value and personal responsibility – optimizing the

value for each dollar spent
• Performance orientation of benefits plans consistent with corporate

goals
• Flexible benefits expanded, addressing the needs of a diverse

workforce
• Employer accountability to expand choices for employees

• Segmented benefits for different demographics
• Greater employee accountability for decision-making
• Emerging shift in definition of dependent

• Domestic partner, aging parents, elder care, adoption
• Consolidation of health-care industry

FIGURE 8.1 (Continued)

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Elements of Benefits 199

Income Protection
Plans (Mandatory)

• State and Federal Unemployment
Insurance

• Workers’ Compensation
•

Social Security

• State Temporary Disability Insurance (New Jersey,

New York, Hawaii, Rhode Island, California)

Income Protection
Plans (Mandatory)

• State and Federal Unemployment
Insurance

• Workers’ Compensation
• Social Security
• State Temporary Disability Insurance (New Jersey,

New York, Hawaii, Rhode Island, California)

FIGURE 8.2 Benefits programs at a glance.

2000s and 2010s: Focus on corporate accounting/governance; health-care coverage
debates; Social Security solvency

• Movement away from “entitlement” (paternalism) to partnership and
shared accountability between employers and employees

• Consumer-driven health plans expand; consumerism opportunity
provided by technology

• Wellness initiatives and well-being programs expand
• Funding for Social Security coverage debated
• Triple whammy: child-care, elder-care, and retirement planning at

the same time
• Uninsured and underinsured increases; issue of universal health-care

coverage debated
• The Patient Protection and Affordable Care Act

Today, initiatives from the US government (involving Medicare) and
employers are placing more responsibility and accountability on employees
for benefit decision-making and cost responsibilities. Businesses and govern-
ment still have important roles, but the trend is for employers and govern-
ment to share the platform with benefit recipients. Some call this shared
accountability.

ELEMENTS OF BENEFITS

Benefits programs may be categorized into the following two elements: (1)
income protection programs; and (2) pay for time not worked programs.
(See Figure 8.2.)

FIGURE 8.1 (Continued)

(continued)

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200 Benefits Basics

Income Protection
Programs (Non-
Mandatory)

Health-Care Benefits
• Medical Plans (Indemnity Plans and Managed

Care Plans, such as HMOs, PPOs, and POS)
•

Prescription Drug Coverage

•

Dental Plans

• Vision Plans
• Hearing Plans
Welfare Benefits
• Employee

Term Life Insurance

• Dependent Term Life Insurance
• Accidental Death and Dismemberment
• Sick Pay (Salary Continuation)
• Short-Term Disability
• Long-Term Disability
• Long-Term Care Insurance
Flexible Benefits
• Premium Conversion
• Flexible Spending Accounts (Health Care and

Dependent Care)
• Full Flexible Benefits Plans
Retirement and Investment Plans
• Defined Benefit Plans
• Defined Contribution Plans (Savings/Thrift Plans,

Profit-Sharing Plans, SIMPLE Plans, Money Pur-
chase Plans, Employee Stock Ownership Plans)

• Hybrid Plans (Cash Balance Plans, Pension Equity
Plans)

Executive Benefits
• Supplemental Executive Retirement Plans
• Supplemental Health Plans
• Supplemental Life Insurance Plans
• Supplemental Disability Plans

Pay for Time
Not Worked
(Non-mandatory)

At Work
• Rest Periods
• Lunch Periods
• Wash-Up Time
• Clothes Change Time
Not at Work
• Vacations
• Holidays
• Personal Leave
•

Jury Duty

• Military Duty

FIGURE 8.2 (Continued)

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Benefits Plan Objectives 201

Income Protection Programs

Income protection programs are designed to protect the standard of living
of the employee and his or her family. The programs include mandatory
and nonmandatory or voluntary coverage.

Mandatory plans are required by federal or state law to cover employees for:

• Social Security
• Workers’ compensation
•

Unemployment

• Nonoccupational disability (five states only)

Nonmandatory or voluntary plans are provided at the discretion of the
employer and include:

• Medical
• Prescription drug
• Mental/behavioral health
• Dental
• Vision
• Disability income
• Survivor benefits
• Flexible spending accounts
• Retirement plans

Pay for Time Not Worked Programs

Pay for time not worked programs are designed to protect the employee’s
income flow during certain periods, both at work and not at work, when the
employee is not working.

For example, common paid time-off benefits would include vacation,
holidays, sick-pay, and leaves of absence including time off for jury duty, vot-
ing, military duty, and medical or bereavement leaves.

BENEFITS PLAN OBJECTIVES

Employers and employees value benefits differently. They will rarely agree
on the level of benefits that plans should provide. Employers seek to balance
the employees’ needs and the cost to the organization. Employees wish to
maximize the value of benefits received and minimize out-of-pocket expenses.

Employer Objectives

The employer objectives for benefits plans are influenced by:

• Meeting corporate, business, and compensation objectives
• Actual dollar cost and percentage of payroll

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202 Benefits Basics

• Administration complexity and cost
• Tax and accounting issues
• The role benefits play in the total rewards objectives of the organization

Employee Objectives

Employee objectives for benefits plans include income protection for:

• Cash flow. Ensure cash flow is not compromised due to large medical
and/or dental claims.

• Income replacement. Replace income if employee becomes disabled.
• Income for surviving dependents. Provide income for surviving depend-

ents in the event of death.
• Adequate retirement income. Provide adequate income upon retirement.

In order to design a benefits program, an organization should define its
program objectives. Additionally, program objectives need to be aligned
with the organization’s and HR’s philosophy and strategy. Because company
philosophies and strategies differ, no two companies will share the same
objectives for employee benefits plans.

Review the objectives listed in Figure 8.3 and rank the three to five
objectives that are most important to your company regarding employee
benefits.

Please prioritize the top three to five objectives for employee benefits in
your organization.

Objectives Rank
Increase employee morale
Motivate action
Attract good employees
Reduce turnover
Keep unions out
Better use compensation dollars
Enhance employee security
Maintain favorable competitive position
Enhance organization’s image among employees
Increase employee productivity

______
______
______
______
______
______
______
______
______
______

FIGURE 8.3 Employee benefits plan objectives.

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Government Regulation of Benefits Plans 203

GOVERNMENT REGULATION OF BENEFITS PLANS

Management of employee benefits includes compliance with numerous fed-
eral and state laws and regulations. Sanctions and penalties for noncompli-
ance can be severe, including plan “disqualification” under the Internal
Revenue Code. Disqualification can cause employees to lose tax exemption
or tax deferral of benefits values, and employers to lose the advantage of tax
deductibility of plan expenditures.

Figure 8.4 highlights major laws affecting benefits plans and identifies
principal agencies that issue regulations and monitor compliance. At least
one new law each year affects some aspect of employee benefits. It is impor-
tant to know that benefits continue to change due to legislation.

Federal regulations with the most significant influences include:

• Internal Revenue Code (IRC)
• Refers to tax laws passed by Congress and administered by the IRS.
• Early statute governing private pension plans.

• Title VII of the Civil Rights Act of 1964
• Employers can never legally base benefits decisions on race, color,

religion, sex, or national origin.
• Age Discrimination in Employment Act of 1967 (ADEA)

• If an employer provides benefits to its employees, it generally must
do so without regard to an employee’s age. ADEA does permit em-
ployers to provide different benefits to older employees only under
certain circumstances.

• The Employee Retirement Income Security Act of 1974 (ERISA).
• ERISA introduced federal government involvement in the employee

benefits arena.
• ERISA establishes minimum standards to provide protection for par-

ticipants and beneficiaries in employee benefits plans (participant
rights). Among other things, ERISA standards cover access to plan
information and fiduciary responsibility.

• ERISA covers most private sector health and pension plans but does
not apply to public-sector benefits.

• Those individuals who manage plans (and other fiduciaries) must
meet certain standards of conduct under the fiduciary responsibili-
ties specified by law.

• The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
EGTRRA was a massive piece of federal tax legislation that:
• Enacted substantial changes in the income and estate tax rate

structures
• Made major changes in the alternative minimum tax rules
• Established qualified tuition programs and college savings accounts

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204 Benefits Basics

• Created a new tax credit for low-income savers
• Liberalized estate and gift tax rules
• Adopted a broad range of enhancements affecting tax-qualified re-

tirement plans

The changes affecting qualified retirement plans represent a major
retirement-policy turning point. Prior to EGTRRA, the trend in tax and
benefits policy was to progressively limit the amounts that could be contrib-
uted to, and benefits that could accrue, under tax-qualified retirement
plans. While it is true that the deferral limits for 401(k) plans were rising
modestly over time with increases in the cost of living, the overall contribu-
tions limits under Code §415, among others, had been cut substantially.
EGTRRA represents an abrupt departure from this trend, and it opens up
significant new planning opportunities, especially for small, closely held
businesses. With the passage of EGTRAA (as supplemented by certain
technical corrections made in the Jobs Creation and Worker Assistance Act
of 2002 [JCWAA]), Congress liberalized and rationalized the rules that
govern the design, adoption, and operation of qualified plans.

Laws/Regulations Scope/Provisions Enforcing Agency

Family and Medical
Leave Act of
1993 (FMLA)

Consolidated
Omnibus Budget
Reconciliation Act of
1985 (COBRA)

Group health plans –
requirement to
continue regular
coverage during
periods of qualifying
leaves (as many as
12 weeks per year)

Civil Rights Act
of 1964

Health Insurance
Portability and
Accountability Act
of 1996 (HIPAA)

All benefits plans –
regulations prohibiting
discrimination against
women and other pro-
tected classes in ben-
efits plan “terms and
conditions”

Group health
plans – requirements
for continuation of
coverage following
termination of
employment and
other “qualifying
events.”

US Department of
Labor (DOL)
Equal Employment
Opportunity
Commission (EEOC)

FIGURE 8.4 Regulations of employee benefits.

(continued)

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Government Regulation of Benefits Plans 205

Family and Medical Leave Act of 1993

The Family and Medical Leave Act (FMLA) entitles employees to take as
many as 12 weeks of unpaid, job-protected leave each year for specified fam-
ily, medical, and exigent military service reasons, and as many as 26 weeks of
unpaid, job-protected leave each year to care for a family member who is a
covered service member. The FMLA is intended to allow employees to bal-
ance their work and family lives by taking reasonable unpaid leave under
limited circumstances.

Laws/Regulations Scope/Provisions Enforcing Agency

Group health
plans – requires em-
ployers to provide
terminated employees
with a certificate of
group health plan
coverage, when
requested.

US Department of
Labor (DOL)
Internal Revenue
Service (IRS)
US Public Health
Service (for state
and local
employee plans)
US Department of
Labor (DOL)

Securities and
Exchange
Commission (SEC)
Regulations

Plans that provide
employer stock to
participants –
information
requirements

Securities and Exchange
Commission (SEC)

State insurance
regulation

Insured benefits
plans – standards for
coverage, conversion
and coordination
of benefits

State insurance
commissioners

Health Savings
Accounts (Part of
Medicare Prescription
Drug Improvement
and Modernization
Act of 2003)

Provide tax incentives
to lower health-care
costs. Includes high
deductibles; must
be under age 65 to
participate

Department of
the Treasury

The Patient Protection
and Affordable Care
Act of 2010

Transformed the
regulation of
health-care
financing in the
United States

Department of
Health and
Human Services

FIGURE 8.4 (Continued)

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206 Benefits Basics

Employer Coverage, Employee Eligibility, and Leave Entitlement

The FMLA applies to public agencies, including state, local, and federal
employers and local education agencies (schools), and it applies to private
sector employers with at least 50 employees. Spouses employed by the same
employer are jointly entitled to a combined total of 12 workweeks of family
leave for the birth of a child or for placement of a child for adoption or
foster care, and to care for a parent (but not a parent “in-law”) who has a
serious health condition. Leave for birth or adoption (including foster care
placement) must conclude within 12 months of the birth or placement.

Intermittent Leave

Under certain circumstances, employees may take FMLA leave intermit-
tently. This means that an employee may take leave in blocks of time or by
reducing his/her normal weekly or daily work schedule.

If FMLA leave is to care for a child following the birth of the child or the
placement of a child with the employee for adoption or foster care, use of
intermittent leave is subject to the employer’s approval.

FMLA leave may be taken intermittently when medically necessary for
planned and/or unanticipated medical treatment or a related serious health
condition by or under the supervision of a health-care provider or for recov-
ery from treatment or recovery from a serious health condition. It also may
be taken to provide care or psychological comfort to an immediate family
member with a serious health condition.

FMLA Eligibility

To be eligible for FMLA benefits, an employee must meet the following
conditions:

• Work for a covered employer
• Have worked for the employer for at least a total of 12 months
• Have worked at least 1,250 hours during the past 12 months
• Work at a location where the employer within a 75-mile radius employs

at least 50 employees

Note: An employee also is eligible if he/she has worked at least 12 months
for a covered employer that has failed to keep records regarding service time.

A covered employer must grant an eligible employee as many as 12 work-
weeks of unpaid leave during any 12-month period for one or more of the
following reasons:

• Birth of a child and to care for the newborn child or for placement of
a child for adoption or foster care

• To care for an immediate family member (spouse, child, or parent)
with a “serious health condition”

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Government Regulation of Benefits Plans 207

• To take medical leave when the employee is unable to work because of
a “serious health condition.”

• For “any qualifying exigency” arising when a military family member is
on active duty with the National Guard or Reserves or called to active
duty status in support of a contingency operation

A covered employer must also grant an eligible employee as many as
26 workweeks of unpaid leave during any 12-month period to care for a cov-
ered service member with a serious illness or injury incurred in the line of
duty on active duty.

Designation

The employer is responsible for designating leave as FMLA-qualifying. An
employee giving notice of the need for FMLA leave must explain the reasons
for the leave so as to allow the employer to determine whether the leave is
FMLA-qualifying. If the employer does not have sufficient information about
the reason for an employee’s use of leave, the employer should request more
information from the employee to determine whether leave is potentially
FMLA-qualifying. An employer may deny leave if the employee fails to
explain the reasons for the leave.

Once the employer has acquired knowledge that the leave is being taken
for an FMLA-qualifying reason, the employer must notify the employee
within five business days that the leave is designated and will be counted as
FMLA leave. An employer may, however, retroactively designate leave as
FMLA leave with appropriate notice to the employee provided that the
employer’s failure to timely designate leave does not cause harm or injury to
the employee. In all cases where leave would qualify for FMLA protections,
an employer and an employee can mutually agree that leave be retroactively
designated as FMLA leave.

Military Leave Policies

In 2009, the Department of Labor issued final regulations updating the
FMLA to include two types of military leave:

“Qualifying exigency” leave provides up to 12 weeks of leave to eligible
employees with a covered military member serving in the National Guard or
Reserves for “any qualifying exigency” arising out of the fact that a covered mili-
tary member is on active duty or called to active duty status in support of a con-
tingency operation. A qualifying exigency includes one or more of the following:

• Short-notice deployment
• Military events and related activities
• Childcare and school activities
• Financial and legal arrangements
• Counseling
• Rest and recuperation

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208 Benefits Basics

• Post-deployment activities
• Additional activities not encompassed in the other categories, but

agreed to by the employer and employee

“Military caregiver” leave provides up to 26 weeks of leave to eligible
employees who are family members of a covered service member will be
able to take leave to care for a covered service member with a serious ill-
ness or injury incurred in the line of duty on active duty. Military family
leave is available to “next of kin,” defined as the nearest blood relative,
other than the covered service member’s spouse, parent, son, or daughter,
in the following order of priority: (1) blood relatives who have been
granted legal custody of the service member by court decree or statutory
provisions, (2) brothers and sisters, (3) grandparents, (4) aunts and uncles,
and (5) first cousins.

Substitution of Paid Leave

In most cases, FMLA leave is unpaid. However, under certain circumstances,
an eligible employee may use paid leave provided by the employer concur-
rently with unpaid FMLA leave, which is referred to as substitution of paid
leave for purposes of the FMLA. If an employee does not choose to substi-
tute accrued paid leave, the employer may require the employee to substi-
tute accrued paid leave for FMLA leave.

An employee must qualify for paid leave under the terms and conditions
of the employer’s normal leave policy in order to substitute paid leave. If an
employee does not meet the additional requirements in an employer’s paid
leave policy, the employee is not entitled to substitute accrued paid leave,
but remains entitled to take unpaid FMLA leave. Thus, for purposes of sub-
stituting paid leave, an employer may require that an employee take a mini-
mum period of leave time, such as one full day, or provide a minimum
number of days of notice, if those conditions are required under the
employer’s paid leave program.

Serious Health Condition

“Serious health condition” means an illness, injury, impairment, or physical
or mental condition that involves one of the following:

• Inpatient care (i.e., overnight stay) in a hospital, hospice, or residential
medical care facility, including any period of incapacity (i.e., inability
to work, attend school, or perform other regular daily activities due to
the serious health condition, treatment therefore, or recovery there
from), or any subsequent treatment concerning such inpatient care.
The first (or only) in-person treatment visit must take place within sev-
en days of the first day of incapacity.

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Government Regulation of Benefits Plans 209

• Continuing treatment by a health-care provider. A serious health condi-
tion involving continuing treatment by a health-care provider includes
any one or more of the following:

A period of incapacity of more than three consecutive calendar days
and any subsequent treatment or period of incapacity relating to the
same condition, which also involves:

• Treatment two or more times, within 30 days of the first day of
incapacity, by a health-care provider, by a nurse or physician’s as-
sistant under direct supervision of a health-care provider, or by
a provider of health-care services (e.g., physical therapist) under
orders or on referral by a health-care provider

• Treatment by a health-care provider on at least one occasion that
results in a regimen of continuing treatment under the supervision of
the health-care provider

• A period of incapacity due to pregnancy or for prenatal care.
• A period of incapacity or treatment due to a chronic serious health

condition that continues over an extended period, requires periodic
visits to a health-care provider, and may involve occasional episodes
of incapacity (e.g., asthma, diabetes).

• A period of incapacity that is permanent or long-term due to a con-
dition for which treatment may not be effective (e.g., Alzheimer’s, a
severe stroke, terminal cancer).

• Any absences to receive multiple treatments for restorative surgery
or for a condition that would likely result in a period of incapacity of
more than three days if not treated (e.g., chemotherapy or radiation
treatments for cancer).

Note: According to the DOL regulations, an employee is unable to per-
form the functions of the position if the health-care provider finds that
the employee is unable to work at all or is unable to perform of any one of the
essential functions of the employee’s position within the meaning of
the Americans with Disabilities Act (ADA).

An employee who is injured on the job will likely qualify for workers’ com-
pensation and thus will not use accrued paid leave. When workers’ compensa-
tion only replaces a percentage of an employee’s salary, though, an employer
and employee may voluntarily agree, subject to state law, to use paid leave to
supplement the workers’ compensation benefits. The workers’ compensation
absence will count against the employee’s FMLA entitlement if the employer
properly designates the leave as FMLA leave (as described above).

Maintenance of Health Benefits

A covered employer is required to maintain group health insurance cover-
age for an employee on FMLA leave whenever such insurance was provided

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210 Benefits Basics

before the leave was taken and on the same terms as if the employee had
continued to work.

Where appropriate, arrangements will need to be made for employees
taking unpaid FMLA leave to pay their share of health insurance premiums
while on leave. For example, if the group health plan involves co-payments
by the employer and the employee, an employee on FMLA leave must con-
tinue making his/her portion of the insurance premium payments to main-
tain insurance coverage, as must the employer. The employer must provide
the employee with advance written notice of the terms and conditions under
which these payments must be made.

The employer is responsible for designating whether paid leave used by
an employee counts as FMLA leave, based on information provided by the
employee (as described above). Continued health insurance coverage dur-
ing FMLA leave must be at the same co-payment rates as for active employ-
ees. Higher COBRA premiums may be required only after FMLA leave ends.

An employer’s obligation to maintain health benefits under FMLA ends if
an employee informs the employer that he/she does not intend to return to
work at the end of the leave period, or if the employee fails to return to work
when the FMLA entitlement is completed. In certain instances, the employer
may recover premiums it paid to maintain health insurance coverage for an
employee who fails to return to work from FMLA leave. However, an
employer cannot recover premiums paid to maintain group health coverage
if the employee does not return to work due to (i) the continuation, recur-
rence, or onset of a serious health condition of the employee, the employee’s
family member, or a covered service member, or (ii) circumstances beyond
the control of the employee.

In addition, an employer’s obligation to maintain health insurance cover-
age generally ceases under FMLA if an employee’s premium payment is
more than 30 days late. To stop coverage for an employee whose premium
payment is late, the employer must provide written notice to the employee
that payment has not been received. Such notice must be mailed to the
employee at least 15 days before coverage is to cease, advising that coverage
will stop on a specified date unless payment has been received by that date.

The Health Insurance Portability and Accountability Act of 1996

Title I: Group Health Plan Portability

Title I of the HIPAA amended Title I of ERISA, the IRC, and the Public
Health Service Act (PHSA) to impose new requirements on employer-
sponsored group health plans, insurance companies and health maintenance
organizations (HMOs). These rules include provisions that limit exclusions
for pre-existing conditions, prohibit discrimination against employees and
dependents based on their health status, and guarantee renewability and
availability of health coverage to certain employers and individuals.

While these protections are often referred to as the “health-care portabil-
ity” rules, they do not provide for true portability in that a person transferring

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Government Regulation of Benefits Plans 211

from one plan to another is provided with and entitled to only the benefits
under the new plan. Coverage under the new plan could be less or greater.
Moreover, employers and insurance companies may continue to establish
waiting periods before enrollees become eligible for benefits under the
plan, and HMOs may have “affiliation periods” during which an enrollee
does not receive benefits and is not charged premiums. Affiliation periods
may not last for more than two months, however, and they only are allowed
for HMOs that do not use preexisting condition exclusions. Even after
HIPAA, the provision of health coverage by an employer is still voluntary.

Preexisting Condition Limitations

HIPAA limits the extent to which group health plans can limit coverage of
preexisting medical conditions by requiring plans to cover an individual’s
preexisting condition after 12 months (or 18 months in the case of a late
enrollee). Moreover, for purposes of determining the preexisting exclusion
period, employees must be given credit for previous coverage that occurred
without a “break in coverage” of 63 days or more. This is referred to as “cred-
itable coverage.” Any coverage occurring prior to a break in coverage of 63
days or more would not be credited against an exclusion period. Significantly,
COBRA coverage counts as creditable coverage.

Preexisting Conditions

Under HIPAA, a preexisting condition is a condition for which medical
advice, diagnosis, care, or treatment was recommended or received within
the six-month period ending on the enrollment date in any new health plan.
Thus, if an employee had a medical condition in the past, but he/she
received no medical advice, diagnosis, care, or treatment within the six
months prior to enrolling in the plan, the old condition is not a preexisting
condition for which the exclusion can be applied.

Certificates of Creditable Coverage

HIPAA requires insurers and group health plans to provide documentation
(referred to as “certificates of creditable coverage”) to individuals attesting to
their creditable coverage. Insurers and group health plans that fail or refuse
to provide certificates of creditable coverage in a timely manner are subject
to penalties. HIPAA also requires that a process be established that will allow
individuals to show they are entitled to creditable coverage in situations
where they cannot obtain a certification from an insurer or group health plan.

Nondiscrimination

Group health plans and issuers may not establish eligibility for enrollment
based on an employee’s health status, medical condition (physical or
mental), claims experience, receipt of health care, medical history, genetic
information, evidence of insurability, or disability. For example, an employee
cannot be excluded or dropped from coverage just because he/she has a

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212 Benefits Basics

particular illness. Employers may establish limits or restrictions on benefits
or coverage for similarly situated individuals under a plan, but they may not
require an individual to pay a premium or contribution that is greater than
that for a similarly situated individual based on health status. HIPAA does
not require specific benefits, nor does it prohibit a plan from restricting the
amount or nature of benefits for similarly situated individuals.

The Patient Protection and Affordable Care Act of 2010

The Patient Protection and Affordable Care Act of 2010, as amended by the
Health and Education Reconciliation Act of 2010 – referred to collectively
in this chapter as the “Affordable Care Act” or, simply, the “Act”) – together
transformed the regulation of health-care financing in the United States.
The Act’s provisions include:

• An expansion of Medicaid eligibility, extending funding for the Children’s
Health Insurance Program (CHIP), and subsidizing private insurance
premiums and cost-sharing for certain lower-income individuals.

• A series of measures aimed at enhancing the delivery and quality of
patient care.

• Pilot, demonstration, and grant programs to test integrated models of
care. This includes accountable care organizations (ACOs), medical
homes that provide coordinated care for high-need individuals, and
bundling payments for acute-care episodes (including hospitalization
and follow-up care).

• A new agency to test payment and service delivery models, primarily
for Medicare and Medicaid beneficiaries. It mandates pay-for- reporting
and pay-for-performance programs within Medicare that will pay
providers based on the reporting of, or performance on, selected
quality measures.

• Incentives for promoting primary care and prevention, for example, by
increasing primary care payment rates under Medicare and Medicaid;
covering some preventive services without cost-sharing; and funding
community-based prevention programs, among other things.

Each of these programs, while important in the larger context of health-
care reform, are beyond the scope of this work, the focus of which is
employee benefits and programs.

Titles I and X of the Act, which include insurance market reforms, indi-
vidual and employer mandates, state-based insurance exchanges, low-income
premium support, and cost-sharing subsidies, and tax financing, are of par-
ticular concern to employers and employer-sponsored group health plans. It
is these provisions that – directly or indirectly – required significant design
and operational changes to all employer-sponsored group health plans,
whether fully insured or self-funded. The market for individual health insur-
ance coverage has been similarly affected. Most of these “employer” provi-
sions of the Act took effect in 2014, but certain insurance market reforms
affecting group health plans took effect on or shortly after enactment.

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Government Regulation of Benefits Plans 213

The Affordable Care Act represents the culmination of decades of efforts
to reign in health-care costs, improve the quality of medical outcomes, and
expand coverage. The law implemented a series of market-based reforms
that built on existing structures, i.e., the commercial insurance market and
employer-provided group health insurance to reach its goals. This approach
stands in marked contrast to other approaches, such as single-payer, which
are politically far less palatable. To say that the law is politically divisive is an
understatement. While outright repeal is unlikely, it is likely to undergo sig-
nificant changes.

As of August 2020, the individual mandate (health insurance coverage)
is no longer mandatory at the federal level. Some states, however, still require
individuals to have health insurance coverage to avoid a tax penalty.

In addition, as of this writing (August 2020), while cost-sharing subsidies
are still available for eligible marketplace enrollees, the federal government
will no longer be reimbursing insurers for these subsidies. Insurers, how-
ever, are required by law to provide reduced cost-sharing for lower-income
enrollees.

For many years, the federal government has encouraged the development
of employee benefits plans because of their social value. One way this has
occurred is through changes in the tax code. In recent years, however,
increasing controls and regulations have offset some tax advantages.
These include:

• Federal tax advantages for both employers and employees.
• “Qualified plans” that meet IRS requirements and receive allowable

offsets for statutory coverage.
• Pension plan changes (see Sidebar 8.1).

Sidebar 8.1 The Pension Protection Act’s Impact on Total
Rewards Professionals

The Pension Protection Act (PPA) of 2006 ushered in perhaps the
most significant changes to impact retirement security in 20 years.
Most of the provisions did not take effect until 2008, but the bill had
immediate and long-lasting effects on how employers provide retire-
ment security to their employees.

Highlights of the Act include:

• The PPA requires plans to be 100 percent funded and tightens the
actuarial assumptions that apply when employers calculate
the accrued liability and the return on plan assets.

• The PPA amended section 409A of the Internal Revenue Code
to provide a 20 percent excise tax penalty to certain executives
if funds are set aside to pay nonqualified deferred compensation
if the employer or a member of its controlled group is bankrupt,
has an at-risk plan, or a plan that has terminated with insufficient
assets to cover all liabilities. In addition, the PPA blocks the

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214 Benefits Basics

The role of government in addressing the social needs of the nation
underwent a dramatic and controversial change in the 1980s and 1990s.
Federal budget deficits forced Congress to:

• View with caution any proposals for new programs that would require
increased federal spending.

• Look for additional methods of increasing revenues by taxing items
that had not been taxed before.

employer from taking a deduction for tax gross-up payments
intended to cover the penalties triggered by funding nonquali-
fied deferred compensation.

• The PPA restricts payments from plans that are less than 60 per-
cent funded and prohibits benefit increases for plans that are less
than 80 percent funded, using a special liability measure, and lim-
its lump-sum payments.

• The PPA permits employees who reach age 62 to continue working
and to receive pension payments without being penalized under
tax law or the Employee Retirement Income Security Act (ERISA).

• The PPA sets a single age discrimination standard for all defined
benefit (DB) plans under ERISA. It clarifies that hybrid plans
such as cash balance or pension equity plans do not violate the
age discrimination provisions in ERISA, the Code or the Age
Discrimination in Employment Act (ADEA) if the individual’s
accrued benefit would be equal to or greater than any similarly
situated younger individual who could be a participant.

• The PPA places restrictions on conversions from traditional DB to
hybrid plans. It requires employers to start benefit accruals under
the new plan immediately after a conversion takes effect.

• The PPA makes it easier for employers to encourage employee
participation in 401(k) plans by creating a safe harbor from fi-
duciary liability and state garnishment laws for automatic enroll-
ment programs.

• The PPA provides for the purchase of long-term care from annuity
and life insurance products, making these products more flexible.

• The PPA allows employees to diversify at any time out of employer
stock purchased with employee contributions. It requires employ-
ers to allow diversification out of employer contributions after the
employee has been in the plan for three years and may be phased
in over three years.

• The PPA requires all employer contributions, whether match-
ing or nonelective, to vest entirely after three years or phased in
20 percent per year starting in the second year the employee par-
ticipates in a plan.

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Statutory Benefits 215

Federal governing agencies that influence employee benefits plans
include the following categories.

Equal Employment Opportunity Commission (EEOC)

Established by Title VII of the Civil Rights Act of 1964, the EEOC began
operating on July 2, 1965. It enforces the following federal statutes:

• Title VII of the Civil Rights Act of 1964
• The Age Discrimination in Employment Act of 1967 (ADEA)
• The Equal Pay Act of 1963 (EPA)
• Title I and Title V of the Americans with Disabilities Act of 1990

(ADA)

Department of Labor (DOL)

The Employee Benefits Security Administration (EBSA), formerly known as
the Pension and Welfare Benefits Administration (PWBA), of the US
Department of Labor (DOL) is responsible for administering and enforcing
provisions of ERISA.

Securities and Exchange Commission (SEC)

The SEC is responsible for ensuring that employees as investors receive finan-
cial and other significant information concerning securities being offered
for public sale (e.g., company stock, 401(k), and employee stock owner-
ship plans).

Pension Benefit Guaranty Corporation (PBGC)

The PBGC, an agency under the EBSA, guarantees vested defined benefit
pensions up to a maximum amount established annually. Employers offer-
ing covered pension plans pay insurance premiums.

STATUTORY BENEFITS

Federal and state laws require all companies to offer the following “core”
benefits:

• Social Security (federal)
• Workers’ compensation (state)
• Unemployment compensation (state) and
• Nonoccupational disability (five states)

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216 Benefits Basics

Social Security

Since its creation in the 1930s, Social Security has been at the center of
national public policy debates. In 1945, there were 20 workers for every
retiree and few sources of retirement income security outside the extended
family. Today, there are only three active workers to support each retiree,
and extended families provide minimal support.

The Social Security system has four distinct types of benefits:

• OA – retirement income in “old age”
• S – survivor income
• D – disability income
• HI – health insurance benefits (Medicare)

The federal Old Age, Survivors, Disability, and Health Insurance Program
(OASDHI) emerged as a result of the Social Security Act of 1935. The fed-
eral budget now includes almost $500 billion in spending toward Social
Security; less than half of that amount goes toward retirement.

Old Age (OA): Retirement Benefits

Presently, the earliest age at which one can start receiving Social Security
retirement benefits is 62. Those born prior to 1938 are eligible to receive full
benefits beginning at age 65. Those born after 1959 cannot receive full ben-
efits until age 67. Those born between 1938 and 1959 are on a graduated
scale. An individual who wishes to retire early may do so but is subject to a
reduction in benefits as follows:

• 5/9 of 1 percent for each month (up to 36 months) that the benefit
is paid prior to full retirement age (FRA), plus 5/12 of 1 percent for
each month that the benefit is paid earlier than 36 months prior to full
retirement age.

Individuals also are eligible for increased benefits beyond full retirement age
(between 5 percent and 8 percent per year depending on the year of birth).

Floor of Protection

Monthly Social Security benefits provide a minimal standard of living.
Compensation is taxed and benefits are calculated based on the employee’s
covered compensation up to each year’s taxable wage base. Social Security,
however, was never intended to be a sole source of retirement income.

Previously, some retirement benefits were withheld from workers ages 65
through 69 when they reached a certain earnings level. In 2000, the
“Freedom to Work Act” was passed, allowing older workers who reached full
retirement age to work and receive their full Social Security retirement ben-
efits. There continues to be an earnings limitation for Social Security retir-
ees under the age of full retirement whose employment earnings exceed a
certain level.

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Statutory Benefits 217

Survivor Benefits

Sidebar 8.2 addresses the features of survivor benefits.

Social Security Health Insurance (HI)

Medicare is the most expensive component of Social Security. It covers per-
sons aged 65 and over and persons who are disabled and have been receiv-
ing disability benefits from Social Security for two years.

Covered individuals pay the deductible for each confinement. The
deductible is the amount that covered individuals pay for hospital charges,
as determined each year by the government, prior to Medicare paying.
Medicare pays the full cost of remaining charges for the first 60 days per
occurrence of illness. Many people choose to add Medicare Part B, a sup-
plemental insurance program (see Sidebar 8.3).

Other limited hospital insurance benefits include skilled nursing
facilities, home health services, and hospice care. Custodial care is not
covered.

Social Security FICA Tax

Federal Insurance Contributions Act (FICA) taxes are the taxes for Social
Security. Employers and employees equally share the tax, which was sepa-
rated into two components in 1991. As coverage has become more compre-
hensive and more people have become eligible, the tax rate and wage base
(indexed each year) have increased steadily. For the health insurance com-
ponent, 1994 was the first year that no maximum tax applied.

Sidebar 8.2 Social Security Survivor (S) Benefits Key
Characteristics

• $255 lump sum death benefit payment.
• Benefit has not been indexed.
• Was originally intended to cover funeral costs.
• Widows and widowers.
• Survivors age 60 and older.
• Survivors ages 50 to 59 if disabled.
• Any survivor age if caring for dependent children (under age 16).
• Dependent children to age 18 (19 if a full-time student).
• Dependent parents (age 62 and older) who had been receiv-

ing at least half of their support from the beneficiary at the
time of death.

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218 Benefits Basics

Sidebar 8.3 Medicare Part B: Supplementary Medical
Insurance Key Characteristics

• Cost

• Individuals who choose to participate in Part B: Supplementa-
ry Medical Insurance are required to pay a premium that is ad-
justed annually by the government. If a person does not enroll
upon initial eligibility, he or she remains eligible to enroll dur-
ing a future enrollment period but will pay a higher premium.

• Annual deductible

• After deductible, covered individuals pay 20 percent and
Medicare pays 80 percent.

• Basic list of covered services

• Physicians’ services

• Physical and occupational therapists

• Diagnostic X-ray, laboratory, and other tests

• Prescriptions

• In December 2003, President George W. Bush signed into law
the Medicare Prescription Drug, Improvement, and Moderni-
zation Act (H.R. 1). This act created a prescription drug ben-
efit for the first time in Medicare history (see Sidebar 8.4).

Sidebar 8.4 The Impact of Medicare Reform

H.R. 1, the Medicare Prescription Drug, Improvement, and Modern-
ization Act of 2003, had – and will continue to have – a major impact
on employer-provided benefits. A good start to understanding the
Act’s implications would be to examine the key provisions that affect
employers in this era of consumer-driven health care.

H.R. 1, commonly referred to as the Medicare Modernization Act
(MMA), ushered in some important changes by creating health savings
accounts (HSAs), which greatly alter the landscape of employer-
provided health-care arrangements.

An HSA is a trust created for an individual that is established to pay
the qualified medical expenses of the individual (or the individual’s

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Statutory Benefits 219

dependents). The trustee typically is a bank, an insurance company, or
a third-party administrator. HSAs are not taxed on any earnings accrued
while the assets are held in trust.

HSAs, which took effect at the beginning of 2004, are portable
(meaning rollovers are permitted from other HSAs) and may be
funded on a pretax basis and through a cafeteria plan. Additionally, an
individual’s HSA can be transferred tax-free upon divorce or separa-
tion to another individual or to the individual’s spouse upon death. If
the HSA is transferred to someone other than the individual’s spouse
upon death, the account ceases to be an HSA and the HSA assets
become taxable income at the fair market value to the individual or
the individual’s estate.

The Tax Relief and Health Care Act of 2006 includes important
changes for HSAs. The law, according to the Employee Benefits
Institute of America Inc., affects HSA eligibility for certain individuals
who are covered by health flexible spending arrangements (health
FSAs) during a grace period, changes the limits for allowable HSA con-
tributions, and allows a rollover from an IRA, health reimbursement
arrangement (HRA), or health FSA to an HSA under certain conditions.

Medicare Part D

Under MMA, Medicare Part D provides a limited, voluntary benefit for
outpatient prescription drugs. Although the number of employers
offering post-retirement health benefits has declined significantly in
recent years, Medicare’s new drug benefit has revitalized discussions
about whether and how to provide retiree health care.

The Medicare prescription drug benefit (Part D) is delivered to ben-
eficiaries either through a private prescription drug plan (PDP) or
Medicare Advantage plans (either Medicare HMOs or PPOs).

Medicare prescription drug plans must, at a minimum, provide a
standard level of coverage. There are various plans available, much like
private coverage. Those who qualify for extra help because of limited
income and assets receive help that pays for all or part of the monthly
premiums, deductible, and fills in the coverage gap and lowers the
prescription copayments.

If a beneficiary’s employer continues to offer prescription drug
coverage, he or she can decide whether to keep the existing coverage
or switch to another plan. Note: Those who drop their employer-
sponsored drug coverage may not be able to re-enroll.

As of this writing, employer-sponsored plans that provide an
“actuarially equivalent” prescription drug benefit to Medicare benefi-
ciaries are eligible to receive a financial subsidy to help offset their
costs. For up-to-date information, go online and visit www.medicare.gov.

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http://www.medicare.gov/

220 Benefits Basics

Workers’ Compensation

Workers’ compensation is employer-paid and offered by all states. The
employee receives income and the employer pays for medical and rehabilita-
tion costs associated with a work-related incident resulting in an injury or illness.

Unemployment

Like workers’ compensation, unemployment compensation is employer-
paid and offered by all states. Unemployment compensation provides
income (for a period of time) to an employee who loses employment and is
willing and able to work.

Nonoccupational Disability

Five states (New York, New Jersey, Rhode Island, California, and Hawaii)
offer a nonoccupational disability benefit. The benefit provides temporary or
short-term income due to a nonoccupational incident resulting in a disability.

HEALTH AND WELFARE PLANS

Health and welfare plans are critical components of the employee benefits
package. These plans have been affected by significant changes over the
years, including the introduction of managed care in the 1990s. However,
escalating health costs, particularly for prescription drugs, have placed
increasing pressure on benefits professionals attempting to continue to
offer competitive benefits while maintaining fiscal responsibility for their
employers’ benefits budgets. As a result of these challenges and changes in
the tax code, programs such as consumer-driven health plans have emerged,
offering employees greater benefits choices with certain tax incentives.

Health and Welfare: A Brief History

When Social Security first surfaced in the 1930s, it excluded health insur-
ance, causing the private sector to take the lead in sponsoring health insur-
ance coverage. Blue Cross/Blue Shield developed private plans, soon to be
followed by commercial insurers.

The wage freezes of the post–WWII era prompted companies to offer
noncash rewards in the form of health care. This is where the entitlement
mentality began, with employees feeling entitled to health-care insurance.
Soon after, the Taft–Hartley Act mandated the inclusion of benefits in col-
lective bargaining. This era also saw the first major medical benefits intro-
duced, supplementing the hospital and surgical coverage previously offered.

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Health Care 221

Over time, more companies began offering health insurance and other
options, such as dental. However, health-care costs began rising faster than the
consumer price index. US workers began to retire as they reached age 65 and
they found no viable health-care insurance available. The federal government
responded by instituting programs such as Medicare and Medicaid.

The lack of cost-cutting initiatives soon led to rising health-care costs and
the emergence of health maintenance organizations (HMOs) to curb these
costs. Congress then enacted ERISA to protect qualified benefits plans, and
the introduction of diagnostic related groups of service (DRGs) helped curb
Medicare costs.

Soon, unions began to reduce bargained benefits due to most companies’
inability/unwillingness to sustain current levels of coverage. Larger num-
bers of employers self-insured, finding they had more control over benefits
offered and associated costs.

Although HMOs did help to control costs, quality of care and choice of
providers became a prevailing issue with employees. Enter the era of pre-
ferred provider organizations (PPOs) with negotiated-fee contracts and a
larger choice of providers.

Now, as health-care costs again rise, many employers are opting to embrace
a strategic approach to consumerism.

Health and Welfare Plan Elements

Health and welfare plans are primarily categorized as follows:

• Health care
• Medical
• Prescription drug
• Behavioral health
• Dental
• Vision
• Long-term care

• Disability income
• Sick leave
• Short-term disability and/or salary continuation
• Long-term disability

• Survivor benefits
• Term life
• Accidental death and dismemberment
• Dependent life
• Business travel accident

HEALTH CARE

Health-care programs, specifically medical care, are generally the most pop-
ular and most expensive component of a company’s employee benefits

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222 Benefits Basics

program. Managed care plans, the most prevalent medical care programs,
attempt to control cost and ensure quality of care by encouraging the utiliza-
tion of network providers who have agreed to accept discounted fee pay-
ments. These models include health maintenance organizations (HMO),
preferred provider organizations (PPO), point of service (POS), and other
hybrid arrangements. Indemnity plans, now rare, are traditional plans that
provide specific cash reimbursement for covered services.

Health Maintenance Organization (HMO)

An HMO provides a network of physicians and hospitals for employees and
their dependents to receive comprehensive care, including preventive care.
The traditional HMO model requires receiving a referral from the primary phy-
sician or “gatekeeper” to receive care from a specialist. Otherwise, the employee
could be liable to pay the total cost to see the specialist (see Sidebar 8.5).

Sidebar 8.5 Health Maintenance Organization (HMO)
Key Characteristics

HMOs are managed care plans that attempt to control the cost and
ensure quality of care by encouraging preventive care. They provide
both the financing and delivery of comprehensive medical coverage.
Key features include:

• Primary care physician (PCP)

• Employee-selected physician that provides all routine medical
care.

• Serves as gatekeeper by controlling specialist referral, there-
fore curbing unnecessary medical expenses.

• Preventive/routine care typically includes:

• Well-woman, well-man, well-baby care

• Routine physicals

• Immunizations

• Copayments eliminate deductibles and coinsurance.

• Provider pay is sometimes on a capitation or discounted fee-for-
service basis; physicians are sometimes salaried.

• HMO models

• Independent Practice Association (IPA)

• Group Practice Association (GPA)

• Staff

• Combinations

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Health Care 223

Preferred Provider Organization (PPO)

Unlike HMOs, the PPO model does not include a primary physician or gate-
keeper. PPOs include two levels: in-network providers (physicians and hospi-
tals) and out-of-network providers. By using the in-network providers,
employees receive a higher level of reimbursement for care. The PPO pro-
vider should not bill the employee for any differences between the dis-
counted contracted rate and the provider’s normal fee. In contrast,
out-of-network providers could charge more for services rendered (see
Sidebar 8.6).

Sidebar 8.6 Preferred Provider Organization (PPO) Key
Characteristics

PPOs are arrangements where providers agree to discount their nor-
mal fees. They continue to have the highest enrollment on a national
basis. Key features include:

• Discounted fee for service

• To achieve greater volume

• No capitation

• Fees subject to a schedule

• Broader choice of providers

• Choice of provider is usually made at time medical care is
needed.

• Incentives to use preferred providers

• Lower or reduced deductibles and coinsurance

• Increased coverage, such as preventive care

• In-network/out-of-network

• Patient may access in-network specialty care without primary
care physician gatekeeper coordination.

• If patient chooses out-of-network care, financial incentives do
not apply.

• Utilization reviews

• Assessment of medical necessity

• Curbs unnecessary procedures and monitors hospital stays

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224 Benefits Basics

Point of Service (POS)

A typical POS is a combination of HMO and PPO. The employee would
need a referral to see an in-network specialist (similar to an HMO). However,
the cost for seeing an out-of-network specialist would be higher than an
in-network provider (similar to a PPO).

Point of service (POS) evolved as a response to a market force. It addressed
the concerns employees had about being locked into the narrow network of
an HMO plan. POS combines discounted fee agreements for cost savings
with employee choice. Key features include:

• A hybrid between traditional indemnity, HMOs, and PPOs
• A coordinated delivery system aimed at managing utilization and cost

by means of:

• Eliminating excessive utilization
• Reducing costs through negotiated discount payments and

capitation
• Aligning the interests of all payers

Indemnity Plans

Traditional indemnity medical plans (offered by Blue Cross/Blue Shield)
are still available, but at a rapidly decreasing rate. The first health insurance
plan in existence, an indemnity plan is designed where the employee pays a
deductible after base benefits are exhausted. Indemnity plans offer greater
“freedom of choice” in selecting providers because referrals are not needed,

• Choice of providers

• Selected at time of treatment.

• Primary care physician gatekeeper coordinates in-network spe-
cialty care in network/out-of-network benefits.

• Out-of-network provider, deductibles, and copayments tend to
be higher. Meaningful coinsurance differential provides incen-
tives to use in-network.

• Patient retains some coverage for services even if not author-
ized by primary care physician.

Models

• Open-ended

• Gatekeeper

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Health Care 225

and the employee is free to visit any provider. However, the indemnity is now
rare since it is the most expensive medical model.

Prescription Drug Coverage

Prescription/drug programs are growing in popularity and costs. These pro-
grams can be part of the medical program or carved out and managed by a
Pharmacy Benefit Manager (PBM). Companies are now offering three or four
tiers of coverage. Employee copayments also increase by tier. Examples include:

Tier 1: Generic drugs $10–$15 copayment
Tier 2: Brand drugs $20–$25 copayment
Tier 3: Lifestyle drugs $30–$50 copayment
Tier 4: Mail order Three-month supply for “maintenance”

drugs. Copayment can be equal to one or
two months’ copayments.

Copayments can be a percentage of costs instead of a dollar amount.

Behavioral Health

Coverage includes mental health and chemical dependency services.
Services can be provided on an inpatient or outpatient basis and are often
integrated with an employee assistance program (EAP).

Dental Plans

Most dental plans have four components:

1. Preventive and diagnostic
2. Basic services
3. Major services
4. Orthodontia

Dental plans often provide 100 percent reimbursement for preventive
and diagnostic services; charges for these services usually are not subject to
a deductible. The rationale is to encourage employees to have periodic den-
tal visits because these exams can help prevent future dental services more
costly to both the employer and employee.

Deductibles can apply to all other services. Because of costs, orthodontia
(installation and adjustment of braces) is not included in all dental plans or
only applies to dependent children. In addition, orthodontia services are
usually subject to a per-person lifetime maximum ($1,000–$1,500).

The traditional dental model is the indemnity approach (similar to medi-
cal indemnity model). To control costs and expand services, companies

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226 Benefits Basics

provide managed care models called DMO (dental management organiza-
tion – similar to medical HMO) or a DPPO (dental preferred provider
organization – similar to medical PPO).

Vision Care Plans

Vision care plans often provide a flat-dollar rate of reimbursement or a spe-
cific percentage reimbursement for an annual eye examination and a new
pair of lenses per year. New frames are usually limited to one pair every
two years.

Concern for eyewear and strain is growing due to increased computer use.

Long-Term Care

Long-term care is growing in importance as people live longer. Coverage
commences when a person is unable to perform at least two of the five
daily living activities – bathing, dressing, eating, walking, and using the
bathroom.

DISABILITY INCOME

Disability income benefits are income replacement programs provided by
employers or public agencies during the time an employee is unable to work
due to a qualified disability.

Sick Leave

Key features:

• Specified number of days
• Based on service
• Continuation of full pay
• May be carried from one year to the next

Short-Term Disability (STD)

The STD benefit provides income when an employee is unable to work due
to a short-term nonoccupational illness or injury. There is usually a seven-
day calendar waiting period to qualify for benefit coverage that commences
after the seventh day from the incident. Benefits can extend for up to six
months. Payment is a percentage of pay, often 50 percent up to a
weekly maximum.

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Survivor Benefits 227

Long-Term Disability (LTD)

The LTD benefit provides income due to a nonwork illness or injury; pay-
ments can be up to age 65. The waiting period to qualify for coverage ranges
from three to six months from the date of incident. Payments range from 50
percent to 67 percent of wages up to a maximum monthly amount.

While an employee collects LTD, most employers will continue to accrue
pension benefits for the employee at the pre-disability rate of pay.

If the employee pays the full cost of LTD coverage with post-tax dollars,
then any benefits paid are nontaxable. If the employer pays the full cost of
LTD coverage or the employee pays the premium with pretax dollars, then
any benefits paid are subject to tax.

LTD plans typically have a split definition of disability eligibility. To be
eligible, an employee must be unable to perform current job duties for the
first two years when benefits are payable; and thereafter, unable to perform
job duties of any occupation. This transition period is designed to help an
employee prepare to change careers without a loss of income.

SURVIVOR BENEFITS

Term Life Insurance

The most typical form of survivor benefits is term life insurance. The insur-
ance is paid to the employee’s designated beneficiary (who can be anyone)
in a lump sum. In contrast, under statutory programs such as Social Security
and workers’ compensation, payment of survivor benefits depends on
whether the employee has a spouse or eligible dependents as outlined by
applicable law.

The practice for lump sum payments for exempt (salaried) staff is usually
multiples of annual salary. The norm for nonexempt (hourly) workers is a
flat dollar amount (independent of annual wages) but in some companies is
multiples of annual wages. Term life insurance ends upon termination of
employment. Employees have the right to convert within 30 days of termina-
tion to a whole life or universal life insurance policy. Rates per $1,000 of
coverage are based on age. The benefit to employees is the waiving of pass-
ing a physical.

The Internal Revenue Code permits an employer to provide up to $50,000
of noncontributory group life insurance to an employee without any tax
consequences, provided the plan does not discriminate in favor of higher-
paid employees. Employees who receive more than $50,000 of employer-
paid group life insurance are subject to additional taxes depending on an
employee’s age and amount of coverage in excess of $50,000. This addi-
tional tax is called imputed income tax.

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228 Benefits Basics

Accidental Death and Dismemberment (AD&D)

AD&D provides a benefit to the employee in the event of dismemberment
or the beneficiary in the event of accidental death. It often duplicates the
term life amount and has two components: company-paid portion and sup-
plemental (employee-paid) portion.

Supplemental Life Insurance

It’s common for employers to provide employees with opportunities to pur-
chase additional term life insurance. Rates vary by employees’ ages. Older
workers pay more per $1,000 of coverage than younger workers.

Dependent Life Insurance

Employees can purchase life insurance for a spouse and dependent chil-
dren. This benefit is often called burial insurance. The monthly premium is
usually very low, and the benefit is a set dollar amount.

FLEXIBLE BENEFITS

Flexible benefits provide employees with choices that allow them to select
between cash and one or more qualified (nontaxable) benefits (e.g., health,
life, disability insurance). Made possible by Section 125 of the Internal
Revenue Code (IRC), flexible benefits plans are also referred to as cafe-
teria plans.

Employees have a chance to change elections to their flexible benefits
plan during an annual open enrollment period held by the employer.
Changes during a plan year are only allowed in the event of a “qualified sta-
tus change” as defined by the IRS. Qualified status changes include the birth
or adoption of a child, the death of a dependent, open enrollment at a
spouse’s place of employment, marriage, or divorce.

Flexible benefits allow employers to:

• Manage rising costs
• Maximize employee perceptions of benefits
• Facilitate program design
• Readily adapt to change in laws, benefits, and business conditions
• Reap advantage of tax savings
• Support a total rewards focus
• Meet competitive pressures
• Maintain progressive company image

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Retirement Plans 229

RETIREMENT PLANS

Under the Employee Retirement Income Security Act of 1974 (ERISA), and
the Internal Revenue Code (IRC), employer-provided pension plans are
classified as either:

• Defined benefit (DB) plans, or
• Defined contribution (DC) plans.

Key differences between these two types of plans are highlighted in
Figure 8.5.

Defined Benefit (DB) Plans

A defined benefit plan promises an employee a specific future benefit if
certain age, tenure, and income projections are achieved. The actual plan
formula and the definition of earnings in the formula have a significant
impact on the level of benefits an employee will receive. Many DB plans use
the average of an employee’s highest five consecutive calendar years of earn-
ings during the employee’s last 10 years of service to calculate benefits. This
“high” five of past “10” method frequently is referred to as FAP, or final
average pay.

Defined Benefit Plans Defined Contribution Plans

Benefit is known. Benefit is unknown.

Cost is unknown. Cost is known.

Employer bears financial risk. Employee bears financial risk.

Generally provides higher
benefits for long-service
employees.

Can provide substantial benefits
to short-service employees.

Separate account for each
employee is not required.

Separate account for each
employee is required.

Requires sign-off by an
enrolled actuary.

Actuary not required. However,
record keeper is required.

Subject to PBGC premiums. Not subject to PBGC premiums.

FIGURE 8.5 Primary differences between defined benefit and defined
contribution plans.

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230 Benefits Basics

An example of a DB plan is found in Figure 8.6.
Cash-balance plans, also categorized under hybrid pension plans, are DB

plans. Companies have switched from traditional pension plans to cash-
balance plans since they are less costly to the employer and provide a guar-
anteed pension to workers. An employee’s vested balance is portable on
termination.

In DB pension plans, employers typically fund the plan 100 percent.
Employees make no contributions and become vested (entitled to pension)
upon being vested. However, even after becoming vested, an employee may
have to wait to receive the pension. Normal retirement is age 65 with early
retirement at age 55. Plans can have lower age limits.

Most companies use either “cliff” or “graded” vested schedules. Cliff
means the employee becomes fully vested after five years of qualified service.
With graded, an employee becomes partially vested after two years and
increases a percentage of vesting for each year after two, but must be fully
vested after seven years. These vesting schedules are used for “qualified
plans” as defined by ERISA. Qualified plans mean both the employer and
employee receive favorable tax treatments on pension monies.

Most DB pension plans provide a variety of payout options. A key consid-
eration is whether anyone is financially dependent on the employee.
Generally, a single life annuity option will provide the largest monthly pre-
mium. Following are the most prevalent:

• Single life annuity. Benefits are payable only to the employee. There is
no survivor benefit. When the employee dies, all payment ceases. This

Eligibility
Date of employment
Formula
1.75 percent final average pay X years of service
Final Average Pay
An employee’s highest five consecutive calendar years of earning during his
or her last 10 years of service
Normal Retirement
Age 65
Early Retirement
At least age 55 and 10 or more years of service
Vested Benefit
100 percent vested after five years of credited service
Payment Option
Lump sum or 50 percent joint and survivor annuity or 100 percent joint and
survivor annuity

FIGURE 8.6 Sample defined benefit plan.

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Retirement Plans 231

is the default option for single employees. This means if the single em-
ployee dies before selecting an option, the plan automatically selects
single life annuity.

• Joint and survivor option. The employee is the “joint” and the spouse is
the “survivor.” This is the default option for a married employee who
dies before electing an option. If a married employee wishes an op-
tion other than joint and survivor, then the employee’s spouse must
sign a form agreeing to permit the employee to do so. Otherwise, the
employee must use the joint and survivor option.

If the employee (joint) dies first, then the spouse (survivor), de-
pending on the percentage for this option, will receive 100 percent, 75
percent, or 50 percent of the employee’s monthly pension. Payment
will stop once the survivor dies. If the survivor dies before the employ-
ee, then payments will stop once the employee dies.

• Lump sum. The employer provides the employee with a lump sum
amount that is calculated by determining the present value of the
future annuity payments the employee could have received. Most plans
give employees a lump-sum payout if total payment is less than $5,000.

• Period certain. The employee receives a monthly amount for either
three years (36 months) or 10 years (120 months). If the employee
dies before receiving total months eligible, then the employee’s benefi-
ciary will receive the remaining number of monthly payments based on
option selected.

Defined Contribution (DC) Plans

DC plans are increasing in popularity since companies can control costs by
adjusting employer contributions, and many employees like the possibility
of managing their own pension monies. DC plans are also easier for
employees to understand and, in many cases, provide short-service employ-
ees with higher benefits than DB plans. With DB plans, the company makes
all decisions, including selection of investment vehicles. In contrast, with
DC plans, employees have greater say on investment options and amounts
to invest.

The most prevalent DC plan is a “savings/thrift” plan, with a 401(k)
feature. Sometimes these 401(k) plans are called “capital accumulation”
plans. An attractive feature is that employee contributions are tax
deferred. Many plans have “matching” employer contributions that can
be viewed by employees as “free money.” The match amount varies by
company. While in the plan, all monies compound tax-free. This means
that an employee pays federal and state withholding tax on redeeming
funds, preferably on retirement when the individual tax rate is usually
lower than while working. An example of a 401(k) plan is found in
Figure 8.7.

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232 Benefits Basics

Employees can make withdrawals for specific reasons, but the withdrawals
are generally subject to taxation. Therefore, many plans contain a loan pro-
vision that enables employees to borrow rather than withdraw funds when
necessary. IRS regulations limit the size of a loan to 50 percent of the employ-
ee’s vested account balance or $50,000, whichever is less.

Distribution options are available when an employee terminates employ-
ment. These include a lump-sum payment, an annuity arrangement, install-
ment payments, and a direct rollover to an IRA or another employer’s
qualified plan. By directly rolling over a lump-sum distribution to an IRA or
another qualified plan, an employee is able to avoid the 20 percent with-
holding tax required by government regulations.

Eligibility
First of the month coinciding with or next following date of employment
Employee Contributions
2 percent to 15 percent of an employee’s earnings

• Pretax basis or
• After-tax basis or
• A combination of pretax and after-tax

Company Contributions
50 percent match on first 6 percent contributed by employee
Vesting of Company Contributions (Cliff)
100 percent vested after three years of credited service
Investment Choices
Employee contributions

• Common stock fund
• Company stock
• Bond fund
• Fixed-rate-of-return vehicle

Company contribution – company stock
Withdrawal Provisions
Age 59 ½ or older
Death or disability
Retirement or termination of employment
Loan Provision
Up to 50 percent of value of vested account balance or $50,000, which-
ever is less
Payment Options
Cash
Company stock

FIGURE 8.7 Sample 401(k) plan.

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Pay for Time Not Worked Benefits 233

Vesting for employer contributions in 401(k) plans are:

1. 100 percent vested after three years if “cliff option” is selected.
2. 100 percent vested after six years if “graded” option is selected.

An employee is 100 percent vested immediately for all monies the
employee invests.

Other types of DC plans include:

• Money-purchase pension plans whereby the company contributes a speci-
fied percent of each employee’s salary to purchase annuities.

• Employee stock-ownership plans whereby the employee receives an annual
allocation of employer stock.

• Deferred profit-sharing plans whereby the company contributes an amount
of profits each year, and each participant is credited with a share.

PAY FOR TIME NOT WORKED BENEFITS

Pay for time not worked benefits are generally not regulated by the govern-
ment. Typically, they are covered by company policy. The most frequently
provided time-off benefits are:

Vacation

2. Sick leave
3. Legal holidays
4. Bereavement leave
5. Military leave
6. Jury duty
7. Personal holidays
8. PTO (paid time off) banks

Vacation

Vacation allowances are often based on service and position. Exempt staff
usually receives more generous vacation time than nonexempt, especially
during the earlier years of employment. Increases based on service can be
as follows:

Years of Service Annual Vacation Allowance

3 months to 1 year 5 days
1 to 5 years 10 days
5 to 15 years 15 days
15 to 20 years 20 days
20 or more years 25 days

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234 Benefits Basics

Sick Leave

Companies provide a set number of days per year for salary continuation in
the event an employee is unable to work due to a personal illness.

Legal Holidays

Most companies provide employees with payment for not working on legal
holidays. Holidays typically include:

• New Year’s Day
• Martin Luther King’s Birthday
• Memorial Day
• July 4th
• Labor Day
• Thanksgiving Day
• Christmas Day

Companies often pay nonexempt employees “premium” time if they work
on a legal holiday and grant another day off with pay as the legal holiday.

Bereavement Leave

Companies often grant time off to attend the funeral of an immediate family
member. Typical number of days off with pay is three.

Military Leave

According to the Uniformed Services Employment and Reemployment
Rights Act, employees who serve in the armed forces are entitled to the con-
tinuation of their position, seniority, status, and pay rate as if there had not
been a break in employment.

Jury Duty

Companies are required to grant employees time off for jury duty. The
employee receives nominal payment for serving from the court. Additional
compensation is based on company policy.

Personal Holidays

Companies frequently provide two to three paid personal days per year for
an employee to use for any purpose. Some companies view these days as
“emergency days.”

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Other Benefits 235

Paid Time Off (PTO) Banks

Unscheduled absences are costly and can negatively affect a company’s abil-
ity to meet customer demands. In response, companies are implementing
paid time off (PTO) programs to control costs associated with unscheduled
absences and give employees time off with pay to balance work and nonwork
pressures.

With PTO programs, an employee receives a bank of time to use for time
off activities regardless of reason. PTO replaces traditional separate accounts
for vacation, personal time, sick time, and in some cases legal holidays.
When designed properly, PTO can save a company money and still provide
a safety net of time off with pay for workers to meet nonwork pressures.

OTHER BENEFITS

Many “other benefits” are self-explanatory. However, it is important to note
that a specific written company policy should be prepared and available for
employees to use. Written policies help to ensure equity among all employ-
ees and resolve disputes if an employee questions the appropriateness of any
procedures. Examples of “other benefits” include:

Adoption benefit. Some companies decided that because medical plans pro-
vide maternity coverage, it is appropriate to also provide some reimburse-
ment to employees who elect to adopt a child. Reimbursements can range
from $1,500 to $3,000 per adoption.

Commuting assistance. This benefit includes vans or vouchers used for pub-
lic transportation.

Credit unions. These employee-run endeavors provide loans for employees
and give interest on account balances.

Dependent care and health-care reimbursement accounts (flexible spending
accounts). Both accounts use pretax dollars to reimburse for eligible ser-
vices and have a “use it or lose it” provision. This means any money left
in the plan at the end of the plan year’s grace period is forfeited back
to the plan.

With a dependent care account, an employee uses the money to reim-
burse caregivers who provide covered services to an employee’s dependent
child or children. With the health-care reimbursement account, an employee
pays for services not covered by the company’s health-care plans. Also
included are deductibles, copayments, and co-insurances.

Educational assistance plans. These plans are sometimes called tuition reim-
bursement plans. The plan provides for full or partial reimbursement of eligi-
ble educational expenses per year that are incurred by employees.

Employee assistance program (EAP). This program often features a toll-free
telephone number employees can call to seek help to resolve personal mat-
ters (i.e., financial, marital, or substance abuse problems).

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236 Benefits Basics

Employee health services. This benefit usually provides on-site medical
care in the event an employee becomes ill at work or is injured on
the job.

Financial counseling. This benefit provides financial advice to workers,
especially for those enrolled in 401(k) plans.

Flextime. This policy allows employees to choose convenient starting and
quitting times and under some plans, extended lunchtime, while still
requiring the standard number of hours worked each day or week.

Product/service discounts. Employees use many companies’ services and
products. Therefore, it’s common for companies to make their services or
products available to workers at a reduced cost.

Relocation allowances. Companies often ask exempt staff to relocate to a
different company facility. To assist with the move, companies underwrite
the costs to help cushion any upset associated with relocation. Allowances
are sometimes provided to new hires, but generally are less generous than
for current employees.

Subsidized food service. Employers typically subsidize the cost of food served
in employee cafeterias.

Job share. This is where two part-time workers end up doing the work of a
full-time employee. The two employees share the workload. This arrange-
ment is often effective when employees do not want to work full-time and
can complement each other.

THE IMPORTANCE OF EFFECTIVE COMMUNICATION

Effective communication (both written and oral) is essential for employees
to understand and appreciate the value of your company’s total rewards pro-
gram. Compared with wages and salaries, which are relatively easier to
understand and highly visible, benefits tend to be complex, diverse, and, to
some extent, hidden. You only use benefits when you need them. Therefore,
unused benefits tend to be invisible.

To be effective, a benefits communication program should:

• Meet legal requirements (ERISA) for reporting and disclosing critical
information to employees and regulators.

• Have means for employees to express interests and concerns and
include a feedback mechanism to respond to workers’ comments.

• Enable employees to clearly understand the provisions of their ben-
efit package.

• Gain employee confidence that the information about their benefits
is easily accessible and accurate, and that the benefit plans will deliver
what they promise.

• Highlight value of benefits.
• Have employees realize the dollar investment made by employers for

providing employees with benefits.

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The Importance of Effective Communication 237

Legal Requirements

ERISA (Employee Retirement Income Security Act) requires plan sponsors
(employers) to give participants (employees) various documents. Two
basic ones are:

1. A summary plan description (SPD) is the benefits “handbook.” This
document should explain the benefit in a way an average worker would
understand. The SPD must be given to each plan participant within 90
days of participation.

2. A summary annual report (SAR) includes key financial information
about the benefit plan. The SAR must be given to participants within
nine months following the end of each plan year.

In addition to satisfying ERISA reporting and disclosure provisions, ben-
efits administrators need to comply with other federal and state require-
ments for distributing and posting various information affecting employees.

Cobraize Employees

Employees become eligible for COBRA (Consolidated Omnibus Budget
Reconciliation Act of 1985) on losing welfare benefits due to various qualify-
ing events (e.g., loss of job). COBRA allows an eligible employee to continue
receiving some benefits for themselves and their eligible dependents and
spouse for up to 18–36 months by paying the full monthly premium, plus a
2 percent administrative fee.

Most workers are shocked with the high cost of medical coverage. The
information causes many employees to appreciate what the company had
done for them; unfortunately, this awareness occurs when most workers
leave the company.

What is recommended is to “Cobraize” employees the first day of employ-
ment (in addition to meeting traditional COBRA requirements). This means
informing employees what the employer is paying for benefits (in particular,
medical) in addition to what workers pay. Numbers convey value, and per-
haps the disclosure will cause employees to have a greater appreciation of
what companies are doing for them.

Creating and Building Awareness of Benefits

In some instances, employees and their dependents become aware of bene-
fits coverage only when needs become acute. For example, when someone
becomes ill or disabled, when the day of retirement nears, or when a death
occurs, there will be a search for and inquiries about necessary application
forms. However, workers may fail to use other company-provided benefits
unless they receive periodic reminders. Examples, as described earlier,

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238 Benefits Basics

include educational assistance, employee assistance programs, long-term
care, and adoption benefits.

Ways to inform employees about benefits include:

• Articles in company newsletters and company intranet site
• Notices posted on bulletin boards
• Information mailed to employees’ homes
• Payroll inserts
• Benefits fairs
• Special programs (e.g., a representative from the Social Security

Administration makes a presentation and answers questions)

Permit employees to invite nonworkers to attend benefits information
meetings held by the company. Often, benefit decision makers are not the
workers. Allowing employees to bring a family member or friend will help
foster better understanding and decision making.

Enhancing Confidence and Trust

Credibility is enhanced when employees have confidence in the accuracy of
plan information and believe they can obtain information about benefits on
a timely basis. Responding quickly and accurately is the key to building cred-
ibility. The delivery of benefits information to workers can be facilitated by
the use of:

• Interactive voice response via touch-tone telephones
• Touch-screen kiosks
• Intranet
• Email

Involve Employees in Benefit Changes

Many companies find success by actively involving employees when chang-
ing benefits programs. This includes use of “employee task forces” or “focus
groups” to review ideas and express opinions of planned changes. Other
task forces are asked to review proposed communication pieces to ensure
employee understandings. These interactions are similar to companies ask-
ing a group of paying customers to critique a new product or service before
being marketed.

Marketing executives have learned the value of customer feedback to
ensure new products or services meet customers’ needs. The best way is to
ask for comments rather than wait until after the product or service goes
live. The same logic applies to asking employees for comments prior to final-
izing a new benefits program or communication piece.

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2 Everything You Want to Know
about Compensation (but Were
Afraid to Ask)

Compensation systems have moved from backroom systems largely run by
HR into complex management systems that serve as the foundation for
organizational alignment and employee motivation, as well as providing
important support for job families and career pathing.

Compensation systems are important tools for managers, HR business part-
ners, and senior management. In large organizations with shared-services
models or centralized compensation functions, HR business partners often
broker compensation services on behalf of their business unit or division.
Some organizations now allow line managers direct access to salary struc-
tures, market pricing, and incentive payout predictors in order to recom-
mend initial hiring salaries, merit increases or incentive payout. Senior
management is typically actively involved in both setting objectives for com-
pensation and reward systems and monitoring/evaluating results.

In smaller organizations, HR business partners or one-person HR depart-
ments take on overall responsibility for everything from developing pay
strategy to overseeing pay administration for the local employee workforce.

The following discussion focuses on the fundamentals of compensation
systems within larger organizations. However, the concepts outlined are
applicable to organizations of all types and sizes. New approaches and ideas
are constantly being tested; the key, as always, is to ensure that the final sys-
tem meets the organization’s needs.

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EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS
AN: 2734783 ; WorldatWork, Dan Cafaro.; The WorldatWork Handbook of Total Rewards : A Comprehensive Guide to Compensation, Benefits, HR & Employee Engagement
Account: s4264928.main.eds

WorldatWork, & Dan Cafaro. (2020). The WorldatWork handbook of total rewards : A
comprehensive guide to compensation, benefits, HR & employee engagement. Wiley.

Chapter 2: Everything you want to know about compensation (but were afraid to
ask)

Book Title:

Aligning Compensation with Business Strategy 25

THE FOUNDATION: THE COMPENSATION PHILOSOPHY

Successful compensation programs are the result of well-defined and closely
managed systems. A compensation philosophy provides the foundation to
ensure that each of the different programs and systems is working in har-
mony with the others. A compensation philosophy should explain:

• Who the organization defines as labor competitors.
• How the organization prefers to set pay levels for its various job titles

compared to the market (at the market, ahead of the market, below the
market, on a total compensation basis, etc.).

• What the balance is between internal and external equity.
• The roles of managers, compensation, and HR in managing pay.
• What technology or systems will be used to manage pay.
• Frequency and timing of key events, such as merit increases (annual or

semi-annual, etc.).
• The type of incentives in use, as well as eligibility.
• The type of organizational culture and/or business results desired by

the company, and how the compensation systems will support each.
• ROI (return-on-investment) requirements for different types of programs.
• Sunset dates for any key programs, if applicable.
• The scope and type of programs used (e.g., the extent of variable pay).
• The role of quasi-compensation systems, such as rewards and

recognition.

These collective areas provide insight and direction to senior manage-
ment and the compensation function, as well as the entire HR organization.
In some cases, a compensation philosophy is a written document, often
summarized in employee handbooks. In other cases, the philosophy is less
documented and instead is a recognized set of practices.

Compensation philosophies provide an important foundation for the
development of all compensation programs. The most important part of the
process is the discussion behind each element. Does your organization plan
to emphasize incentives? If so, do you wish to provide incentives at a level
that matches your competitors, or do you wish to exceed competitors’
program designs in order to capture the best talent? These important
conversations are typically created by a cross-functional group of compensa-
tion specialists, line managers, and HRBP. An edited compensation
philosophy statement is outlined in Figure 2.1. See Figure 2.2 for sample
questions to use to guide a compensation philosophy planning meeting.

ALIGNING COMPENSATION WITH BUSINESS STRATEGY

The following “ideal” characteristics are necessary for every compensation pro-
gram in order to attract, motivate, and retain qualified employees that support
business strategy. (Note: These characteristics are primarily for all positions

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26 Everything You Want to Know about Compensation (but Were Afraid to Ask)

ABC believes in creating a high-performance culture for our employees. In
our belief, a motivated and engaged workforce will provide job satisfaction
for our employees, above-average shareholder returns, and sustain our high-
performing culture. We offer a wide variety of programs to motivate
employees, depending on the location and business unit. Please check with
your manager or ABCHR (our online reference tool) for information for
plans in your location.

As a global organization, we provide flexibility to all regions to create spe-
cific compensation programs for approval by corporate compensation.

The corporate compensation group develops an overall strategy in align-
ment with the company’s total rewards strategy, created in 2015. Business-
unit compensation develops local strategies based on approval from
corporate compensation. Line managers are responsible for setting indi-
vidual pay levels.

In general, our programs have the following components on a world-
wide basis:

• Base salary is based on local market conditions and targeted to be
competitive with those companies that we directly recruit from. Line
managers have the authority to recommend higher than competitor
pay levels, based on consultation with their HRBP and the Corporate
Compensation Department.

• Incentives are offered to roughly 25 percent of our workforce and are
generally focused on mission-critical roles, directors and above or those
positions where our competitors have implemented incentive plans.

• We believe in transparency. Therefore, all employees can view their
own salary range and the range of any positions that they are around
two candidates. All managers can view salary ranges for all subordinate
positions, plus the ranges up to two levels beyond their current posi-
tion. This information is available in ABCHR.

• Incentives are funded by several metrics, which are set each year by
our senior leaders. They include factors such as profitability, market
penetration and customer satisfaction. In addition, we use a balanced
scorecard approach that measures employee retention and operational
excellence.

• We use salary ranges as a tool to manage employee salaries. All em-
ployees below the maximum of their salary range are eligible for an-
nual merit increases, which are designed to be competitive with other
employers of our size. Merit budgets are set using external, country,
and regionally specific data. Merit budgets are communicated to all
line managers, who are responsible for communicating the budget to
all employees. Employees over the maximum of their range are eligible
for lump-sum payouts that do not add to base pay.

• We offer a competitive benefits package, which is designed to be gener-
ally comparable to our market competitors for labor.

FIGURE 2.1 Sample compensation philosophy.

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Aligning Compensation with Business Strategy 27

except single incumbent senior management positions.) These characteristics
are the foundation for an ideal pay structure that ties to business strategy:

• Meets the organization’s unique needs. To some degree, each company
is unique within its own industry or geographical area. Unique
characteristics need to be recognized and addressed when designing
compensation programs, and particularly, pay structures. Compensa-
tion systems must reward business strategy goals and objectives.

• Internal equity. A measure of how an organization values each of its jobs
in relation to one another. Although formal job evaluation systems have
become less prevalent in recent years, state-level programs that empha-
size comparable pay, plus the constant need to maintain internal equity
as a motivation tool places the importance of formal understanding of
how to assess internal equity.

1. What is the organization’s compensation philosophy? What do we
believe is important, and why? Should we pay more or less than com-
petitors? Why or why not? How do we, as an organization, define
pay-for-performance?

2. How will we determine incentive eligibility? Which positions will be
eligible for incentives, and why? Will we grant incentives to those posi-
tions that do not receive incentives at our competitors for labor?

3. How transparent will we be? Will we share market data, salary ranges,
merit budgets, etc., with all employees or just with managers?

4. Will the organization provide incentives based on specific job market
data, or by salary grade?

5. How important is internal equity in our organization? To what extent
do we wish to encourage transfers?

6. How does the Corporate Compensation Department work with other
groups? What information will be shared, and at what levels?

7. What current compensation programs are working effectively, and
which may need to be altered? Why?

8. Philosophically, how long should it take for a fully qualified individual
with at-target performance to reach the midpoint or targeted pay?

9. What cycle will we use for various compensation programs? The calen-
dar year or fiscal year?

10. What measures of corporate performance should be used through-
out the organization to fund and guide compensation programs? Bal-
anced scorecard? Corporate measures or divisional measures, or a
blend of both?

11. To what extent will our compensation philosophy exceed federal or
state laws?

12. How often will we review our philosophy, and who is responsible and
accountable for beginning the review?

FIGURE 2.2 Guiding a compensation philosophy development meeting.

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28 Everything You Want to Know about Compensation (but Were Afraid to Ask)

• External competitiveness. A measure of an organization’s pay structure
compared to that of its competitors. This critical element is often
dependent on job family and salary structure.

• Affordability. A measure of how costly a compensation program is to a
company. If pay structures are not developed responsibly, an organi-
zation could incur labor costs that exceed what it can afford to pay.
Base pay, for example, is earned once and paid forever. Thus, merit
increases and base pay are fixed costs.

• Legal defensibility. Compensation programs must adhere to specific fed-
eral and state laws designed to provide fairness in how employees are
paid. These laws are discussed at the end of this chapter.

• Understandable/saleable. To be accepted and understood, compensation
programs must be well communicated at all levels of the organization.
In most organizations, line managers and HR business partners are
responsible for explaining the impact of compensation systems on
individual employees and groups.

• Efficient to administer. With increased pressure to improve productivity and
reduce costs, it is important that an organization’s compensation program
be as simple and straightforward as possible to maintain and administer.
A balance needs to be struck between what appears to be the “best” pro-
gram and what is efficient, effective, and easiest to administer. Complex
measurements for incentive systems, for example, reduce employee light of
sight, and employee motivation to work to meet the needs of the program.

• Support sustainability and organizational ethics. The compensation pro-
gram should reward performance fairly without encouraging inappro-
priate behaviors. Rewards should reflect both individual employee and
company performance.

• Flexible design and administration. Flexible pay programs are necessary
tools to compete for labor in the marketplace. As such, they must be
flexible and capable of changing as needed without requiring a rede-
sign every time a new need arises.

Most compensation programs will balance each of these objectives as
sometimes these characteristics may be in conflict. For example, it may not
always be possible to maintain internal equity when a company is trying to
be externally competitive. Therefore, it is important to recognize the possi-
bility of such conflict and review the business strategy and/or how mission-
critical the positions are to determine the appropriate balance of all features
of the compensation program. Pressures for pay transparency can compli-
cate balancing each of these objectives (see Sidebar 2.1).

Although compensation is the largest component of the total rewards sys-
tem and a major cost factor for organizations, many employers have not had
a formal discussion in place to ensure that compensation dollars are used
wisely. Additionally, the broader concept of directing employees’ behaviors
to desired outcomes through rewards is not always integrated into an organi-
zation’s overall strategic planning process, although it typically arises in the
strategic planning implementation process as illustrated in Figure 2.3.

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Compensation Programs – Elements of Compensation 29

COMPENSATION PROGRAMS – ELEMENTS
OF COMPENSATION

Compensation systems are usually divided into base pay and variable pay
systems as shown in Figure 2.4.

Sidebar 2.1 Pay Transparency

Pay transparency has emerged as a major issue due to various factors.
Sources such as Glassdoor and Indeed.com release pay information
that has been gathered directly from individuals. Employees who feel
that they are underpaid are known to create spreadsheets that crowd-
source pay data directly from co-workers. Various states have created
pay equity or pay transparency laws that restrict companies from asking
individuals for pay data, which makes the process of quickly obtaining
competitive market data more problematic. In addition, these prac-
tices create pressure on organizations to be more transparent
about pay data.

Despite these pressures, individual pay information remains largely
confidential within organizations, unless an individual decides to share
actual pay information. Privacy concerns, concerns about disrupting
motivation levels, and concerns related to internal equity continue to
drive tight control over information related to individual salaries. From
time to time, small startup organizations experiment with full transpar-
ency, but such approaches are extremely rare.

Visioning Strategic plan
creation

Strategy
implementation

planning

FIGURE 2.3 Stragetic planning implementation process.

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http://indeed.com

30 Everything You Want to Know about Compensation (but Were Afraid to Ask)

Much of the innovation in compensation is occurring in the variable-pay
element. Companies are making greater use of variable-pay programs by
expanding them to a significantly broader portion of the workforce than
they have in the past. However, market pressures and stabilizing merit
increase budgets are creating new solutions toward managing base pay.
A detailed summary of the various programs within each of these areas is
summarized in Figures 2.5 and 2.6.

UNDERSTANDING BASE PAY

Every organization must decide how much to pay each of its employees,
however, HR business partners, compensation specialists, and line managers

• Fixed cost for the organization

• Most employees only receive
base pay

• Should re�ect internal and
external equity

• Includes spot awards, annual
incentive plans, long-term
incentive plans, and sales plans

• Typically offered only to 20% to
30% of the company

• Variable cost to the company

Variable
pay

Base pay

FIGURE 2.4 Base pay versus variable pay.

• Salary, hourly, or piece rates
• Knowledge- or skill-based pay
• Competency-based pay
• Differentials
• Shift pay
• Weekend/holiday pay
• Expatriate remuneration
• Market adjustments
• Merit increases
• Lump-sum increases
• Step-rate increases
• General increases
• Cost-of-living increases
• Promotional increases
• Red- or green-circle pay

FIGURE 2.5 Base pay programs.

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Understanding Base Pay 31

often have different viewpoints about how to manage this process. HRBP
and line managers tend to think first about the requirements of the person,
while specialists tend to think first about the requirements of the job.

Edward E. Lawler III, PhD, director of the Center for Effective Organizations
at the University of Southern California’s Graduate School of Business
Administration, wrote in his book, Strategic Pay, “Organizations hire individuals,
but once individuals join most organizations, the amount they are paid is deter-
mined primarily by the type of job they do.” Therefore, it is important for HRBPs
and line managers to understand the steps required in job-level pay determina-
tion, as well as individual-level pay determination. Job-level pay determination
includes job analysis, job evaluation or job worth determination, salary structure
placement, incentive pay determination, and performance management.
Understanding such programs will allow HR business partners and line manag-
ers to more effectively work with their compensation specialists.

Job Analysis

Job analysis is considered the first step in determining base pay under any pay
system as job analysis allows us to understand the specific steps undertaken by
an individual or group of individuals. This process is formally called job analy-
sis, which is sometimes accompanied by a job description or job summary.

The depth of the job analysis is dictated by time, economics, and whether
the analysis will be used for purposes other than compensation. At one time,
job analysis was conducted for all positions; some organizations analyzed
jobs on a regular cycle, such as every two to three years. Entry-level compen-
sation specialists and/or HRBPs completed this work by interviewing incum-
bents or managers or reviewing completed structured questionnaires.
In recent years, this practice has fallen by the wayside as organizations have

• Based on organizational, group/team or individual performance
• Profit-sharing plans
• Performance-sharing plans
• Group/team incentives
• Individual incentives
• Short-term incentive plans
• Sales incentive plans/commissions
• Executive incentive plans

• Discretionary bonuses (annual or spot)
• Equity-based compensation
• Stock options
• Stock grants
• Restricted stock
• Performance unit plans

FIGURE 2.6 Variable pay programs.

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32 Everything You Want to Know about Compensation (but Were Afraid to Ask)

looked for ways to streamline their processes and reduce headcount. In
addition, many organizations now rely on line managers to create job
descriptions or to describe job content. Some organizations use sources
such as Indeed or LinkedIn to identify job descriptions from competitors to
use as the foundation for defining jobs.

Currently, most compensation departments have streamlined methods of
analyzing jobs, including matching to position surveys, using prewritten job
descriptions, requesting thumbnail descriptions of job duties and account-
abilities or analyzing job content only when the position is being evaluated
or reviewed for compensation purposes. As job analysis has become more
abbreviated, job description preparation has declined. Many organizations
have eliminated job descriptions, or only prepare them if required or
requested to do so. Others have moved to high-level job summaries, which
outline key accountabilities with little specificity. However, companies with
internal-worth job evaluation systems, described later in this chapter, typi-
cally will use a proscribed format for job descriptions to ensure that all
meaningful data are compiled.

Despite its decline, there is a role for job analysis, which provides mean-
ingful information for staffing and recruiting and performance manage-
ment, as well as compensation decisions. Job analysis can be gathered
through interviews and structured questionnaires.

In any of its guises, job analysis is typically performed when a position is
first created, or when job content changes in a substantial way. Streamlined
job analyses are most common when an organization reorganizes, downsizes,
or changes its overall scope and direction. Some jobs are so stable that the
analysis remains stable over time, or only minimal revisions are required.

As corporate human resources departments downsize, many organiza-
tions have begun to shift the responsibility for job analysis from compensa-
tion to HR generalists to line management. This can create challenges when
the compensation department requests specific information required for
determining job worth, which line management or line HR has not gath-
ered. Therefore, it is important to understand the depth of job analysis
required for your organization under different circumstances.

Job Evaluation – Internal Equity

In many organizations, the job analysis phase is either very short or in some
cases, nonexistent. Therefore, the first visible step for many HRBPs or line
managers is job evaluation. There are two major schools of job evaluation:
market-driven systems and job-worth systems. Market-driven systems are the
most prevalent.

Market-Driven Systems

In a market-driven compensation system, the “going rate” for the position is
the primary determinant of pay. See Chapter 8 for further discussion on the

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Understanding Base Pay 33

subject. Compensation specialists then attempt to resolve any potential ineq-
uities that are created by one of several methods:

• Paying one position above the market in order to obtain internal equity
• Paying each position slightly different than market pay, in order to

obtain internal equity
• Targeted each position at the market and using incentive systems as a

way to address inequities
• Targeting pay for each position at market

Each of these approaches has advantages and disadvantages. The most
current trend is to target pay for each position in the market. This creates
the need for constant communication and has also driven line manager
desires to have more transparency in terms of viewing market data.

Market-driven systems should be monitored closely to track changes in
pay. The move from one set of external comparisons to another can result
in substantial changes in recommended pay levels. For example, not-for-
profit organizations typically pay less than general industry for director-level
positions. Changing the market reference point from services to manufac-
turing could imply that the whole compensation system is out of whack when
it is not. With enough time and attention, inequities that arise from a
market-driven pay system can be corrected. However, line managers are
often frustrated by inequities with the market, especially when a hot candi-
date for a hard-to-fill job is being recruited or when there are numerous
long-service employees in low market value positions.

Job-Worth Systems

In a job-worth system, the primary determinant of pay is the value of the job
to the organization. In some cases, a job-worth system can result in pay differ-
ences from the external marketplace. Again, managers may struggle with
implementation as they attempt to find a way to reflect the market without
violating the spirit of the internal job-worth system. At one time, companies
were attempting to find neutral ground between internally and externally
driven systems, using complex multiple regression models. Over time, such
systems have fallen into disfavor because of their administrative complexity. In
addition, such systems mitigate the problems associated with either a purely
market-driven or purely internally driven system; they do not eliminate them.

Job-worth systems typically grant points for the presence of various factors
such as the skills required to perform the job, the effort required to achieve
results, the number of employees supervised, and the size of the assets man-
aged. Figure 2.7 illustrates the Hay system, one of the largest and most prev-
alent point factor systems in use. At one time, many US organizations used
the same or largely identical factors to determine job worth. In Canada,
pay-equity laws require the use of four generic factors: skill, effort, responsi-
bility, and working conditions. In the most formal systems, a maximum num-
ber of points are available for each factor, leading to the name point-factor
system. As the needs of organizations have become more complex, most

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34 Everything You Want to Know about Compensation (but Were Afraid to Ask)

organizations have moved away from job-worth systems towards market-
driven systems. Some organizations, such as manufacturing and the govern-
ment sector, continue to use point-factor systems.

Pay equity and comparable worth laws in various states have resurfaced inter-
est in job-worth approaches as methods to explain and support pay decisions.

Market-Driven versus Job-Worth Systems

Market-driven and job-worth systems yield different results. In the case of a
discrepancy, internally driven job-worth systems will err on the side of main-
taining internal equity, and external, market-driven systems will err on the
side of reflecting how the outside world pays the position.

The debate regarding the appropriateness of either system has gone on
for some time. Internal-equity proponents speak about the scarcity of appro-
priate market data reference points and the need to address employees’
ongoing efforts to compare worth internally. Market proponents point to the
differences between internal job evaluation systems and the marketplace,
with differences of 5 percent to 20 percent not uncommon. In the end, a
market-based approach has proven to be the most popular; WorldatWork
reported in 2015 that 88 percent of organizations had an established method
for evaluating jobs, most of which used market-driven systems (see Figure 2.8).

Which Approach Is Best?

Because of the differing results between market-driven and job-worth
systems, the majority of organizations have moved to a market-driven
pay system. This has placed enormous emphasis on the need for accurate and
timely external market comparison data. In addition, many organizations
have begun to shift the responsibility for determining job worth to the line. In
major organizations, including those with limited corporate or shared-services
compensation staff, local HR is required to determine the worth of the posi-
tion by matching directly to databases of surveys or internal reference points.
Organizations with managerial self-service models accompanied by extensive
technological support often require managers to identify job worth through
the selection of a salary grade with only minimal oversight from HR.

Regardless of which kind of system is used, the results of a job evaluation
will indicate the salary grade in which a job will be placed.

Hay point-factor system Job-worth factors
– Skills
– Responsibility
– Effort
– Working conditions

FIGURE 2.7 Point-factor categories.

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Understanding Base Pay 35

Market Analysis

Whether an organization uses an internally or externally driven pay system,
it is important to compare pay practices to the external market. Most
organizations participate in regular surveys that gather data from a specific
set of competitors and release overall averages on an annual basis. Typically,
however, every position is not included. Those positions that are included
(often called benchmarks) typically exist in most organizations with fairly
similar responsibilities.

Salary surveys with national and geographic data may be purchased from
numerous organizations, including all of the major consulting firms such as
Mercer, PayScale, or Willis Towers Watson. Most of the major survey providers
have set up web-enabled access allowing for instantaneous access to data.
Salary survey data provides real-time information on various jobs and job
families, as seen below.

Variable Pay

Ranking
Classi
fication

Point
factor

Job
component

Market
pricing

Senior management
(n = 616)

3% 6% 16% 2% 74%

Middle management
(n = 625)

3% 7% 19% 2% 7

Professional
(n = 625)

2% 7% 20% 2% 69%

Sales (n = 552) 2% 7% 17% 2% 72%

Administrative
(n = 623)

2% 8% 20% 2% 68%

Production (n = 543) 3% 10% 17% 2% 69%

FIGURE 2.8 Market-driven systems.

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36 Everything You Want to Know about Compensation (but Were Afraid to Ask)

• Discretionary bonuses (annual or spot)
• Equity-based compensation
• Stock options
• Stock grants
• Restricted stock
• Performance unit plans

Some companies find that it is impossible to match all of their positions,
and thus need to conduct custom surveys to gather specific information (see
Sidebar 2.2).

Sidebar 2.2 Conducting Surveys

Sometimes it is important to gather survey data on what local competi-
tors are doing. Before beginning a custom survey, check to see if a
survey already is conducted in the area; WorldatWork or local compen-
sation and benefits groups can help identify existing surveys, saving
organizations the time, effort and expense of conducting their own. If
a custom survey is necessary, the following steps can prove useful:

• Decide on the depth of the information that needs to be gath-
ered and what jobs should be included. Asking about base salaries
when total compensation data are needed will only provide part
of the answer. Prepare job descriptions or summaries for each
position to be surveyed.

• Contact the competitors with whom the organization would like
to work. Selecting the wrong competitors in a market-driven sys-
tem can be a major mistake, yielding results that are unusable.
Volunteer to analyze data fully, in the format the survey partici-
pants would like to see and promise a quick response in providing
results. Often, an external consultant, who can guarantee confi-
dentiality, can perform data analysis effectively. The use of a third
party to gather and analyze data is essential in some industries
where the exchange of salary data can give the appearance of col-
lusion and raise antitrust issues.

• Ask for a wide range of data such as salary range minimums, mid-
points, and maximums as well as current average pay levels and
typical starting salaries. The more data that are collected, the bet-
ter the chance of making a true comparison. If an organization
has an average pay level that significantly exceeds the midpoint
because of high tenure in a particular job, data on the typical
starting salary for that job can help prevent a misleading com-
parison. It also is useful to ask about incentive targets, typical
payouts, and descriptions of what incentive plans reward. If an

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Salary Ranges or Market Value Ranges 37

Compensation departments at large organizations usually participate in a
number of surveys each year and are requested to participate in custom
surveys on an ad-hoc basis throughout the year. Typically, organizations
participate in annual market studies that often are tied to the end of the
fiscal or calendar year. Published surveys have their own timelines that are
set by the firm that compiles and analyzes the data. HRBPs and line managers
can help the compensation department identify benchmark jobs and which
surveys to participate in.

SALARY RANGES OR MARKET VALUE RANGES

Salary ranges and market value ranges are one of the most important deter-
minants of pay on a daily basis. Understanding the fundamentals of ranges
is critical.

Every salary or market value range has a minimum, midpoint, and
maximum. These factors define the lowest possible level that someone
should be paid, a targeted pay level or market-based pay level and a maximum
pay level. Some companies divide their ranges into thirds; others use
quartiles. Most organizations use the same terms in relation to managing
pay within a range, as specified in Sidebar 2.3.

Sidebar 2.3 Terms Used in Managing Pay

Spread: The difference between the minimum and the maximum is
often referred to as the “spread.”
Starting pay point: The minimum or lower portion of the structure
viewed as the lowest pay level a company would offer.
Midpoint/middle of the range: Defined as the place where fully quali-
fied individuals are paid. Most compensation systems gear merit
increases to move employees closest to, or within 10 percent of, the

organization pays for skills or knowledge, it should ask about the
number of steps used by other organizations and the require-
ments to progress through each step. If an organization uses sal-
ary bands, it should ask about the range widths of each band used
by other organizations.

• Share the survey results quickly, including data from the
organization conducting the research. Everyone appreciates
a prompt reply, and responsiveness can help ensure that these
organizations participate in future surveys.

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38 Everything You Want to Know about Compensation (but Were Afraid to Ask)

Typically, the midpoint is geared to the marketplace as much as possible.
The focus on midpoints can often cause problems for line managers and
employees, who rightfully look at the entire salary range as their pay
potential. Many employees question why they are unable to move up in their
ranges, or always are compensated at approximately the same place in the
range. It is important to remember that in a market-driven system, an
employee who is at the maximum of a 50 percent wide range is being
compensated 25 percent more than the going rate for that job. In a
market-driven system, jobs are placed into grades based on the market. The
position is slotted into the grade with the midpoint closest to the market
value of the position. In an internally driven system, jobs are placed into
grades based on point values.

Bands versus Ranges

Salary bands and salary ranges share many characteristics. Salary bands are
typically wider than ranges and may include smaller market-based ranges
within each band. This approach allows for more focus on individual market
compensation levels. Such systems meet the goal of being flexible and
responsive. In some organizations, all pay grades have been collapsed into as
few as five pay bands. In many systems, each position has its own “band
within the band,” reflecting its competitive market, often referred to as the
competitive zone.

Employees and line managers must be educated to understand that their
salary band encompasses numerous positions and that the most relevant

midpoint of the salary or market range. The maximum is the highest
rate paid for a position in that grade.
Red/green circle: Employees above the maximum of the range will
likely have their pay frozen until salary range adjustments bring them
back within the range. This is referred to as red-circling. Employees
whose starting pay falls below the minimum are referred to as
green-circling and typically have their pay levels increased to the range
minimum at the next review cycle.
Annual adjustments: Typically, ranges are reviewed and updated annu-
ally. Most often, the entire range is moved upward by a selected per-
centage, although in some cases organizations may elect to increase
different salary grades by different levels to fine-tune their relationship
to the market or to fix existing problems.
Forced distribution: Forced distribution of merit increases to remain
within a specific budget is prevalent. In such systems, managers are
required to only spend a specific amount, forcing them to distribute
merit increases in such a way as not to exceed the budget.

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Ranges and Their Connection Pay Increases 39

comparison for the employee is the comparison to market, or their com-
petitive zone. In some organizations, the competitive or market zone is
defined as plus or minus 10 percent of the market; other organizations
elect to target competitive pay with plus or minus 20 percent. For many line
managers and employees, the relatively tight difference between beginning
and ending of market reference points implies that pay opportunities have
been decreased, in comparison to more traditional salary ranges. Careful
communication is key, as is ensuring that the ultimate design meets the
organizational strategy.

STYLES OF RANGES

Attraction to salary bands has ebbed and flowed. Organizations using career
bands also utilize hybrid approaches such as career banding (banding
together several jobs in a family within a band), broad banding (creating
ranges within each band that are tied to market data) or using wide ranges
(to attempt to reduce the number of grades). Overall, many organizations
design their salary ranges and use the decided format for a significant time.
Changing between ranges and bands, or between market ranges within
bands to regular ranges is infrequent. Thus, the selection of the style of
range must be implemented carefully and after much consultation.

Organizations continue to use different ranges that reflect different mar-
ketplaces and/or to divide specific job families such as manufacturing, call
center, or other specific roles.

RANGES AND THEIR CONNECTION PAY INCREASES

Ranges also are used to determine the size and frequency of merit increases.
The most typical tool is a compa-ratio, which represents the individual’s
salary divided into the salary range midpoint. Many companies strive to have
their consistently high-performing employees paid between 90 percent and
110 percent, or 95 percent to 105 percent, of the midpoint. To accomplish
this, high-performing employees with low compa-ratios receive larger pay
increases than high-performing employees with higher compa-ratios. This
will move the high-performing employee’s pay relatively quickly to the
middle zone of the range. However, in organizations with very wide ranges
and modest merit budgets of 2.5 percent, it is not uncommon for even a
high-performing employee to take five years or more to reach the middle
zone of the salary range. A sample compa-ratio-based merit structure based
on a 3 percent average is shown in Figure 2.9. In this approach, a high-
performing person who happens to be at the bottom of the range, perhaps
because they were recently promoted, can expect a pay increase of up to
8 percent while a high-performing individual at the top of the range may
only see a 1 percent increase.

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40 Everything You Want to Know about Compensation (but Were Afraid to Ask)

In this approach, merit dollars are targeted toward both high performers
and all employees whose pay falls at the bottom part of the range. However,
it has become increasingly difficult to meet these common goals effectively
with merit budgets of 2–3 percent. Automated tools ease the administrative
burden, yet still leave the most onerous task untouched – determining how
to allocate a limited budget. HRBPs play a critical role in helping line manag-
ers to make sound merit decisions, rather than succumbing to the pressure
to simply offer everyone the same amount. Forced distribution of merit
increases to remain within a specific budget are prevalent, testing the pay for
performance philosophy used by many organizations. WorldatWork provides
important and specific detail on merit increase practices on an annual basis.

Larger companies are implementing a variety of new administrative meth-
ods tied to salary range management in order to control the costs associated
with base pay. Lump-sum increases for individuals who have reached target
pay or the middle portion of the salary range are more common. Other
hybrid approaches include partial lump-sum and partial base-pay increases
for individuals approaching the midpoint, or the upper portion of a range.
Such systems work well to control fixed costs but often lead to turnover as
employees look for increases to their base pay.

COMPETENCIES/SKILL-BASED

In the 2000s, organizations began to examine competency and skill-based
pay. Competencies can be created to reflect overall organization needs or
the specific technical skills required for a position or job family. The major-
ity of organizations have moved away from competency-based pay because of
the complexities inherent in such systems (see Sidebar 2.4), and are instead
focusing on using competencies as a key element in their selection systems,
performance management systems, and employee development systems.

Compa-ratio

Salary Increase Matrix using the Compa-ratio Approach

Performance

Outstanding

Above

Average

Below Average

Unsatisfactory

0.80–0.89

7.0–8.0%

5.0–6.0%

3.0–4.0%

1.0–2.0%

0.90–0.99

6.0–7.0%

4.0–5.0%

2.5–3.5%

0.8–1.8%

1.00–1.09

5.0–6.0%

3.5–4.5%

2.0–3.0%

0.6–1.6%

1.10–1.20

4.0–5.0%

3.0–4.0%

1.5–2.5%

0.4–1.4%

FIGURE 2.9 Salary increase matrix using the compa-ratio approach.

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Variable Pay 41

VARIABLE PAY

Variable pay plans represent the best, most consistent methods to pay for
performance, enabling an organization to deliver targeted results while
rewarding employees who are responsible for those results.

Designing Annual or Long-Term Incentives

A variable pay plan design is complex and requires a number of steps. Many
large organizations have multiple variable pay programs in use at any time,
and each program must work with all other programs.

• Target Payout Each plan sets a target payout level that often is expressed
as a percentage of pay or midpoint, although it also can be expressed in
terms of dollars. Sometimes there is a minimum or maximum amount
that will be paid. Occasionally, plans will specify that minimum payouts

Sidebar 2.4 Factors in Assessing Appropriate
Total Compensation

Helping people move along in their careers is one of the most
important – and rewarding – roles played by HRBPs. One component
of this role is to ensure that an employee’s total compensation remains
appropriate when the employee changes positions. To make an appro-
priate analysis, consider the following questions:

• Is either position eligible for the incentive plan? If so, what is the
amount of the potential payouts? Does eligibility or payout tim-
ing change?

• Are there any perquisites tied to either position that could change,
such as the use of a company car? How much do these perquisites
add to the total compensation package?

• Does the new position require a move? What are the provisions
of the organization’s relocation policy? Are there different tax
implications in the new location? Employees who are transferred
between divisions sometimes find that their Social Security with-
holding starts again if the divisions are different legal entities. Some
locations are subject to state or local income tax; others are not.

• Are there any special pay practices tied to either position that
could change?

• What will the employee’s new position in the range be? Will this
make the employee eligible for a merit increase sooner?

• Does this change affect eligibility for benefits? Eligibility for the
pension plan or 401(k) plan?

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42 Everything You Want to Know about Compensation (but Were Afraid to Ask)

will occur even if the plan’s performance requirements are not met.
Such a design is extremely rare but is sometimes considered in organi-
zations that are substituting incentive pay for merit increases or other
increases in base pay. In such cases, employees quickly begin to view
minimum guaranteed payments as deferred base pay. A more effective
approach is to fund the plan based on actual performance, and to set
the funding at a level that requires stretch, but not impossible, perfor-
mance levels. Maximum payouts are typically designed to control costs
and prevent windfalls.

• Performance Criteria The best incentive plans measure and reward behav-
iors that are specific, measurable and within the participants’ control.
Designing plans that are within the participants’ control often is the
most troublesome part of developing or managing an incentive plan.
In many cases, the behavior that managers want to encourage is be-
yond the employees’ control. The design should create and encourage
the line of sight between employees’ day-to-day actions and the plan
characteristics. In other words, a job family that cannot influence stock
price should not be placed in an incentive plan that pays out based on
increases in stock prices.

Financial and operational incentive metrics are common. Balanced
scorecard plans reward multiple areas and allow for tighter connection
to business strategy as shown in Figure 2.11.

• Duration Each plan sets a time for measurement of performance and
payment of bonuses. Typically, incentive plans are most effective when
rewards are given soon after the results are measured, although longer
time frames tend to be used for higher-level jobs. Management incentive
plans generally are paid out annually, with ties to the organization’s fiscal-
year results. Lower-level employees, such as hourly workers, may have

1. Spot
awards

Spot awards are given as quickly as possible based on
superior performance or contribution. Such plans can
range from $25 gift cards through formal programs
offering 10 percent of base pay. Spot award programs are
typically designed by HR and funded by the department.

2. Annual
incentives

Annual incentives include the use of formal criteria in
order to receive a payout. Typically, goals are cascaded
down through the organization.

3. Long-term
incentives

Long-term incentives are given only to the highest levels of
management. Three- to five-year goals are set out. Payout
occurs at the end of the three to five years.

FIGURE 2.10 Types of variable pay.

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Variable Pay 43

quarterly incentives. Typically, incentive plans are most effective when
rewards are paid out as soon as possible after the results are measured. Many
companies pay out incentives in separate checks to highlight the reward.

Reasons for Failure

Incentive plans typically fail when employees are not motivated or cannot
influence results. Lack of motivation may be owing to a number of reasons.

• Award Size Awards that are too small will serve as irritants, not motivators.
In general, 10 percent of pay is considered the smallest possible amount
that can lead to changes in behavior. As merit budgets decline to the 2- to
3-percent range, this belief is being challenged and a 5-percent payout level
is becoming more acceptable.

• Plan Complexity Any plan should be simple and easy to understand.
Plans that measure three, four, or more things often fail, either because
employees cannot understand what is expected or because employees
perceive that their efforts in any one given area will not lead to a sig-
nificant reward.

• Control over Results Incentives that are based on the wrong things can
lead to an atmosphere of entitlement (i.e., rewards are “automatic”) or
windfalls (i.e., rewards are “unpredictable”), not motivation.

• Senior-Level Support Senior managers may change their minds about
what behaviors they want to motivate, or they may eventually come to

How can we obtain the �nancial results
of the strategic plan and present it to the
stakeholders?

What are the operational challenges to
achieve better internal and market
efficiency?

How can we empower people for
innovation and resilience? Share the
learning and promote a favorable
environment for our strategy?

What are the demands of potential
customers and how can we serve them
with excellence?

CLIENTS

FINANCE

INTERNAL PROCESSES

LEARNING AND GROWTH

STRATEGIC
VISION

BSC-BALANCED SCORECARD

TOP Excel Templates
topexceltemplates.com

FIGURE 2.11 Balanced scorecard.

Source: Balanced Scorecard (BSC) + Strategy Map – example template Excel spreadsheet.
Retrieved from: https://topexceltemplates.com/free-templates/balanced-scorecard-strategy-map
-example-template-excel-spreadsheet/

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Balanced Scorecard (BSC) + Strategy Map – example template Excel spreadsheet

44 Everything You Want to Know about Compensation (but Were Afraid to Ask)

believe that the amount they are paying to motivate performance is
too much. In some cases, managers will not want to oversee a plan that
creates a total compensation package that is higher than their own.
Each of these factors can lead to a plan that is not supported by senior
management, and, thus, does not succeed.

Other Considerations with Incentive Plans

Equally, there are many reasons why employees may not feel that they can
influence the results, including:

• The plan uses funding measures (such as economic value added) that are
complex and difficult to measure.

• The company sets performance targets too high.
• A high-performing group or division reports into an underperform-

ing business unit with the business unit-wide performance incentive
plan funding.

Incentive plans can be highly effective, but there are as many plans that
underperform as plans that perform on target. Working closely with line
managers and testing the plan to see how it fits the overall compensation
program can minimize the risk of creating a plan that does not perform.
Finally, incentive programs are more difficult to take out than to put in,
therefore it is important that HRBPs and line managers spend time to think
through the ramifications of implementing a plan.

Merit Budget and Pay for Performance

Merit budgets play an important role in organizations, as most employees
will only see changes to their pay through merit, or a promotional increase.
Compensation departments are responsible for creating merit budgets,
determining annual changes or updates to ranges and creating supplemen-
tal budgets for promotions and market adjustments.

Merit matrix design is typically based on several factors:

• The degree of market movement for key benchmark positions from
the prior year

• Company philosophy related to the market
• The company’s ability to pay

Limited changes in market movement will often result in salary ranges
that are not increased. Matrix development has been facilitated by Excel
templates that develop the framework and allow for analysis of projected
costs against the proposed budget.

Salary ranges are reviewed annually and are updated based on market
data, comparisons to other organizations, and current position in the
range. If the market has not changed substantially salary ranges may
not change.

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Variable Pay 45

Organizations often use various methods, including merit budgets, pro-
motional budget, and market adjustment budget. These budgets are often
managed separately. Some organizations integrate merit and market adjust-
ments, and others separate the two, depending on the type of ranges in use
and the overall company philosophy.

In all cases, HR and the finance department work together closely to
develop merit, market, and/or promotional budgets and to analyze poten-
tial costs. Senior management approves the budget prior to implementation.

Overseeing Salary Management

Along with ensuring that salary increases are given on time and that perfor-
mance appraisals are accurate and timely, it is important to ensure that overall
salary levels are appropriate. Therefore, it is important once a year to review the
equity of the organization, division, or group to determine if there are any pay
problems that need resolution. Many companies complete this step concurrent
with the preparation of the merit matrix. The following steps may be taken:

Analyze the pay for all employees, sorted by salary level and job title.
Request the average salary, average compa-ratio and the number of people
in each portion of the salary ranges. The report also should detail each per-
son’s salary, time of service, last performance rating, date placed in current
position, position in the range, last increase amount and next increase date.

Analyze the data. Review the data, using VLOOKUP up and pivot tables to
identify potential problems. An employee who has long-term service in the job
and solid performance history but is paid at the minimum of the range or at
the bottom of his or her competitive zone should be considered for a special
increase. In addition, look to see if individuals performing the same job are
paid equitably. A report that can help identify problems lists position in the
range, sorted by sex and equal employment opportunity (EEO) code. Finally,
look to see if there are any “compression” problems (i.e., too little difference
between an individual’s pay and that of his or her supervisor). Although the
days of maintaining higher salaries simply because of supervisory responsibili-
ties are over, compression problems must be reviewed and explained.

Prepare an initial analysis of what kind of special pay adjustments are nec-
essary to fix any inequities, including the amount of the increase and timing.
Revise as necessary. Decide whether to request special pay increases all at
one time, or whether they should be phased in at the time of service anni-
versaries or salary reviews.

This analysis is often combined with a diversity program analysis, which
reviews actual or perceived inequities between various groups and/or
individuals.

Proving the ROI

Compensation systems remain high-priority areas of focus for organizations.
Efforts to better tie pay with performance, to target pay toward high
performers and mission-critical positions and to prove return on investment

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46 Everything You Want to Know about Compensation (but Were Afraid to Ask)

(ROI) are all key areas for the future. External scrutiny has become more
common, as have requests for pay transparency. In addition, the ongoing
pressures between costs and motivation are never-ending. Training in
rewards management is a key element for success, as is remaining up to date
on market trends through conferences.

THE REGULATORY ENVIRONMENT: THE FLSA AND OTHER
LAWS THAT AFFECT COMPENSATION PRACTICES

One of the most important aspects of a compensation system is that it com-
plies with existing laws and regulations, and that it be legally defensible in
this era of litigation. It is critical for compensation experts and HR profes-
sionals to work closely to ensure that the organization’s pay system is defen-
sible and that everyone who works with compensation understands the
relevant regulations. Figure 2.12 summarizes some of the existing laws that
affect compensation practices, the most prominent (for pay program design
purposes) being the Fair Labor Standards Act of 1938 (FLSA).

The remainder of this chapter addresses the laws regulating compensa-
tion practices.

Rule Details Governing Body

Railway Labor Act Grants the right of non-
managerial and airline
employees in the private
sector to bargain col-
lectively with their em-
ployers on questions of
wages, hours, and work
conditions

National
Mediation Board

Davis-Bacon Act Establishes wage and
fringe-benefit standards
for laborers and mechan-
ics for federal public con-
struction projects that
exceed $2,000

US Department
of Labor

Walsh-Healey Public
Contracts Act

Establishes wage, hour,
overtime pay, child-labor
and safety standards for
employees of manufactur ers
or suppliers of goods
for federal contracts in
excess of $10,000

US Department
of Labor

FIGURE 2.12 Compensation regulation.

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The Regulatory Environment: The FLSA and Other Laws 47

Fair Labor Standards
Act (FLSA)

Deals with minimum
wages, overtime pay, equal
pay for both sexes, child
labor, and recordkeeping
for employees engaged
in interstate commerce
or in production of goods
for interstate commerce,
or employed by an
enterprise engaged in
interstate commerce or
production of goods for
interstate commerce

US Department
of Labor

Equal Pay Act (EPA) Prohibits wage differentials
based on sex for employees
engaged in commerce or
in production of goods for
commerce, or who are
employed by an enterprise
engaged in commerce
or production of goods
for commerce

Equal Employment
Opportunity
Commission
(EEOC)

Title VII of the
Civil Rights Act
(Equal Employment
Opportunity Act)

Prohibits discrimination
based on race, color,
religion, sex, pregnancy,
or national origin for
employers with 15 or
more employees and
whose business affects
commerce; employment
agencies; labor organizations
engaged in an industry
affecting commerce; the
federal government; and
the government of the
District of Columbia

Equal Employment
Opportunity Com-
mission (EEOC)

Service Contract
Act (SCA)

Establishes wage and
fringe-benefit standards
for employees of
suppliers of services to
the federal government in
excess of $2,500

US Department
of Labor

(continued)

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48 Everything You Want to Know about Compensation (but Were Afraid to Ask)

National Foundation
Arts and Humanities
Act

Establishes wage and
working-condition
standards for professionals,
laborers, and mechanics
directly engaged in
working on projects
receiving funding from
the foundation

US Department
of Labor

Age Discrimina-
tion in Employment
Act (ADEA)

Prohibits job discrimina-
tion in hiring, firing, or
conditions of employment
against individuals aged
40 or older for employers
of 20 or more individuals,
employment agencies, and
labor organizations

Equal Employment
Opportunity Com-
mission (EEOC)

Americans with
Disabilities Act
(ADA)

Prohibits discrimination
against individuals with
disabilities in employment,
public services, public
accommodations, and
telecommunications for
employers with 15 or
more workers

US Department of
Labor (DOL)
Equal Employment
Opportunity Com-
mission (EEOC)
Federal
Communications
Commission (FCC)

Civil Rights Act
of 1991

Establishes two standards
of discrimination under
Title VII: disparate
treatment and dispa-
rate impact

Equal Employment
Opportunity
Commission
(EEOC)

Internal Revenue
Code

Defines deductibility
and tax treatment of
compensation for all
employees and all
employers

Internal Revenue
Service (IRS)

Securities and Ex-
change Commission
(SEC) regulations

Regulate plans that
provide employer stock
to participants for all
publicly held companies

Securities and
Exchange
Commission
(SEC)

State laws Affect minimum wage,
hours, overtime pay,
discrimination, and taxes
for various employers

Vary by state

FIGURE 2.12 (Continued)

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Fair Labor Standards Act of 1938 49

FAIR LABOR STANDARDS ACT OF 1938

The Fair Labor Standards Act of 1938 (FLSA) was born of the Great
Depression and Franklin D. Roosevelt’s “New Deal” administration. Roosevelt
sent the bill to Congress in 1937 with a message that the United States should
be able to give “all our able-bodied working men and women a fair day’s pay
for a fair day’s work.”

After a long, hard-fought battle, the FLSA was signed into law on June 25,
1938, and took effect on October 24, 1938. Its primary objective was work-
ers’ rights, and it was intended to eliminate detrimental working conditions,
establish a minimum wage rate, and protect the educational opportuni-
ties of youth.

During his fireside chat right before the implementation of the act in
October, Roosevelt commented that, with the exception of only the
Social Security Act, the FLSA was the most far-reaching, far-sighted pro-
gram for the benefit of the workers that had ever been adopted. He
went on to say that, without question, this act started the United States
toward a better standard of living and increased purchasing power to
buy the products of farm and factory. Roosevelt then admonished some
business leaders by saying that the American people should not let any
“calamity-howling executive” with an income of $1,000 a day, who has
been turning his employees over to the government relief rolls in order
to preserve his company’s undistributed reserves, tell you that a wage of
$10 a week is going to have a disastrous effect on all American industry.
Roosevelt closed his comments about the FLSA by declaring that this
type of executive is a rarity with which most business executives most
heartily disagree.

Hence, the FLSA became the principal federal statute that affects the
design of direct compensation programs. In the beginning, only about one-
fifth of the working population was affected by the act, which established a
minimum wage of 25 cents per hour and a maximum workweek of 40 hours,
or $11 per week. In its current state, after several amendments over the
years, the act now covers more than 143 million workers in the United States
and the current minimum wage is $7.25, but the maximum workweek is
still 40 hours.

Effective January 1, 2020, the act was updated for the first time in more
than 15 years, with the following changes:

• Raised the standard salary level to $684 ($35,568 annually) per week
• Raised the total annual compensation threshold for “highly compen-

sated employees” to $107,432 per year
• Allowed the use of nondiscretionary bonuses and incentive payments

(including commissions), paid at least annually, to satisfy up to 10 per-
cent of the standard salary level

• Revised the special salary levels for workers in the US territories and
the motion picture industry.

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50 Everything You Want to Know about Compensation (but Were Afraid to Ask)

What Is the FLSA?

Congress enacted the Fair Labor Standards Act (FLSA) of 1938 to establish
a floor for minimum wage (see Figure 2.13), overtime, recordkeeping, and
child labor for employers nationwide.

Since it was enacted, a preponderance of case law provided a better
understanding of the concept of the FLSA. However, recent amendments
and interpretations by the courts have made it extremely important to
understand the language of the FLSA. Moreover, because today’s workforce
and workplace are very different from what they were in 1938, it has become
a challenge to comply with the FLSA while still meeting business needs.

Who Does the FLSA Affect?

The FLSA covers employers who are involved in interstate or foreign com-
merce, state and local government employees, federal employees employed
by the Library of Congress, the US Postal Service, the Postal Rate Commission,
and the Tennessee Valley Authority. Coverage is broadly interpreted and
includes nearly all employers of all sizes. The 2020 amendment expanded
coverage to include making an additional 1.3 million workers eligible for
overtime pay. Certain employees, however, are considered exempt from
some of the provisions of the FLSA, including minimum wage, overtime pay,
and certain recordkeeping provisions. All other employees – designated as
nonexempt – are subject to all of the provisions of the act.

1938 $0.25 per hour

1978 $2.65 per hour

1979 $2.90 per hour

1980 $3.10 per hour

1981 $3.35 per hour

1990 $3.80 per hour

1991 $4.25 per hour

1996 $4.75 per hour

1997 $5.15 per hour

2007 $5.85 per hour

2008 (July) $6.55 per hour

2009 (July) $7.25 per hour

FIGURE 2.13 History of the federal minimum wage.

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Fair Labor Standards Act of 1938 51

The major provisions of the FLSA cover rules for:

• The determination of a minimum wage and a regular rate of pay to be
used in the calculation of overtime

• The determination of which activities shall constitute hours worked
• Which positions can be classified as exempt
• Child labor restrictions
• Recordkeeping requirements

What Is Covered?

Minimum Wage

Minimum wage for covered, nonexempt workers is $7.25 per hour (as of
July 24, 2009). Certain full-time students, student learners, apprentices, and
workers with disabilities may be paid less than the minimum wage under
special certifications issued by the US Department of Labor.

Tipped Employees

Tipped employees must be paid a cash wage of at least $2.13 per hour. This
rule applies to employees who receive at least $30 per month in tips. However,
if an employee’s tips combined with the employer’s contribution of $2.13
per hour does not equal the applicable minimum hourly wage, the employer
must make up the difference to meet minimum wage.

Hours Worked

Hours worked are defined as the time when an employee begins, or is required
to be available to begin, his or her principal activities of work until the conclu-
sion of the employee’s workday (when he or she ceases to perform the principal
activities of work). The workday does not necessarily equate to the “scheduled
workday” for the employee and can be much longer or shorter.

Workweek

A workweek is defined as seven consecutive, 24-hour periods totaling 168
hours. This is the unit of measurement used to determine compliance with
minimum wage and overtime provisions. As defined in FLSA, the following
applies to a workweek:

• It can begin on any day of the week and at any hour.
• It does not have to coincide with the duty cycle or pay period, or with a

particular day of the week or hour of the day.
• Each workweek stands alone and cannot be averaged over two or more

workweeks.
• Once the beginning and ending time of the work period is established, it

remains fixed regardless of how many hours are worked within the period.

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52 Everything You Want to Know about Compensation (but Were Afraid to Ask)

• The beginning and end of the work period may be changed, provided
that the change is intended to be permanent and is not designed to
evade the overtime requirements of the Act.

Rates of Pay and Overtime Calculations

The FLSA requires overtime pay, at a rate of time and one-half the regular
rate of pay, for hours worked in excess of 40 in a workweek. Computing an
employee’s regular rate of pay can be complex. In general, the regular rate
is the employee’s average hourly earnings for a given workweek.

The regular rate of pay consists of all remuneration for employment,
including:

• Base rate
• Shift premium
• Piece rate
• Nondiscretionary bonus
• Other regular pay allowances

Types of compensation that may be excluded from the “regular rate” include:

• Discretionary bonuses and gifts
• Reimbursement for expenses
• Payments for time not worked
• Benefit plan contribution
• Overtime premiums
• Third-party payments for insurance, pensions, etc.

The FLSA also explains how to calculate hourly rates of pay for multiple
specific payment contexts (e.g., piecework rates and commissions). While
the general rule for overtime pay requires employers to pay at least one-and-
one-half times the regular rate of all hours worked over 40 in each week, the
Act provides specifics for varying cases.

Child Labor Restrictions

The FLSA was created in part to protect the educational opportunities, health,
and well-being of the youth under the age of 18 in the United States. There are
restrictions on hours of work for minors under the age of 16 as well as a hazard-
ous occupation restriction for all minors under the age of 18. Youths who are
over 18 years of age may perform any job for unlimited hours. Provisions for
nonagricultural jobs and farm jobs identify permissible jobs and hours, by age.

Nonagricultural jobs: Youth (minors under the age of 18) employment in
non-agricultural jobs is subject to the following provisions:

• Minors between the ages of 16 and 17 years may work for unlimited
hours in any nonhazardous job

• Minors between the ages of 14 and 15 years may
• Work in nonmanufacturing, nonmining and nonhazardous jobs
• Work no more than 3 hours on a school day, 18 hours in a school

week, 8 hours on a nonschool day or 40 hours in a nonschool week

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Fair Labor Standards Act of 1938 53

• Not begin work before 7:00 a.m. or end after 7:00 p.m., except
for the period June 1 through Labor Day, when evening hours are
extended to 9:00 p.m.

• May work up to 23 hours in a school week and 3 hours on a school
day (including during school hours), if enrolled in an approved
Work Experience and Career Exploration Program (WECEP)

• At any age, minors may deliver newspapers, perform in radio, television,
movie or theatrical productions; work for parents in their solely owned
nonfarm business or gather evergreens and make evergreen wreaths

Farm Jobs: Youth (minors under the age of 18) employment in farm jobs
is subject to the following provisions:

• Minors over the age of 16 years may work for unlimited hours in any
job, whether hazardous or not.

• Minors between the ages of 14 and 15 years may work in any
nonhazardous farm job outside of school hours.

• Minors between the ages of 12 and 13 years may work outside of school
hours in nonhazardous jobs, with a parent’s written consent or on the
same farm as the parent.

• Minors under the age of 12 years may work on farms owned or operated
by the parent, or with a parent’s written consent, outside of school hours in
nonhazardous jobs on farms not covered by minimum wage requirements.

• Minors at any age may be employed by their parents in any work on a
farm owned or operated by their parents.

The FLSA identifies restrictions for youth covered by the Child Labor
Law. Generally, youth under the age of 18 are prohibited from working in
occupations that are identified as hazardous. There are some exceptions
that apply to work in agriculture. The following includes hazardous
occupations banned for minors under the age of 18:

• Occupations in or about plants or establishments that manufacture or
store explosives or articles containing explosive components

• Coal mining and mining other than coal
• Forest fire fighting and prevention, timber tract, forestry service, and

occupations in logging and sawmilling
• Logging occupations and occupations in the operation of any sawmill,

lath mill, shingle mill, or cooperage stock mill
• Exposure to radioactive substances and ionizing radiations
• Work involving power-driven hoisting apparatus
• Work involving power-driven metal forming, punching, and shear-

ing machines
• Work involving the operation of power-driven meat processing machines,

slaughtering, meat and poultry packing, processing, or rendering
• Occupations involved in the operation of bakery machines
• Occupations involved in the manufacture of brick, tile, and similar

products
• Occupations in roofing operations

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54 Everything You Want to Know about Compensation (but Were Afraid to Ask)

• Work involved with balers, compactors, and power-driven paper prod-
ucts machines

• Work involved with power tools, including saws, shears, woodchippers,
and cutting discs

• Work involved in wrecking, demolition, and ship breaking
• Driving a motorized vehicle
• Trenching or excavating

Nursing Mothers

The Patient Protection and Affordable Care Act (PPACA), Section 7, of the
FLSA, provides a break time requirement for nursing mothers.

Employers must provide reasonable break times for an employee to
express breast milk for one year after the child’s birth. The employer must
provide a private location (not a bathroom), for the employee to express
breast milk. State law may provide a greater employee benefit.

Only employees who are not exempt from FLSA’s overtime pay require-
ments are entitled to breaks to express milk. State law may be different.

Employers with less than 50 employees are not subject to the break time
requirement if it would impose an undue hardship.

Employers are not required to compensate nursing mothers for breaks
taken for the purpose of expressing milk, if the employee is completely
relieved from duty. If employers provide compensated breaks, an employee
may use that break time to express milk and must be compensated the same
as other employees for that break time.

Recordkeeping Requirements

Employers are required to keep records on wages, hours, and other infor-
mation for all employees. These records must be saved for at least three
years. No particular form is required nor are time clocks required.

Records required for nonexempt employees include:

• Name, home address, occupation, sex, and birth date if the employee
is younger than 19 years

• Hour and day when the workweek begins for the employee
• Regular hourly pay rate for any week when overtime is worked
• Hours worked each workday and each workweek
• Total daily or weekly straight time earnings
• Total overtime pay for the workweek
• Deductions or additions to wages
• Total wages paid each pay period
• Date of payment and pay period covered

What Is Not Covered?

The FLSA does require payment for time not worked, such as:

• Vacation pay
• Holiday pay

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Fair Labor Standards Act of 1938 55

• Severance pay
• Sick pay
• Meal periods of 30 consecutive minutes or more, duty-free
• Rest periods (breaks) of more than 20 consecutive minutes if the

employee is completely relieved of duties

The FLSA does not mandate the following:

• Time clocks to record hours worked.
• Any kind of special pay or premiums for Saturday, Sunday, holiday, or

sixth- or seventh-day work.
• That employees be paid at premium rates for hours worked in excess

of eight hours per day, unless the employer chooses and is eligible for
the 8/80 option.

• That an employer differentiates between exempt and nonexempt
employees in any way other than minimum wage payments, overtime
premiums, and records.

• The beginning and ending of a workweek in terms of starting and
stopping on a specific calendar day or time.

• Meal period and rest period requirements (Note: The FLSA does man-
date the ability to exclude such time in the calculation of regular rate).

• The frequency in which employees receive compensation (Note:
Though the FLSA does not set specific intervals for pay periods, most
states have regulations regarding the timing and payment of wages).

• Limitations on the number of hours worked in a day or in a workweek
(Note: The FLSA does state that any work in excess of 40 hours in the
workweek will be treated as overtime and compensated at one-and-one-
half times the regular rate of pay).

• Pay for travel time outside of normal work/business hours when travel
is overnight.

• That employers compensate employees on an hourly rate (Note:
earnings may be determined on a piece-rate, salary, commission or oth-
er basis, but the FLSA does require that overtime calculations be based
on the regular hourly rate of pay).

• Pay stubs or W-2s.
• A notice or reason for discharge or immediate payment of final wages

to terminated employees.

Did You Know?

• Tipped employees can be paid a minimum wage of $2.13 per
hour if they receive at least $30 per month in tips.

• Some states have higher minimum wage standards than those
required by the FLSA. If a company employs workers in those
states, it must comply with state regulations.

• The workday does not necessarily equate to the “scheduled”
workday for the employee and can be much longer or shorter.

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56 Everything You Want to Know about Compensation (but Were Afraid to Ask)

SHERMAN ANTITRUST ACT OF 1890

The Sherman Antitrust Act of 1890, as amended, prohibits every contract,
combination or conspiracy in restraint of trade and allows for the imposition
of substantial penalties for violations thereof. Named after Sen. John
Sherman, the act was proposed to address growing concern over the rapidly
increasing prominence of large corporations, corporate trusts, and business
combinations in the US economic landscape toward the end of the
nineteenth century. Set forth as Title 15, §§ 1–7 of the US Code, the Sherman
Act is based on Congress’ constitutional power to regulate interstate
commerce and was enacted at a time when the only similar laws were state
statutes governing intrastate business.

Though the Sherman Act had immediate potential to aid the federal
government in addressing concerns over increasing corporate power, its
potential was not realized for several years. Initially, Supreme Court decisions
effectively prevented its use by the federal government. Thereafter, Congress
gradually put in place the supporting legislation and agencies necessary to
successfully challenge anticompetitive activities. This building process began
in 1904 when President Theodore Roosevelt launched his “trust-busting”
campaigns and the Supreme Court found in favor of the federal govern-
ment, dissolving the Northern Securities Company.

The Sherman Act’s reach increased during the Taft and Wilson
administrations with the enactment of the Clayton Antitrust Act and the
establishment of the Federal Trade Commission in 1914. Further, the

• The FLSA does not require employers to compensate nonexempt
employees on an hourly basis.

• “Waiting to be engaged” and “engaged to wait” have different
meanings under the FLSA.

• Employees must be paid for all hours worked, even if a supervisor
did not approve the time worked.

• Employees must be paid for the time they take to seek medical
attention for on-the-job injuries.

• Youth between 14 and 15 years of age cannot start work before
7:00 a.m. and must end work by 7:00 p.m. on any given work-
day (the time is extended to 9:00 p.m. from June 1 through
Labor Day).

• The FLSA requires employers to keep pay records for at least
three years.

• Meal and rest periods are not required under the FLSA.
• The FLSA does not mandate overtime pay for more than eight

hours worked in one day. State and local regulations or union
contracts may require payment of daily overtime.

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Davis–Bacon Act of 1931 57

addition of supplementary legislation, such as the Robinson-Patman Act
during President Franklin Roosevelt’s administration, continued to improve
the federal government’s ability to challenge corporate actions on antitrust
grounds. Finally, as federal antitrust agencies began broadening their
interpretations of the antitrust statutes in the 1980s and 1990s, antitrust
enforcement reached new heights, beginning with the 1982 breakup of the
AT&T monopoly and culminating with the widely publicized Microsoft case,
which ended in 2002.

Virtually since its inception, antitrust has been controversial. Proponents
have seen it as a preserver of competition and a protector of consumers,
while critics have viewed it as being based on flawed economic assumptions
and as a destroyer of free markets and property rights.

Although the law prohibits contracts or conspiracies that result in trade
restraint, the specific practices that are illegal are not spelled out in the law.
Instead, they are left to the courts to decide, based on the facts and
circumstances of each case. For example, the Supreme Court decided long
ago that contracts or agreements that restrain trade “unreasonably” are
prohibited, with the definition of “unreasonable.”

Enforcing Antitrust

Antitrust enforcement primarily is handled by two government agencies:
the Antitrust Division of the Department of Justice (DOJ) and the Federal
Trade Commission (FTC). The DOJ concerns itself primarily with “conspira-
cies,” “monopolies,” and the like, while the FTC directs its attention to
“unfair trading practices” in pricing, sales practices, etc. For issues related to
the workforce, the Department of Labor is the enforcer.

These two antitrust organizations operate in a somewhat different fashion.
The DOJ by itself cannot issue an order to impose a penalty. It must initiate
a suit through the courts. The defendant may demand a jury trial. The FTC,
however, is an autonomous administrative agency: It is complainant, judge,
jury, and prosecutor all in one, and it can issue its own cease-and-desist
orders. At no time is there a jury trial in an FTC procedure.

In either type of antitrust action, the defendant may appeal the verdict to
higher courts. However, in a case that may involve thousands of pieces of
evidence in the form of vouchers, receipts, purchase orders, etc., the courts
tend increasingly to rely on “expert” government testimony as to what is
“unfair” or “monopolistic.” The Supreme Court, in particular, usually
upholds the government’s case.

DAVIS–BACON ACT OF 1931

Under the provisions of this act, passed in 1931, federal contractors and
their subcontractors are to pay workers employed directly on the site of the
work no less than the locally prevailing wages and fringe benefits paid on

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58 Everything You Want to Know about Compensation (but Were Afraid to Ask)

similar projects. The Department of Labor maintains a very helpful website
with more detailed information related to this act, which is located at
https://www.dol.gov/whd/govcontracts/dbra-guidance.htm.

NATIONAL LABOR RELATIONS ACT

The National Labor Relations Act (NLRA) of 1935 was enacted with the
intention of creating a better environment for collective bargaining. The
NLRA was created to provide a more equitable environment for labor and
management dispute resolution, and covers all employers involved in
interstate commerce (with the exceptions of airlines, railroads, agriculture
and the government). The NLRA guarantees the right of employees to select
or reject third-party representation, as well as the rules for bargaining in
good faith and controlling against unfair labor practices. The enforcing
agency of the NLRA is the National Labor Relations Board (NLRB). It is
interesting to note that neither the federal courts nor the US Department of
Labor have jurisdiction in matters concerning the NLRB.

WALSH–HEALEY PUBLIC CONTRACTS ACT (PCA)

The Walsh–Healey Act, as amended, provides general employment regula-
tions and establishes minimum wage and maximum hours for work on con-
tracts for employers holding manufacturing or supply contracts with the
federal government in excess of $15,000. Although the law requires employ-
ees to be paid the minimum prevailing manufacturing wage established by
the Secretary of Labor, the secretary has, as a result of litigation, issued the
minimum wage as the “prevailing” wage since the 1960s. The law also estab-
lished certain child labor and safety standards. The US Department of Labor
(DOL) is the enforcing agency for the Walsh–Healey Act.

SERVICE CONTRACT ACT (SCA)

Passed in 1965, the Service Contract Act applies to federal contracts for ser-
vices in excess of $2,500 and requires service contractors to pay minimum
wages and fringe benefits as established to be prevailing by the Secretary of
Labor. As with the Davis–Bacon Act, pay scales are based on “prevailing”
wages, which is typically interpreted by the government as union-equivalent
wages and benefits in the local labor market. The act also includes certain
safety standards. The US Department of Labor is the enforcing agency of
the Service Contract Act.

Recordkeeping and posting requirements, government investigations
and hearings, court actions, and blacklisting of violators have been estab-
lished as enforcement mechanisms for the Davis–Bacon, Walsh–Healey, and
Service Contract Acts.

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https://www.dol.gov/whd/govcontracts/dbra-guidance.htm

Anti-Discrimination Laws 59

THE TAX CUTS AND JOBS ACT OF 2017 (TCJA)

TCJA includes several changes to how executive compensation is treated
under the Internal Revenue Code.

The legislation reduces the corporate tax rate from 35 percent to
20 percent and, in doing so, amends or eliminates many current provisions
including executive compensation requirements of the current tax code.

Notable changes include:

• Elimination of nonqualified deferred compensation arrangements
• Elimination of nonqualified stock options as a long-term incentive vehicle
• Elimination of performance-based exceptions to 162(m) or the $1 million

cap on compensation deduction expense

Tax-exempt organizations being subject to a new 20 percent excise tax on
compensation over $1 million paid to current or former five highest-paid
employees, effective for tax years after Dec. 31, 2017.

ANTI-DISCRIMINATION LAWS

The federal government enacted several statutes in the 1960s that were
designed to ensure the fair treatment of specific segments of the population
regarding their rights as individuals and employees. The most important of
these are the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964.

Equal Pay Act (EPA) of 1963

As early as World War II, the National War Labor Board was created as the
arbiter of salary disputes between labor and management. In 1942, it issued
an order for salary adjustments to “equalize the wage or salary rates paid to
females with rates paid to males for comparable quality and quantity of work
on the same or similar operations.” A bill requiring “equal pay for compara-
ble work” performed by males and females was introduced in Congress in
1945 and rejected, as were several similar bills for the next 18 years.

The EPA, which prohibits gender-based compensation discrimination, was
successfully enacted in 1963. Specifically, the act prohibits an employer from
discriminating “between employees on the basis of sex by paying wages to
employees . . . at a rate less than the rate at which he pays wage to employees of
the opposite sex . . . for equal work on jobs that require equal skill, effort, and
responsibility, and are performed under similar working conditions.” There
are, however, four exceptions (affirmative defenses). Unequal payments can
be based on (1) a seniority system, (2) a merit system, (3) a system that meas-
ures quantity or quality of production, or (4) any other factor aside from sex.

The act, an amendment to the Fair Labor Standards Act, was originally
enforced by the Wage and Hour Division of the Department of Labor, and
employers subject to the FLSA were subject to the provisions of the Equal

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60 Everything You Want to Know about Compensation (but Were Afraid to Ask)

Pay Act as well. In 1979, the Equal Employment Opportunity Commission
(EEOC) became the enforcing agency.

Plaintiffs who file lawsuits under the Equal Pay Act must show that they
are paid less than a person of the opposite sex for doing substantially equal
work (in the same job family) that requires substantially equal skill, effort,
and responsibility and is performed under similar working conditions. Once
the prima facie case has been established, the burden shifts to the employer
to prove that the pay difference is based on a seniority system, a merit system,
a system that measures earnings by quantity or quality of production or some
other factor aside from gender.

The bottom line of the Equal Pay Act for pay program design and admin-
istration is that if, on the average, men and women are paid different rates
when they perform work that is substantially the same, these differences
must be shown to be attributable to one of the “allowable differences.”

The effects of the Equal Pay Act have been far-reaching and include the
revision of employee benefit programs to eliminate gender-based differen-
tials, greater emphasis on written job descriptions, greater emphasis on
job-content-oriented procedures for assignment of pay grades and ranges to
specific jobs, and greater emphasis on written policies and procedures.

Title VII of the Civil Rights Act of 1964

The most comprehensive of the civil rights statutes, this legislation was cre-
ated to prohibit discrimination by employers on the basis of race, color,
religion, sex or national origin, in the hiring, firing, training, compensation
or promotion of employees. On the last day of debate, sex was added as a
prohibited basis of discrimination, creating overlap with the Equal Pay Act.

For cases subject to this overlap on sex-discrimination in pay, the Senate
added the Bennett Amendment that (ambiguously) states, “It shall not be
an unlawful employment practice under Title VII for any employer to dif-
ferentiate upon the basis of sex in determining the amount of the wages or
compensation paid to employees of such employer if such differentiation is
authorized by the provisions of the Equal Pay Act.” Regardless of how the
amendment is interpreted, differences in pay may be defended if attributa-
ble to work that is not substantially equal, or is based on seniority, merit, or
quantity and quality of work.

The Civil Rights Act is enforced by the EEOC, which was created by the
act. Virtually all employers with 15 or more employees are covered.

Employees who file lawsuits under the act must demonstrate either
“ disparate treatment” or “disparate impact.” Under “disparate treatment,”
the plaintiff must prove that the employer deliberately discriminated, based
on the employee’s race, color, religion, national origin, or sex. If this is done,
the employer must demonstrate a legitimate nondiscriminatory basis to
justify the practice; then, in order to prevail, the employee must prove that
any such “justification” is just a pretext for discrimination.

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Anti-Discrimination Laws 61

Under “disparate impact,” the employee must establish a prima facie case
showing adverse impact on a protected class. Then the employer must vali-
date the challenged practice by demonstrating a business necessity for the
practice and proving that no alternative exists that would produce a less
adverse impact.

The bottom line of Title VII for pay program design and administration
is that pay programs should produce pay rates that treat all classes of employ-
ees similarly, and any differences should be attributable to job-related,
defensible causes (seniority, performance, and the like). Case law resulting
from litigation under Title VII created the concept of “bona fide occupa-
tional qualifications” (BFOQ). This concept specifies that job qualifications
imposed by employers must be defensible and necessary for an employee to
perform the job.

The Pregnancy Discrimination Act of 1978

This Act amends Title VII of the Civil Rights Act of 1964 and prohibits sex
discrimination based on pregnancy. Women affected by pregnancy, child-
birth, or medical conditions related to pregnancy or childbirth shall be
treated the same in all employment-related purposes, including receipt of
benefits, as others not affected by pregnancy.

Title VII of the Civil Rights Act of 1991

This amendment to the Civil Rights Act of 1964 addresses several Supreme
Court decisions that did not follow established precedents. Some key cases
that shaped this Act were Price Waterhouse v. Hopkins (1989) and Wards Cove
Packing Co v. Antonio (1989). Decisions made in these cases made it more
difficult for plaintiffs to prevail in a dispute.

The 1991 Act clarified each party’s obligations in a disparate impact case
(Wards Cove Packing), shifting the burden of proof to the employer. The
employer must prove that a challenged practice is job-related and consistent
with business necessity.

The update addressed mixed motive cases. In a mixed-motive case (Price
Waterhouse) the employer will be found guilty of discrimination if an illegal
factor motivated the employment decision.

The Act also provides for a jury trial as well as compensatory and punitive
damages in Title VII and ADA claims of intentional discrimination. Caps are
placed on the maximum amount of damages awarded based on employer size.

The Act expands the right to challenge discriminatory seniority systems.
If an illegal employment practice occurs within a seniority system, the sen-
iority system may be challenged at several points in time: (1) when the
seniority system is adopted; (2) when the individual is subjected to the sys-
tem; or (3) when the individual is negatively impacted by the system.

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62 Everything You Want to Know about Compensation (but Were Afraid to Ask)

Age Discrimination in Employment Act (ADEA) of 1967

The Age Discrimination in Employment Act, passed in 1967 and amended
several times, protects workers aged 40 and older from employment dis-
crimination. The ADEA applies to private employers with at least 20 employ-
ees, state and local governments, employment agencies, labor organizations,
and the federal government. While it prohibits discrimination in all terms
and conditions of employment, it has been applied mainly in cases involving
retirement, promotions, and layoff policies.

The purpose of the act is to “promote employment of older persons based
on their ability rather than age, to prohibit arbitrary age discrimination in
employment, and to help employers and workers find ways of solving prob-
lems arising from the impact of age on employment.”

The law prohibits mandatory retirement (with some exceptions, gener-
ally involving public safety), limiting or classifying employees in any way
related to their age (such as with maturity curves), reducing any employee’s
wage in order to comply with the act, and indicating any preference based
on age in employment advertising. Individual state laws sometimes are more
restrictive than the federal law.

There are several statutory exceptions to the ADEA:

• Bona fide executives who are entitled to $44,000 per year or more in
retirement benefits from employer contributions. Mandatory retire-
ment at age 65 is allowed.

• Elected (or high-level appointed) officials in the government are not covered.
• Bona fide occupational qualifications (BFOQ), defined as an occupa-

tional qualification that is reasonably necessary to the normal operation
of the employer’s business. Employers may discriminate on the basis of
age if it is reasonably necessary to the normal operation of the business

• Bona fide seniority system
• Firefighters and law-enforcement officials
• Bona fide benefit plan
• Reasonable factors other than age

The EEOC has been charged with the enforcement of the act since July
1979. The plaintiff must prove that he or she is a member of a protected
group and that he or she has been adversely affected by a personnel policy
or action (prima facie case). Once this is established, the burden shifts to
the employer, who may argue that the adverse treatment occurred based on
considerations other than age or that the decision or policy was rightly based
on age (e.g., if age is a BFOQ for the job).

Executive Order 11246

This presidential order, signed by President Johnson in 1965 and amended
since that time, requires companies holding federal contracts or subcon-
tracts in excess of $15,000 not to discriminate in their employment practices

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Anti-Discrimination Laws 63

(which include pay practices) on the basis of race, color, religion, sex, sexual
orientation, gender identity, or national origin. Additionally, there is a
requirement to take affirmative action to ensure that employment decisions
are made in a nondiscriminatory manner. Executive Order 11246 also pro-
hibits employers from taking adverse employment actions when applicants
and employees discuss information about pay.

For service and supply contracts in excess of $50,000, contractors must also
develop and implement written affirmative action plans that include goals and
objectives of increasing minority and female participation in their workforce.

This executive order is enforced by the Office of Federal Contract
Compliance Programs (OFCCP) in the US Department of Labor. The OFCCP
also investigates complaints of discrimination and conducts on-site compli-
ance reviews to determine federal contractors’ compliance with the mandates.

Rehabilitation Act of 1973

The act covers persons employed by, or seeking employment from, federal
departments and agencies or businesses performing federal contract work
in excess of $2,500. Recipients of federal assistance are also protected from
discrimination based on any mental or physical disability that substantially
limits one or more major life activities. Section 503 of the Act applies to pri-
vate industry and Section 504 applies to institutions receiving federal grants.
Discrimination in employment is prohibited in all terms and conditions of
employment, which certainly includes compensation. The standards for
determining employment discrimination under the Rehabilitation Act are
the same as those used in title I of the Americans with Disabilities Act.

The act is enforced by the OFCCP, which requires covered employers to
utilize affirmative action to employ and advance qualified disabled individu-
als. The act also requires employers “to make reasonable accommodation to
the known physical or mental limitations of an otherwise qualified, handi-
capped applicant, employee or participant.” Further, the act requires the
elimination of physical barriers, to ensure that the “facility is readily acces-
sible to and usable by qualified handicapped individuals.”

Charges under the Act proceed in the same way as for Title VII. If, for
example, a human resource policy or action has an adverse effect on a disa-
bled person, the employer must then show that the adverse treatment was
based on considerations other than the disability (e.g., seniority or perfor-
mance) or that the disability was a legitimate basis for such policy or action.
This last defense is rare in compensation cases.

Vietnam Era Veterans Readjustment Act (VEVRAA)

The Vietnam Era Veterans Readjustment Act, as amended, requires compa-
nies doing business with the federal government to take affirmative action to
recruit, hire, and promote veterans, including disabled veterans and recently

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64 Everything You Want to Know about Compensation (but Were Afraid to Ask)

separated veterans. Employers may not discriminate in the employment and
advancement in employment of protected veterans.

The act is enforced by the OFCCP, which investigates complaints and
checks for compliance with the act during on-site investigations.

Americans with Disabilities Act (ADA) of 1990

The Americans with Disabilities Act (ADA) of 1990 was enacted to include
any company involved in interstate commerce with 15 or more employees.
A charge of discrimination must be filed within 180 days of the alleged dis-
criminatory act. The Act is enforced by the EEOC.

A disability is defined as an impairment that substantially limits or restricts
a major life activity such as hearing, seeing, speaking, breathing, performing
manual tasks, walking, caring for oneself, learning, or working. Any employee
or job applicant who meets the following criteria may be covered
under the ADA:

• Has a physical or mental impairment that substantially limits one or
more of the major life activities

• Has a record of any such impairments
• Is regarded as having such impairments
• Is associated with anyone having such impairments

This provision is designed to protect any qualified individual, whether or not
they are disabled, from disability-related discrimination. The individual must be
qualified for the job and must be able to perform the essential functions of the
job. A definition of essential functions should include the following criteria:

• Reason the position exists is to perform the function
• Limited number of other employees available to perform the function
• Degree of expertise or skill required to perform the function

Under the ADA, if an employer can reasonably accommodate a request by
a disabled employee (or applicant), the person is required to accept it.
A reasonable accommodation is any change or adjustment to a job or work
environment that permits a qualified applicant or employee with a disability
to participate in the job application process, to perform the essential func-
tions of a job, or to have the benefits and privileges of employment equal to
employees without disabilities. Failure to provide reasonable accommoda-
tion to a qualified individual with a disability is a violation of the ADA, unless
to do so would impose an undue hardship on the operation of the business.
The Act identifies three criteria to measure reasonableness of
accommodations:

1. The size of the business
2. Number (or type) of facilities

• Budgetary constraints
• Type of operation

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Anti-Discrimination Laws 65

• The composition
• The makeup of the workplace

3. Nature and cost of accommodations

Americans with Disabilities Act Amendments Act (ADA
Amendments Act) of 2008

The ADA Amendments Act was enacted to restore the intent and protec-
tions of the 1990 American with Disabilities Act. Supreme Court decisions
(Sutton v. United Air Lines and Toyota Motor Manufacturing, Kentucky, Inc., v
Williams) made under the ADA narrowed the scope of protection intended
by the ADA.

The ADA Amendments Act made several significant changes to the defi-
nition of “disability” to ensure the definition would be broadly interpreted
and applied without extensive analysis by an employer. The amendment
expands the definition of “major life activities” by providing a nonexhaus-
tive list of major life activities that specifically includes the operation of
major bodily functions. The Act makes it easier for employees to show that
their disability influences one of their “major life activities.”

Uniformed Services Employment and Reemployment Rights Act
(USERRA) of 1994

USERRA prohibits employment discrimination against a person based on
past military service, current military obligations or intent to serve. USERRA
applies to those who perform duty, voluntarily or involuntarily, in the “uni-
formed services,” as well as the reserves. Employers cannot deny employ-
ment, reemployment, retention in employment, promotion, or any benefit
of employment to a person based on a past, present, or future service obliga-
tion, regardless of the size of the organization.

The Act establishes a five-year cumulative total of military service with a
single employer, with some exceptions. The purpose of the law is to mini-
mize disruption to people in uniformed services as well as employers by
providing for prompt reemployment on completion of service. The law is
also aimed at minimizing disadvantages to civilian careers resulting from
uniformed service.

Employee rights under this Act include:

• Continuation of position, seniority, status, and pay rate as if there had
not been a break in employment, with the same seniority, status, and pay.

• Reasonable efforts (training or retraining) must be made to enable
returning service members to qualify for reemployment.

• While the individual is performing military service, the individual is
entitled to the same rights and benefits afforded to other individuals
on nonmilitary leaves of absence.

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66 Everything You Want to Know about Compensation (but Were Afraid to Ask)

• If performing military duty longer than 30 days, the individual may elect
continuation of employer sponsored health care for up to 24 months
and may be responsible for up to 102 percent of the full premium.

• If performing military duty less than 31 days, health care coverage is
provided as if the individual remained employed.

• Pension plans are protected, with individuals treated as if they had con-
tinuous service with the employer.

USERRA covers nearly all employees, including part-time and probation-
ary employees. The Act applies to virtually all US employers, regardless of
size. The US Department of Labor’s Veterans’ Employment and Training
Service (VETS) administers USERRA.

Genetic Information Nondiscrimination Act (GINA) of 2008

The Act protects employees or applicants against discrimination based on
genetic information in any aspect of employment, including hiring, firing,
pay, job assignments, promotions, layoffs, training, fringe benefits, or any
other term or condition of employment. Genetic information should not be
used in an employment decision because it is not relevant to an individual’s
current ability to do the job.

The Act prohibits discrimination against employees or applicants based
on an individual’s genetic tests, tests of an individual’s family members, and
information relating to an individual’s family medical history.

Genetic information about applicants, employees, or family members
must be kept confidential and in a separate medical file apart from the per-
sonnel file.

The EEOC enforces Title II of GINA, which focuses on genetic discrimi-
nation in employment.

Lilly Ledbetter Fair Pay Act of 2009

The law extends the time frame for filing pay discrimination claims brought
under Title VII, ADEA, ADA, and the Rehabilitation Act. The law creates a
rolling time frame for filing wage discrimination claims taking the position
that each paycheck containing discriminatory compensation is a separate
violation regardless of when the discrimination began.

This law overturned the Supreme Court’s decision in Ledbetter v. Goodyear
Tire & Rubber Company, which restricted the time period for filing complaints
of employment discrimination regarding compensation.

This Act covers employer decisions about base pay or wages, job classifica-
tions, career ladder or other noncompetitive promotion denials, and failure
to respond to requests for raises.

The EEOC enforces this Act.

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UMGC. (n.d.). Module 3: Core Elements of Non-monetary Rewards and Work Experience

Link:

https://learn.umgc.edu/d2l/le/content/715326/viewContent/29088053/View

————————————————-

Commentary

Module 3: Core Elements of Non-monetary Rewards and Work Experience

Topics

Topic 1: What are Non-monetary Rewards?

Topic 2: Key Elements of Work Experience

Topic 3: Governmental Compliance Issues

Topic 4: Understanding Demographic and Psychographic Differences

Topic 5: Role of Non-monetary Rewards and Work Experience in Total Rewards Design

Topic 6: Conclusions

Topic 1: What are Non-monetary Rewards?

A Society for Human Resource Management study (SHRM, 2005) found that both employers and HR professionals see benefits or non-monetary rewards as a driving factor for job satisfaction. In this module, non-monetary rewards are defined as the set of rewards known broadly as
benefits. The array of benefits that supplement monetary rewards are evolving quickly, as the competition for employees increases. While there is a wide range of non-monetary rewards offered, most center around those that protect against the cost of illness or health emergencies, provide income protection in the case of disability, and and provide general well being for the employees and their families. The more typical non-monetary rewards offered today are shown in the center column in table 3.1 below.

Table 3.1 Three Elements of the Total Rewards Model

Monetary Rewards

Non-monetary Rewards

Work Experience

Base Pay

Income Protection Benefits

Values of the Organization

Variable Pay

Medical Insurance

Community (Individual and Organizational)

Merit and Cost of Living Increases

Vision and Dental

Recognition

Retirement Savings

Disability

Training and Development

Performance Feedback

Life Insurance

Promotions

Deferred Compensation

Paid Time Off

Sense of Accomplishment

Day Care
Employee Assistance Program
Health Related Programs
Tuition Assistance

Companies listed on
Fortune magazine’s list of “100 Best Companies to Work for in America” seem to recognize the importance of offering a wide assortment of benefits. They offer the assortment in order to meet the needs of the employees and address many of the needs in Maslow’s hierarchy (Maslow, 1954).The companies appear to use a total rewards approach to compensation to attract, retain, and motivate their employees. In addition to what has become rather standard as a set of rewards including medical, dental and vision insurance; paid time off; and ample room for career growth, some mix of the following benefits is often present: education reimbursement, employee training, on-site child care services, financial counseling, and retirement benefits (Bates, 2003).

But it is important to remember, just as with consumer purchasing decisions, that what is valued by one employee is not necessarily valued by all. Therefore employers must research what the requisite employees in their organization desire. One way in which information about preferences is gathered is through surveys or interviews, and more than one method of gathering data about the important decisions of rewards is better. Information internal to the organization and outside the organization is recommended. Table 3.2 summarizes a report from a survey conducted by Aon (2002) demonstrating the average range of preferences when individuals taking the survey were asked to rank the benefits from most preferred to least preferred, if given a choice. In this survey, the data revealed that the benefit most often ranking the highest was medical insurance and the lowest was wellness programs. As you read the list of preferences, think about how you would rank your own preferences. Surveys similar to the A on survey can provide information to organizations that can be compared against internal or other external research.

Table 3.2 Employee Benefit Preferences

Benefit preference, in order of most desired

1. medical insurance

2. paid vacation and holidays

3. employer-paid pension

4. retirement savings plan

5. prescription-drug card

6. ability to choose benefits to meet needs

7. sick leave and short-term disability

8. long-term disability insurance

9. preventative/wellness coverage

(Source: Aon Survey, Benefit Preferences, 2002)

When making the decision to offer a benefit, organizations must be careful that the benefit can be continued after it is implemented. Once offered, there can be negative repercussions if it has to be taken away. Employee scan quickly grow accustomed to having benefits and can develop a sense of entitlement to them. In one of the offices of Hewlett-Packard, for example, employees receive free fresh fruit throughout the day, and have now come to expect it, thereby making it difficult for the company to stop doing it. Another large company decided, as a cost-cutting measure, to eliminate the annual free holiday turkey for its thousands of employees. The news created such wide spread negative reaction that the decision was quickly reversed.

There are a few benefits for which there is entitlement by law. Many employees mistakenly believe that their major benefits are mandatory, or required by law to be provided. In fact, however, few benefits are required by law. While the benefits listed in Table 3.3 (the major federally mandated benefits) are certainly more than those offered to employees prior to World War II, they represent only a small portion of the benefits most organizations offer today.

Table 3.3 Federally Mandated Benefits

· Workers Compensation

· Social Security

· Unemployment Insurance

· Time Off for Family or Medical Care (FMLA)

· Continuation of Medical Insurance Coverage (COBRA)

· Health Insurance

Compare the list of government-mandated benefits to the list of typical optional benefits in table 3.4 below. With this list it is easy to see how the cost of benefits can be as much as 40 percent of the overall payroll cost.

Table 3.4 Typical Optional Benefits

· paid time off during working hours: vacation, sick leave, personal days, bereavement, jury duty

· child care facilities or services

· domestic partner benefits

· legal insurance

· tuition assistance

· flexible spending accounts

· legal services and legal insurance

· employee assistance programs

· long-term care insurance

· free or subsidized parking

· free or subsidized public transportation

· cafeteria plans for benefits

In addition, there are benefits that are offered that seem to be designed for specific employees’ interests and enjoyment. The list in table 3.5 provides some examples offered by various organizations.

Table 3.5 Not Widespread but Increasingly Offered Non-monetary Rewards

· gyms or exercise facilities

· pet insurance

· elder care

· stock purchase plan

· career coaches

· subsidized cafeterias or free food and beverages

· financial counseling

· paid days off for volunteering

· banking and post office on premises

· game rooms (with electronic games, pool, table tennis)

· meditation or prayer rooms

· lactation rooms

· concierge services

· other personal services (on-site dry cleaners, car maintenance)

At Google.com, the company that was No. 1 on the list of
Fortune magazine’s top 100 companies to work for in 2007 (
Fortune, 2008), even more non-monetary rewards are offered in addition to most of those listed in tables 3.3, 3.4, and 3.5. The benefits are offered in an attempt to take away as many of the distractions as possible from the employee and also to make employees turn away recruitment calls. For example, if an employee has a baby, she receives $500 toward take-out food to help provide extra time for the work that a new child brings. There is a laundry facility in which employees can wash their clothes for free, on-site doctors for free checkups, and a bookmobile. To complement these benefits that help to eliminate any distractions, there are additional benefits that support the values of the organization. For example, if an employee purchases a hybrid car, there is a $5,000 stipend toward the purchase. Knowing how many workers love their pets, the environment is pet friendly, allowing pets in as long ascertain behavioral standards are met. There are also rewards and recognition for innovation. One employee recently received a bonus of a million dollars for her innovative contributions. Google is not stopping with this list, however, and is considering new offerings such as sabbatical programs and rotation of positions in order to keep the longer-term employees fresh and motivated (
Fortune, 2008).

One aspect of the reward offerings that is a key to their effectiveness is that of communication, to help employees understand the philosophy of the organization about its employees and the rewards offered. Another company on
Fortune’s 100 Best Companies List is Wawa. The Company Spotlight of Wawa shares Wawa’s philosophy and purpose for offering the non monetary rewards it does for the employees. It is an example of how Wawa communicates why they offer the benefits it does.

Company Spotlight: Wawa

Benefits @ Wawa are all about YOU!

At Wawa, pay and benefits work together to help our associates meet their personal financial goals, protect their income against loss, and prepare themselves and their families for a comfortable future. Benefits are an important part of total compensation and Wawa places a high priority on keeping associates informed about how these programs benefit them and their family.” (Source: http://wawa.com/joinwawa/join-benefits.asp)

One of Wawa’s benefits seems to be customized for a relatively young employee population, a generous tuition reimbursement program after only six consecutive months of full-time employment. With all the rewards reviewed thus far, it may be that one would think that organizations merely “throw” benefits at employees. This is not the case. Total rewards is not about how many different benefits an organization can offer, but rather what benefits can be offered that help drive the organization’s strategies. What rewards will align with and reinforce the culture of the organization while still being financially feasible?

Topic 2: Key Elements of Work Experience

In addition to non-monetary rewards, there are other important aspects of the work experience that help to satisfy the needs, wants, and desires of employees. The plan is to get them in the organization and keep them there. A recent job satisfaction survey published by Monster.com revealed that while inadequate compensation is the leading reason that employees cite for leaving a job, other top-ranking reasons include lack of career advancement, insufficient recognition, and inadequate professional development opportunities. Good relationships with coworkers and managers, desirable working hours, and attractive benefits were the top reasons employees cited for remaining in a job. Increasingly, the one segment that allows an organization to distinguish itself from others is this third element of the total rewards approach, the work experience. If the money is available, an organization can compete with its monetary and-non monetary rewards, but it is what one has named “a signature experience” that is difficult to replicate (Erickson & Gratton, 2007). A signature experience is a program, policy, or practice unique to a company that creates an appeal that is not found elsewhere. Some of the important signature experiences or dimensions of the work experience are detailed in the third column of table 3.1.

Company Spotlight: jetBlue

“Companies that target potential employees as methodically as they do potential customers can gain a sustainable market advantage. That’s been the case at jetBlue. When most airlines were using standard call centers, jetBlue devised a system based entirely out of employee’s homes. This has become one of the airline’s signature experiences and part of its organizational lore, attracting a strong and productive base of employees who find flexible schedules more valuable than above-average compensation. According to CEO David Neeleman, it was more than cost savings that prompted the company to create this signature experience. Like the flight crew, the reservations agents are the face of jetBlue, responsible for ensuring high levels of customer satisfaction that will translate into increased revenues. The company couldn’t afford to pay them high salaries, so decided to appeal to a different segment, by letting them work from their homes. We train them, send them home, and they are happy, Neeleman says. jetBlue tries to accommodate call center agents’ varied scheduling requirements (some work only 20 hours a week), including sometimes swapping shifts at the last minute. Employees have unlimited shift-trading privileges, which they can negotiate using an online community board. Since introducing the work-from-home option, jetBlue reports that it has more motivated and satisfied employees and a 38 percent increase in customer-service levels, with a 50 percent decrease in management workload per agent, compared with historical norms” (Erickson & Gratton, 2007, pp. 5-6).

WorldatWork (Christofferson & King, 2006) reported that the biggest changes seen recently in the total rewards model were in the area of work experience. In the 2005 study, 58 percent of the employers showed this area increased in importance. In specific importance were recognition, development, and career opportunities. In addition to current importance, the respondents stated that the category would be increasingly important over the next few years. The changes also noted the interest in the values and culture of the organization, enjoying the people you work with, a sense of accomplishment, feeling valued, recognition, flexible schedules, alternative work arrangements, and career opportunities.

One of the important elements of the values of the organization is that of social and environmental responsibility. This is due in part to the growing number of Millennials (born between 1977 and 1998) in the population. These workers have been exposed to the growing emphasis on social responsibility in their everyday lives. Just as many stockholders look for socially responsible companies in which to invest, so is a company’s social responsibility important to current and potential employees. One example of an organization that is seen as being socially responsible is Starbucks, which has an active recycling program, giving its coffee grounds to interested local groups that use them for compost. Also, older coffee beans that can still be used for coffee are donated to nonprofit kitchens serving the needy, rather than being thrown out. Another example is Marriott International. When guest room beds and baths were upgraded, the still excellent and many unused bath towels, bed linens, and pillows were given away to nonprofit organizations. Yet another large firm in Canada offers to give an additional 25 percent of annual bonuses to the charity of the employee’s choice. These examples help an organization demonstrate its social responsibility.

Like for-profit organizations, nonprofit and governmental organizations also offer opportunities for individuals to work in positions in which they can fulfill their social responsibilities. The nonprofit segment is one that is expanding, through both volunteers and paid employees. According to the Bureau of Labor Statistics, nonprofit organizations employed 1.2 million workers in 2006 and rank in the top 20 fastest-growing fields (http://www.bls.gov). There were 837,027 charitable nonprofits in the United States in 2003, a 68-percent increase from 1993, according to information from the National Council of Nonprofit Associations (http://www.ncna.org). These statistics show that increasingly nonprofits will compete with for-profit organizations for needed employees. The company spotlight below on the American Cancer Society illustrates how a nonprofit provides fulfillment while also offering a wide assortment of competitive benefits.

Company Spotlight: American Cancer Society

Employee Benefits at the American Cancer Society

Save lives. Fulfill yours.

The people who choose to be a part of the American Cancer Society give of themselves personally and professionally. One of their ongoing rewards is seeing the critical and tangible impact that our work has in our communities. But that is not where our rewards end. As all-consuming as the fight against cancer is, it doesn’t eclipse the quality of life that everybody needs to thrive.

In addition to competitive pay, Society staff members enjoy employment benefits that make this a truly great place to work. Key among them is a commitment to a healthy work/life balance, giving staff members access to flexible work schedules, telecommuting and job sharing opportunities, and alternative work hours.

Another major benefit is the opportunity to learn and grow. This begins with an informative orientation when you start working with the Society, and it continues with multifaceted training and experiences that help you grow, both professionally and personally. For people interested in continuing with a formal education, tuition reimbursement may also be available, depending on your location and course of study.

Summary of Other Employment Benefits

1. Comprehensive medical, dental, and vision insurance

2. Life insurance for you and your family

3. Flexible spending accounts for health care and dependent care

4. Domestic partner coverage available in a variety of locations

5. Health and wellness programs

6. Employee assistance program

7. Short- and long-term disability insurance

8. Paid holidays

9. Generous vacation, sick, and personal time policies

10. Pension plan

11. 403(B) plan

(Source: http://www.cancer.org/docroot/emp/content/EMP_1_Benefits.asp)

The examples of programs, policies, and practices in the work experience element of total rewards are not inclusive of all the ones that are important to employees. Other areas, such as training and development, career opportunities, and recognition fulfill several of the highest level of needs on Maslow’s hierarchy (Maslow,1954). These are needs of belonging, identifying with a group, cognitive skills, positive self image, and reaching full potential. But just as with non-monetary rewards, the work experience is not decided in isolation of the other two. The work experience is not one that is randomly decided by an organization, but rather strategically designed in order to attract and retain employees while still supporting the organization’s business objectives and culture.

Topic 3: Governmental Compliance Issues

There are entire textbooks and courses devoted to the governmental compliance issues influencing benefit administration, as there are government web sites, organizational resources, and government agencies. These resources are evidence that the thinking that the government recognizes that fair and equitable treatment of workers in employee benefit plans is required of employers. This is true of both federally mandated and discretionary benefits. The following descriptions of some of the major benefit-related laws and regulations(Bernardin,2003 and Martocchio, 2006) are presented to emphasize that each organization needs to ensure adequate resources, including expert knowledge of those who are consulted as decisions about total rewards are made and administered. The relevance to employee benefits or benefits administration follows each listing of the act, law, or regulation. Although the list may seem daunting, the compliance issues and the list of laws and regulations are only a partial representation of all that exist. They are not inclusive of all those that impact benefit administration.

Some of the major laws, regulations, and acts are:

·
National Labor Relations Act of 1935: requires mandatory bargaining of disability pay, employer-provided health insurance, paid time off, pension and retirement plans.

·
Workers Compensation Laws: requires that employers finance a variety of benefits (lost wages, medical benefits, survivor benefits, and rehabilitation services) for employees with work-related illnesses or injuries on a no-fault basis.

·
Internal Revenue Code: mandates multiple regulations for legally required and discretionary benefits including the
Federal Insurance Contributions Act (FICA), which are taxes employees and employers pay to finance the Social Security Old-Age, Survivor, and Disability Insurance Program. Also, unemployment insurance benefits are financed by federal and, sometimes, state taxes levied on employers. Federal tax is levied on employers under the
Federal Unemployment Tax Act (FUTA).

·
Fair Labor Standards Act of 1938 (FLSA): applies to benefit practices in two ways. First, under the overtime pay provision, employees who are covered by FLSA are entitled to pay at a rate of one-and- a-half times their normal hourly rate for hours worked in excess of 40 during a workweek. Employee benefits that are linked to pay, as in the case of unemployment insurance, increase correspondingly during those overtime hours. Second, the FLSA specifies time-off practices that qualify as hours worked.
The Portal to Portal Act of 1947 defines the term
hours worked as the compensable activities that precede and follow the primary work activities, such as non-production time cleanup, travel time between job locations within the scope of the regular work shift, and rest periods shorter than 20 minutes.

·
Equal Pay Act of 1963: is based on the principle that men and women performing equal work should receive equal pay. The definition of wages in the Equal Pay Act encompasses employee benefits. Thus, employers must provide equal employee benefits to male and female employees who perform equal work and their beneficiaries regardless of cost differences.

·
Title VII of the Civil Rights Act of 1964: makes it unlawful practice for an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his or her compensation, including employee benefits.

·
Age Discrimination in Employment Act of 1967 (ADEA): prohibits illegal discrimination in employment on the basis of age and makes specific reference to employee befefits. The ADEA sets limits on the development and implementation of employer “early retirement” practices that many companies use to reduce the size of their workforce. The
Older Workers Benefit Protection Act (OWBPA) is an amendment to the ADEA that places additional restrictions on employer benefit practices. One of several requirements is the equal benefit or equal cost principle, requiring employers to offer benefits to older workers that are equal to or more than the benefits given to younger workers, with the exception of when the costs to do so are greater than for younger workers.

·
Pregnancy Discrimination Act of 1978: is an amendment to Title VII of the Civil Rights Act of 1964. It prohibits discrimination against pregnant women in all employment practices. The relevance to benefit practices is that employers must not treat pregnancy less favorably than other medical conditions covered under the medical benefit plans. In addition, employers must treat pregnancy and childbirth the same way they treat other causes of disability.

·
Consolidated Omnibus Budget Reconciliation Act (COBRA): requires employers to provide access to health care coverage in particular instances when coverage would otherwise be terminated. Costs of the coverage may be completely passed on to the worker. Administrative record-keeping fees may also be charged.

·
Family and Medical Leave Act of 1993 (FMLA): Requires employers to continue providing health care coverage to employees who are on FMLA leave (up to 12 weeks per year for specified family emergencies) on the same basis that it was provided before the leave period.

·
Health Insurance Portability and Accountability Act (HIPAA): is designed to lessen an employer’s ability to deny coverage for a preexisting condition and prohibit discrimination on the basis of any health-related status. It imposes privacy provisions and strict compliance guidelines for health-related information.

·
Employee Retirement Income Security Act (ERISA): requires that employees be eligible for pension plans beginning at age 21 if offered by the employer. ERISA does not require that employers offer a pension plan, but if a company does have one ERISA controls the administration of it, including vesting and portability.

·
Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA): gives individuals the right to employment by the company in which they worked prior to military service. Employers choose whether or not to pay employees while on military leave.

·
The Clean Air Act Amendments of 1990: requires employers in smoggy metropolitan areas such as Los Angeles to comply with state and local laws concerning commuter trip reduction. For example, this act could require employers to offer alternatives for carpooling and provide other resources to promote reducing automobile usage.

·
Sarbanes-Oxley (SOX): requires specific actions for employers to take when changing stock options and/or announcing blackout periods.

·
Affordable Care Act of 2010: The Affordable Care Act was passed by Congress and then signed into law by the President on March 23, 2010. On June 28, 2012 the Supreme Court rendered a final decision to uphold the health care law.

As is evident from the list provided, compliance issues are numerous and complex. When employers are designing and implementing total rewards, steps must be taken to comply with all the relevant laws and regulations in order to not be in violation of the laws. It is recommended that experts are included in the decision-making process and serve as a key resource to the organization when the administrative procedures are written.

Topic 4: Understanding Demographic and Psychographic Differences

The term
demographics refers to the statistical makeup of a population, such as the percentages of people who are married or single; the number who are male or female; the percentage of ethnicity, such as Hispanic, Asian, Caucasian; and the makeup by age groups such as percentages of Baby Boomers (born between 1946–1964) and Millennials (born 1978 or after). The United States demographics or statistical makeup of the labor force is changing, with racial and ethnic minorities now accounting for a growing percentage of the overall labor force, and more women in the workforce than ever before. The average age of workers is also now considerably higher than it was just 10 years ago. Knowing the demographics of a population can help an organization strategically plan (but only to a limited extent). Knowing the demographics can help determine generalizations about the groups that can
suggest a preference for certain rewards. For example, along with more women in the workforce, there are also larger numbers of both parents working outside the home. This demographic of more two-parent-working families drives many organizations to provide for more family-friendly rewards such as flex time, job sharing, child care services, or on-site facilities.

Psychographics refer to the personality traits of individuals. A demographic segment is an overall segment of the population. A psychographic segment is a psychological trait or set of traits of a population segment. The psychographic traits of individuals include, for example, what type of work is enjoyed, what motivates them to do a good job, what values they hold, how they like to receive feedback, and what rewards are important to them. As with demographics, different psychographics can be generalized and are helpful to reward design to an extent. For example, one organization found that there was a psychographic segment they named “fast food junkies,” employees who wanted to work only in the fast food industry. What was important to them was learning as much as they could about fast food, in their own store and in others. For them, a work experience in which they could benchmark practices of other stores, learn more about fast food trends, and have promotions within the fast food organization was important. Just as organizations study their consumers to know what is important in their buying decisions, it is important for organizations to know what is important to their current and future employees. The psychographic traits of individuals are critical to know when making decisions about the rewards offered. One reason is there is a cost to each benefit offered, and much money could be wasted on benefits that employees may not necessarily value. Another reason is that if the appropriate rewards are not offered, the organization risks higher turnover.

It is important to know by demographic and psychographic segment what, generally, will help attract, retain, and motivate. This information is important in marketing used in designing a total rewards approach, one that will attract the requisite employees with the skills needed for the organization to be successful. However, companies should not presume to know the needs and preferences of their own employees or potential employees based only on generalizations, on what other organizations offer, or on what they learn through surveys. While this information’s helpful, more research must be done with their own employees or potential employees before decisions can be made about their total rewards programs. Keeping the point in mind as to how the information must be further researched, some of the general information available about demographics, gender differences, and generational differences follows.

Demographics

One of the things we know is that each person is unique, with their own set of personal desires that affect what they want in are wards package. We also know that these desires may change depending on changing situations or life events for the person. And, increasingly so, each organization will employ multiple generations in its population of employees, as well as multiple ethnicities, which further affects the diversity of reward desires. Keeping these statements in mind, some generalizations have been reported by demographic sector for preferences of benefits or work experience.Table3.6 shows typical benefits found to be preferred by employees, indicating demographic characteristics and probable life events (Martocchio, 2006, p. 31).

Table 3.6 Likely Preferred Benefits by Demographic and Life Events

Demographics

Preferred Benefits

Unmarried male and female employee

Physical fitness programs
Generous vacation allowances

Employee with dependent elderly
parent or relatives

Elder care benefits
Flexible work schedules

Married male and female employee

Flexible work schedule

Employee with children

Day care assistance
Life insurance
Health insurance with dependent coverage
Education benefits for children

Older employee nearing retirement

Retirement plans with accelerated benefits accumulation
Health insurance coverage with prescription drug benefits
Generous sick leave allowance
Disability insurance
Retiree health care benefits

Source: Martocchio (2006, p. 31)

Gender Differences

The findings of a Monster.com survey (2008) differed based on gender and other factors. For example, the survey revealed that while men listed good pay as the main reason for remaining at a company, women rated good relationships with their coworkers and managers and desirable work hours as their top reasons for remaining.

Age Differences

Although there will be multiple generations in any organization, many companies are targeting individuals born in 1978 or later (the Millennials) for recruitment and retention. This segment is important because it is80 million strong (the largest age group in the United States) and is just entering the workplace. Following is a listing published by Versant (2008) of some of the general psychographics of the age group. From this information, it is easy to see why many organizations are finding it important to publish, promote, and engage in socially responsible activities. Many organizations now offer paid time for volunteering in an interested cause.

Millennials:

· view their career as an opportunity to contribute to a greater good

· have ideas and solutions that are often technology-oriented

· have a strong sense of social responsibility and seek out employers who give back to the community

· do not define themselves by their jobs

· want to do excellent work, but their lifeis not about their work

· value work-life balance as very important to them

· want to be connected and know how they fit into the bigger picture

· are team-oriented

(Source: www.versantblogs.com/employerbranding/)

Other age segments in the workplace include the Generation Xers (born between 1965 and 1976), who are 45 million in number and are reported to value ongoing training and appreciate the people and the teams they work with, but are not necessarily loyal to the company. If dissatisfied they will not hesitate to look for a different organization to join; they will move on quickly. Other traits of the Generation Xers include being comfortable in multicultural settings, desire for some fun in the workplace, and a pragmatic approach to getting things done. They seem to be more satisfied with flexibility in their schedules and prefer independence in their tasks. They perform best when there are chances to compete, are offered constant feedback, and are assigned a series of long-term, meaningful projects (Kaye, Scheef & Thielfoldt, 2003).

In addition, there are currently 78 million Baby Boomers (born between 1946 and 1964) in the population. They tend to focus on personal accomplishment and are motivated through acknowledgment of their contributions and recognition of their value to the organization. They appreciate the work experience dimensions that give fulfillment and help to express their spirituality. They are also interested in social issues and want jobs that will allow for accommodation for family demands of children and aging parents (Kaye, Scheef & Thielfoldt, 2003).

The oldest major segment of the workforce is that of the Matures (born between 1925 and 1945), with 75 million in the population. Because Americans are now working longer and the age span is increasing, this segment of employees may be seen in organizations for some time to come. The Matures tend to want choices in their work and have a desire to contribute. They also want respect for the experience they have gained through the years. They are reported to value job titles, direction from managers, and recognition for their dedication. A few reasons why many Matures have continued to work or are reentering the work force is for additional income, additional medical insurance, and the desire to contribute (Versant, 2008, p. 7).

Only some of the many general differences by segment of employees have been mentioned. Much further study of the employees within the organization and the potential employees the organization hopes to recruit is essential in order not only to select the rewards that are valued, but also to make the best use of the dollars spent.

Topic 5: Role of Non-monetary Rewards and Work Experience in Total Rewards Design

The role of non-monetary rewards and work experience is a critical one in the overall design of total rewards because of the growing competition for skilled employees. The International Society of Certified Employee Benefit Specialists stated, in the 14th annual top five total rewards priorities survey conducted by Deloitte Consulting LLP (Deloitte, 2008), that a shortage of skilled and talented workers has become the most pressing concern among employers. This supplants the leading problem of recent history of rising health care costs (Deloitte, 2008).

It is reported that many organizations plan to redesign their total rewards to address the shortage. The majority (68 percent) plan to redesign some of their non-monetary reward programs to better align the interest of employees and the organization and promote employee engagement. Some of the most commonly identified programs to change would be learning and development programs (51 percent), paid time off (44 percent), flexible work arrangements (39 percent), and mentoring programs ( 28 percent). The respondents reported that nearly one-third of them would be making changes to their total rewards programs with generational preferences in mind (Deloitte, 2008).

WorldatWork reports that the “core” parts of the traditional elements of rewards (pay, benefits, and stock awards) are no longer differentiating factors for organizations. Given this, it seems logical that organizations look to what they need to offer in total rewards to employ and engage their needed employees. In order to make the needed decisions, an organization must first know its objectives, values, and financial status as well as the specific KSAs currently required and expected in the future. In addition, the psychographics of the current and potential employees by demographic segments need to be understood in order to design a total rewards package that is customized to attract and hold those individuals. The decisions for the total rewards design are not made by element, but rather are considered in unison with each other as a strategic marketing approach.

Topic 6: Conclusions

Two significantly important elements of the total rewards approach to compensation management were discussed in this module. These were two elements that do not include monetary rewards, but rather complement and supplement that element. The typically offered non-monetary rewards were detailed, with examples of rewards that may be surprising to some. In addition to the non-monetary rewards, the evolving element of work experience was reviewed. While all three elements are essential as a holistic package, it is the work experience that can be a leading differentiating factor for employment. Also in this module, it was detailed how there are demographic and psychographic preferences affecting total rewards.

As was the case with monetary rewards, there are governmental compliance issues to be concerned with regarding benefits and their administration. The major issues were delineated in this module. Finally, the role of non-monetary rewards and work experience in the broader total rewards approach and how decisions are made was emphasized. While modules 2 and 3 have both touched upon how total rewards are decided, module 4 will provide greater detail on exactly how rewards are designed and implemented.

References

Aon. (2002). “Benefit Preferences Survey.” http://www.Aon.com

Bates, S. (March, 2003). “Benefit packages nearing 40 percent of payroll.”
HR Magazine.

Bernardin, H.J. (2003).
Human resource management: An experiential approach. New York: McGraw-Hill.

Brown, D. (2004). “Total Rewards: Adding up the non-monetary side.”
Canadian HR Reporter.

Christofferson, J.; and King, B. (2006). “The ‘IT’ factor: A new total rewards model leads the way.” Workspan, http://www.worldatwork.org

Deloitte Consulting LLP. (2008). “Top five total rewards priorities survey.”

Erickson, T.J.; and Gratton, L. (March, 2007). “What it means to work here.”
Harvard Business Review.

Fortune magazine. (Jan., 2008). “100 Best companies to work for in America.”

Kaye, B.; Scheef, D.; and Thielfoldt, D. (2003.)
Human Resources in the 21st Century. Chapter 4: Engaging the generations. M. Effron; R. Gandassy; and M. Goldsmith. New Jersey: John Wiley & Sons.

Maslow, A. H. (1954).
Motivation and personality. New York: Harper.

Mathis, R. L.; and Jackson, J. H. (2008).
Human resource management. South-Western: Thompson.

Martocchio, J.J. (2006).
Employee benefits: A primer for human resource professionals. McGraw-Hill Irwin.

Milkovich G.T.; and Newman, J.M. (2008).
Compensation. McGraw-Hill Irwin.

Monster.com. (2008). “Job Satisfaction Survey Reveals Why Employees Move On.” Retrieved 4/9/08 from http://career-advise.monster.com/career-change/job-satisfaction-survey

National Council of Nonprofit Associations. “The United States Nonprofit Sector.” Retrieved 4/22/08 fromhttp://www.ncna.org

Society for Human Resource Management. (2004). “SHRM Benefits Survey.” http://www.shrm.org

Society for Human Resource Management. (2005). “Job Satisfaction Survey.” http://www.shrm.org

The American Cancer Society. (2008). “Employee Benefits at the American Cancer Society.” Retrieved April 23, 2008, from http://www.cancer.org/docroot/emp/content/EMP_1_Benefits.asp

U.S. Bureau of Labor Statistics. Retrieved April 22, 2008, from http://www.bls.gov

Versantworks.com. “Aligning a Multi-Generational Workforce With Your Business Goals.” Retrieved April 23, 2008, from http://www.versantworks.com

Versantworks.com. “Employer Branding and Recruitment Marketing.” (2008.) Retrieved April 23, 2008, from http://www.versantblogs.com/employerbranding

WorldatWork. (2007).
The WorldatWork handbook of compensation, benefits & total rewards: A comprehensive guide for HR professionals. New Jersey: John Wiley and Sons.

UMGC. (n.d.). Module 2: Core Elements of Monetary Rewards

Link to this note:

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Commentary

Module 2: Core Elements of Monetary Rewards

Topics

Topic 1: What are Monetary Rewards?

Topic 2: Key Elements of Analysis and Documentation

Topic 3: Assessing and Rewarding Performance

Topic 4: Regulatory Aspects of Monetary Rewards

Topic 5: Philosophy of Market Positioning and Link to Total Rewards

Topic 6: Conclusions

Topic 1: What are Monetary Rewards?

The total rewards approach to compensation management is strategically planning a targeted reward package to successfully attract, retain, and motivate segmented populations of employees who possess the requisite knowledge, skills, and abilities (KSAs) needed to achieve the organization’s objectives. Table 1.2 in module 1 illustrates the interdependent relationship of the components of the total rewards approach to compensation. The table shares the three major components of total rewards, including the monetary, non-monetary, and other elements of the work experience, which combine strategically for the total rewards philosophy for the organization. Column 1 in Table 2.1 below shares many of the monetary rewards organizations offer today and will be described in this module.

Table 2.1 Three Elements of the Total Rewards Model

Monetary Rewards

Non-monetary Rewards

Work Experience

Base Pay

Income Protection Benefits

Values of the Organization

Variable Pay

Medical Insurance

Community (Individual and Organizational)

Merit and Cost of Living Increases

Vision and Dental

Recognition

Retirement Savings

Disability

Training and Development

Performance Feedback

Life Insurance

Promotions

Deferred Compensation

Paid Time Off

Sense of Accomplishment

Day Care
Employee Assistance Program
Health Related Programs
Tuition Assistance

Monetary Rewards

Monetary rewards are, unmistakably, a vital element of total rewards. Christofferson & King (2006, p. 27) describe mometary rewards as “the pay provided by an employer to an employee for services rendered (i.e. time, effort, and skill).” Monetary rewards include, but are not limited to, the list of rewards in column 1 of table 2.1 above. As the largest expenditure of most organizations’ rewards budget, monetary rewards help to satisfy several of the need areas described on Maslow’s Hierarchy of Needs (Maslow, 1954); for example, short- and long-term survival and self-esteem.

An important psychological view of the perception of pay is vital to the discussion of monetary rewards. Lawler (1971, 2000) states that in order for pay to not become a dissatisfier it must be viewed as being fair. Fairness is defined as being paid an equitable amount of salary as compared to others performing relatively the same job. And the fairness necessity extends to both internal and external comparisons. Therefore, organizations must take steps to ensure that the pay and rewards for the work performed are based on objective criteria from research. This is done through the job evaluation, which examines the internal worth of the position, and the competitive and market evaluation that determined the pay for the position against outside positions. These evaluations are important for many reasons, including that the perception of fairness by the incumbent employees is mandatory for both pay and performance rewards to be effective. Organizations realize that “in addition to being strategically aligned, performance measures and standards need to be sufficiently objective and credible so that employees feel they are being measured fairly. In absence of the perception of fair and valid measurements, there is little chance the employee will see the link between individual performance and their rewards” (Lawler, 2000, p. 152). Therefore, steps must be taken to assess and document not only each job’s responsibilities and requisite knowledge, skills, and abilities, but also a pay comparison for similar work. Monetary rewards are not restricted to base pay, but also include variable pay and, in many positions, compensation paid long after the employee has completed the work.

Designation of Employee Types

Although there are many types of employees in an organization in the United States, distinctions are typically made among three major categories for compensation purposes. These three are hourly, salaried, and executive employees. Hourly employees are also known as nonexempt employees because they are paid by the hour and are subject to overtime pay as regulated by the Fair Labor Standards Act (FLSA). Salaried employees are exempt from overtime; most managers and professionals fit into this category. The pay of salaried employees is calculated on an annual, monthly, or some other periodic means rather than on an hourly basis. Executives are also salaried employees, but they are designated as a separate category in this discussion due to the amount of variable pay generally at risk in their roles. For some top-level executives, the variable pay can be as much as 95 percent (Mathis & Jackson, 2008).

Types of Pay

There are several basic terms prevalent in the discussion of types of pay, including base pay, variable pay, merit pay, cost of living adjustments, retirement, and deferred compensation. A definition of each term follows:

Base pay is considered “the cash compensation that an employer pays for the work performed” (Milkovich & Newman, 2008, p. 10). Whether an hourly, salaried, or executive employee, base pay is one of the key elements that organizations benchmark for competitive or market positioning purposes. This base pay “reflects the value of the work or skills and generally ignores differences attributable to individual employees” (Milkovich & Newman, 2008, p. 10). Differences attributable to the level of responsibility and/or the size of the organization are not ignored, however, and are taken into consideration when compensation is compared for competitive comparisons. For example, an administrative assistant to the chief executive of an organization may have a base rate of 25 dollars per hour if the organization has revenues less than a million dollars, but if the organization is one with revenues of more than $100 million, the base rate will likely be higher. Also, the length of service of the employee enters into the equation. An administrative assistant with 10 years of experience will likely have a higher per-hour rate than one with less than two years of experience.

Variable pay is “compensation linked directly to individual, team, or organizational performance” (Mathis & Jackson, 2008, p. 361). While there are other forms and combinations, examples of variable pay include bonuses, incentives, stock options, and stock grants. Also known as
incentives, variable pay is tied to performance and can be paid daily, weekly, monthly, quarterly, or annually. Incentives are paid in addition to base pay and are at risk. In other words, they are not guaranteed. Incentives are earned based upon what is agreed on before the performance period begins. The performance objectives that variable pay is based on are linked to the strategic goals of the organization or support of those goals. For example, the goal may be to provide incentives toward increased revenues, employee satisfaction, customer satisfaction, cost reduction, innovation, or any other key element for the success of the organization. If the variable pay is considered in the competitive or market positioning purposes, an average or norm payout of the variable payout is used. Variable pay is renegotiated each performance period and is not rolled into the base pay, unlike merit or cost of living adjustments. Variable pay for executives often takes the form of pay or stock (options or grants) either as a portion of or the entire incentive.

Most organizations reward with both short- and long-term variable or incentive pay. Longer-term incentives are to help focus the employee on future performance goals, usually beyond the year in which the performance occurred. Real estate developers, for example, may have short-term variable pay tied to locating and developing a property, and long-term variable pay tied to the
occupancy of the property in future years. Most executives will also have short- and long-term variable pay tied to the current and longer-term objectives of the organization.

Merit and Cost of Living Adjustments: After being hired into a position, an employee typically receives an increase in base pay periodically (intervals of 12 or 18 months, for example) based on their performance against a set of expectations for their set of responsibilities. A merit increase is an increment to the base pay in recognition of past work (Mathis & Newman, 2008, p. 10). The range of merit increase is dependent upon the budget for the merit increases and the employee’s level of performance. Typically, the merit increase is higher and the time cycle shorter for those employees who are evaluated as higher performing. Thus, an outstanding performer may receive a merit increase of 7 percent after an eight-month period of time, while an average performer may receive a merit increase of 5 percent after a year.

Cost-of-living adjustments increase an employee’s pay in line with inflation and are not based upon performance. Cost-of-living adjustments are not given by all organizations across the board to all employees, but rather may adjust only the lower-paid employees who are most affected by inflation. Some organizations will adjust their wage and salary scales every few years and adjust only those employees who fall under the new minimum of the scale. Other organizations combine their merit increases with the cost-of-living adjustments, which allows for a differentiation for the level of performance while also providing an adjustment for inflation.

Retirement and Deferred Compensation: In addition to the base and variable pay, many organizations also provide for the future retirement compensation of their employees. This reward is discussed as monetary rewards because, although it is not rewarded until after retirement, it is a monetary reward that is earned while the employee is working and the organization funds the future rewards as the employee works. This reward can be a very important portion of the total rewards strategy because it satisfies the need for future financial security, satisfying one of the need levels on Maslow’s hierarchy of needs.

One type of retirement funding is a defined contribution plan, of which there are various forms, including 401Ks and profit sharing whereby the employer contributes an amount, typically a percentage of the employee’s income, with the employee contributing as well. Another type of retirement benefit (increasingly rare) is the defined benefit plan. In this plan the employee receives a set amount of money during their retirement years, as in a traditional pension.

In addition to savings and earnings for retirement, many organizations also offer the opportunity for salaried employees (mostly executives) to defer their compensation to future years. This deferred compensation helps the executive prepare for their future years while also equalizing their income better for tax purposes.

Topic 2: Key Elements of Analysis and Documentation

While the total rewards approach to compensation management is a holistic approach to the work experience (recognizing the importance of monetary, non-monetary, and other elements of the work experience), it is the monetary element of the entire employment experience that has traditionally been viewed as imperative to be perceived as fair both internally and externally (Lawler, 2000). This perception is important whether it is an hourly, salaried, or executive-level position. Analysis, research, and documentation helps an organization ensure this perception of fairness.

Figure 2.1 below illustrates the key elements. The first step is the work flow analysis, which reviews the entire system of bringing in raw materials (human resources or materials) and transforming them into goods or services. The internal and external assessment for equity and competitiveness begins with a job analysis. Through the job analysis, the core elements of the job are determined, which then leads to the creation of a job specification. The job specification is a listing of the core KSAs; the KSAs from the job specification are used to design a job description. The job evaluation is an internal comparison of the value of the job, while the market evaluation is a comparison for similar jobs in other organizations. The job evaluation measures the internal equity, while the market evaluation measures the competitiveness of the pay for the position. Because a job can have a variety of names, depending on the organization or the industry, it is the core job specification (KSAs) that are compared when setting a price or value on a position (the rate of pay). For example, a position with responsibility for cleaning a guest room may be titled housekeeper, room attendant, or guest service representative, depending on the hotel company. Without knowing the core elements of the job, one could not know if they are comparing the same positions.

Figure 2.1
Key Elements of Analysis and Documentation

Figure 2.1 illustrates the key elements of analysis and documentation comprising the key steps leading to the decisions for market positioning of compensation and other monetary rewards. The first step is the overall work flow analysis, how work flows through the organization. Job analysis is the step of collecting information that identifies the KSAs of the position. From the information obtained through the job analysis, job specifications and job descriptions can be designed. The job specifications and job descriptions are used for most of the HR activities; for example, hiring, promoting, determining of exempt or nonexempt status, and structuring of pay. The job evaluation and market evaluation are conducted in order to access internal and external positioning. With the steps from the broad work flow through job and market evaluation conducted, the organization has the data needed to decide its market positioning, what they need to pay for specific jobs in relation to what the competition is paying.

Work Flow Analysis: “Work flow refers to the process by which goods and services are delivered to the customer” (Milkovich & Newman, 2008, p. 60). The analysis of the work flow, therefore, is a study of that flow, and may begin at the end of the process with the desired or actual outputs (the goods and services). The activities (the tasks and jobs) that lead to the outputs are studied to see if they are achieving the desired outputs. Lastly, the inputs (the people, material, information, data, equipment, etc.) must be assessed to determine if they make the outputs and activities more efficient or better (Mathis & Jackson, 2008).

Figure 2.2
Work Flow: A Systems Approach

The work flow analysis is a broad look at the whole system of the organization and is essential to determine the throughput activities (the tasks and jobs) needed to produce the output (the goods and services). The analysis shows how much labor is required to achieve the organization’s business goals and can also show if there are gaps in the needed labor. A simple example is automobile production. The raw materials of steel, computer parts, tires, leather, and other materials for various car parts, the design of the car, and the desires of the customers are the
inputs. The
throughput are the tasks and jobs performed by the employees and machines to assemble the car, which is the final output that is sold to customers. At times, a problem in the end result (the output) will trigger the need to conduct a work flow analysis. For example, when automobiles have been recalled for technical or performance difficulties, the company will look at both the throughput and the inputs to see where the problems lie. It may be found that certain jobs have to be redesigned in order to ensure the that gap in the system is corrected.

Job Analysis: Mathis & Jackson (2008) define job analysis as “a systematic way of gathering and analyzing information about the content, context, and human requirements of jobs” (p. 174). While there are various methods of collecting information on the characteristics of a job, the end result is the same. The various methods of questionnaires, interviews, observations, and logs/diaries collect information on the characteristics of a job that differentiates it from other jobs. This information is used for the design of both a job description and the job specifications. The work flow analysis, a broad look at the entire organization, yields some basic information about the level of labor needed, while the job analysis provides more specific details about the job. The job analysis further defines the specific tasks required of each position. It defines what each job is required to entail in order for the entire work flow process to work properly.

The job analysis is one of the core activities that provides the basis for the standard employment functions performed by human resources professionals. The information gained clarifies hiring criteria, defines the Bona Fide Occupational Qualifications (BFOQs) promotional standards/ criteria, and identifies training needs and performance evaluation criteria. The information is also used for meeting the FLSA regulations for the classification of jobs for exempt and nonexempt determination. In addition, the data allows compliance with the Americans with Disabilities Act (ADA), requiring that organizations must identify job activities for essential versus marginal job functions and also document the steps taken to identify the job responsibilities.

Job Specifications: Job specifications are a list of the qualifications (the knowledge, skills, and abilities) an individual needs to perform a job satisfactorily. The job specification takes the broader job analysis to an additional level of specification. The KSAs include education, experience, work skill requirements, personal abilities, and mental and physical requirements. The job specification is used as a basis for hiring. It is important to note that the job specifications are what a person needs to do the job, and therefore a crucial element of the process of designing a total rewards package that will attract the KSAs for the organization to achieve its business objectives. The job specifications supply essential data for decisions that are made about market positioning as well as other decisions that will be made in order to determine what total rewards will be offered.

Job Descriptions: Job specifications are a summary version of the more definitive job description, which further describes the outcomes and responsibilities of the job (Mathis & Jackson, 2008, p. 186). The job description provides a “word picture” of the outcomes of the job. Portions of performance standards (those indicators of what the job accomplishes and how performance is measured in key areas of the job description) are generally drawn from the job description. Descriptions of the salaried and executive-level positions often include more detailed information on the nature of the job, its scope and accountability. Many of the salaried and executive-level job descriptions capture the relationships among the job, the person performing it, and the organizational objectives; how the job fits into the organization; the results expected; and what the person performing it brings to the job (Milkovich & Newman, 2008, p. 103). The strategic alignment of the organization’s objectives and monetary rewards is very evident when the specific responsibilities of the employee are clearly related to the objectives of the organization and are documented in the job description and included as an outcome in the performance appraisal process. This allows the employee to be compensated and given incentives for accomplishing work, service, or projects that relate directly to the organization’s objectives.

Job Evaluation: Job evaluation is a formal, systematic means to identify the relative worth of jobs within an organization (Mathis & Jackson, 2008). It identifies a job’s comparative worth within the organization and shows how valuable the organization deems the job to be. The evaluation is based on a combination of job content, skills required, value to the organization, organizational culture, and the external market (Milkovich & Newman, 2008, p. 115). Some methods of comparison include the point method, such as the long-popular Hay system. Point plans are the most commonly used job evaluation approach in both the United States and Europe (Bernardin, 2003; Mathis & Jackson, 2008; WorldatWork, 2007). The point plan differs from ranking and classification methods in that it makes explicit the criteria for evaluating jobs, known as the compensable factors.

Point methods have three common characteristics:

· compensable factors

· factors with degrees numerically scaled

· weights reflecting the relative importance of each factor

Each job’s relative value, and hence its location in the pay structure, is determined by the total points assigned to it (Milkovich & Newman, 2008, p. 125). Other methods for job evaluation include the ranking method, classification, and factor comparison method. The internal job evaluations allow organizations to equate the worth of a position to the pay structure. The higher the worth of the position, the higher the pay.

The internal job evaluation helps to define the relationship of jobs inside the organization, the internal worth of a job, and how each job is aligned with others. In addition to determining the location within the pay structure, this knowledge helps individual employees plan their careers. For example, a computer software organization may have a series of escalating internal worth positions beginning with an entry-level position of a computer programmer, a senior programmer, a lead programmer who supervises other programmers, and a division director. If the internal worth of jobs is clearly defined and communicated, the information can be used to define career paths and to help the individual employee understand their position’s relative worth in the hierarchy of jobs within the organization. Thinking back to Maslow’s hierarchy of needs, this understanding of relative worth can lead to satisfaction in the need areas of self-esteem and self-actualization.

Competitive Evaluation, Market Evaluation, and Market Positioning: While job evaluation is a focus of comparative worth within the organization, the competitive and market evaluation is identifying the relative value of jobs based on what other employers are paying for similar work performed outside the organization. With the knowledge gained through a competitive or market evaluation, the organization can then decide its market positioning, whether it will match the market, lead it, or lag behind. The decisions for market positioning are significant decisions for the overall total rewards approach to compensation management. Although it is only one of the decisions to be made, it is one of the very important major decisions and will affect the other two elements of non-monetary rewards and other elements of the work environment.

External competitiveness is information gained through the competitive and market evaluation and refers to the pay relationships among organizations. This is the value of a job as measured by pay relative to its competition (Milkovich & Newman, 2008). The factors that shape the external competitiveness include the labor market, the individual product or service markets, and organizational factors. The organizational factors are those related to the business strategy, the experience of the workforce, and the size and profitability of the organization. The market competitiveness of compensation has a significant impact on how equitably employees view their compensation. Providing competitive compensation to employees is a necessity for all employers for recruitment, retention, and motivation (Mathis & Jackson, 2008). Most organizations establish specific policies about where they want to be positioned in the labor market; this is called market positioning and is a key element of the organization’s compensation philosophy.

The three competitive pay policy alternatives generally attributed to the decisions that organizations make for market positioning are to:

·
match: paying with the competition

·
lead: paying more than the competition

·
lag: paying below-market rates

Organizations do not base their decisions about market position on base pay alone. Rather, they also include the variable forms of compensation that are awarded for the position. The basic premise is that the competitiveness of pay will affect the organization’s ability to achieve its compensation objectives, and this in turn will affect its performance. Today it is realized, in the total rewards approach to compensation management, that the monetary element of the reward package has to be evaluated along with all the other important elements of non-monetary rewards and the other important elements of the work experience. Rather than focusing on just one aspect of the compensation strategy, all dimensions but be considered together. In module 4, the design of the total rewards philosophy of the organization will be discussed and it is revealed then how organizations make their decisions on the monetary element not in isolation but in conjunction with other elements. In their book,
The Workforce Scorecard, Huselid, Becker, and Beatty (2005) concur by stating that embedding compensation strategy within the broader HR strategy affects results. They share that compensation does not operate alone, but as a part of the overall HR perspective.

Eventually, however, organizations will have to make the decisions as to what their market position will be regarding compensation. “Given the choice to match, lead, or lag, the most common policy is to match rates paid by competitors” (Milkovich & Newman, 2008, p. 201). Organizations justify this policy by saying that failure to match competitors rates would make the existing employees unhappy and limit the organization’s ability to recruit. Many non-union organizations tend to match or even lead the competition in order to discourage the formation of unions. However, while the compensation being viewed as fair brings some advantages, it may not necessarily lead to the ability to recruit, retain, and motivate unless other important aspects of the reward package are offered to satisfy the employees’ wants, needs, and desires.

Just as a company would attempt to “position” its products or services in terms of price (similar to how Wal-Mart positions itself as a low cost leader), or geographically (as McDonald’s does by offering grits in southern states), an organization can position itself to attract the segment or segments of the population it requires in order to meet its business objectives. Organizations decide how they will position their pay structure relative to the competition. Marriott’s philosophy is to pay equal to (match) or better than (lead) the competition, but to never pay less than (lag) the competition, whereas a nonprofit organization may pay equal to (match) or less than (lag) corporations outside the nonprofit arena but offer a more generous benefit package, or rely on the admirable mission of the organization to attract employees.

These strategies address different needs on Maslow’s hierarchy of needs. The nonprofit organization may be meeting the higher-level needs of self-actualization in contrast to the higher pay addressing the survival needs. The decision an organization makes about its market positioning is a major strategic decision, whether to mirror what competitors are paying or to design a pay package that may differ from competitors but better fit the business strategy. This is not decided in isolation of the other elements of the total rewards philosophy but is a very important component that must be decided in conjunction with the other elements of non-monetary and other work experiences (Milkovich & Newman, 2008).

Company Spotlight: Costco and Wal-Mart

Costco and Wal-Mart follow different compensation strategies due to varying business strategies. Costco’s business strategy stresses customer service and selling higher margin products to somewhat more affluent customers. Costco has adopted an average hourly pay rate of $15.97 and offers broad-based health and retirement benefits. More than 80 percent of Costco employees participate in the benefits plans. Wal-Mart, on the other hand, uses a different compensation strategy that is consistent with its business strategy of keeping prices low and constantly reducing costs. This strategy has been successful in reducing the prices of goods sold to Wal-Mart customers. However, the average wage for Wal-Mart employees is just $9.47 an hour. Sam’s Club (a division of Wal-Mart) pays $11.52 per hour (excluding the lower-paid, part-time employees.) Wal-Mart employees also pay for more of their benefit costs than do Costco employees, which has resulted in a significantly less employee participation rate in the benefit plans. While these differences between the compensation philosophies of Costco and Wal-Mart do not necessarily mean that one is more appropriate than the other, they do demonstrate how organizations can make strategic decisions about their pay practices aligning with the organization’s objectives (Mathis & Jackson, 2006, p. 363).

Topic 3: Assessing and Rewarding Performance

Lawler states that “performance appraisal has been one of the most praised, criticized, and debated management practices for a number of decades” (2000, p. 166). It is, however, one of the most important segments of the performance management process in an organization. It is a key method of linking individual performance to the business strategy and objectives of the organization. Employers want employees at all levels to perform in ways that lead to better organizational performance. It is through the performance appraisal that feedback and rewards are given to the individual employee, related directly to their contributions (Milkovich & Newman, 2008). There are a variety of approaches to assessing and rewarding performance, including three highlighted here: pay for performance, individual contributor assessments, and team-based assessments. Some of the formats used in assessing performance include ranking, rating, and management by objectives (MBOs).

Methods for Assessing and Rewarding Performance

Of the many approaches to assessing and rewarding performance, three will be reviewed here. Pay for performance is mentioned because it is one of the leading approaches for measuring performance today. Two units of performance are reviewed, that of the individual and that of a team. Of course, some combination of these can also be applied. For example, individuals may be rewarded for their own contributions as well as their contributions to a team.

Pay for performance is the performance management system that rewards employees for performing work and allows that compensation differs for various levels of performance. Organizations operating under this philosophy do not guarantee additional or increased compensation simply for completing another year of service (Mathis & Jackson, 2008, p. 362). The overall trend is toward greater use of a pay-for-performance system, with most organizations, including federal government agencies, using it or moving toward it at least partially. A survey of
Fortune 1000 firms found that more than 80 percent of them use some type of performance-based compensation plans (Mathis & Jackson, 2008, p. 362).

The total rewards approach reflects a more performance-oriented philosophy because it tries to place more value on individuals and their performance rather than simply holding the job (Mathis & Jackson, 2008, p. 362). The pay for performance method of assessing performance is therefore a popular approach in the total rewards model.

The two
units of measurement used most often are
team-based or
individual assessments. Team-based compensation gained popularity in the 1990s. A survey by the Hay Group showed 3 percent of the organizations surveyed using some type of team-based compensation prior to 1992 and 9 percent after 1992, with an additional 39 percent considering it (Flannery, Hofrichter & Platten, 1986, p. 117). Lawler (2002) reported that virtually all United States corporations use some type of team in some segment of their organization. Teams come in a variety of shapes and sizes, from two-person work groups to entire organizations (for example, the well-publicized Team Xerox). Just a few types of teams include work teams, project teams, parallel teams, and partnership teams. Each team requires a different type of compensation architecture and performance appraisal approach. For example, a work team would likely use a peer evaluation and skill-based approach whereas the parallel team would use a predefined incentive for the accomplishment of goals.

Executive-level appraisals often include several levels of assessment. For example, a division head of a large corporation may be assessed on his or her own separate MBOs, on the performance of the division they lead, and on the performance of the entire corporation. The compensation will also likely be a combination of rewards, including, for example, base pay, cash bonus, stock awards and/or stock options, and possibly deferred stock awards.

Formats: Ranking, Rating, and MBOs

Before feedback is given to an employee, some format of evaluating the employee compared to certain criteria must be conducted. Two formats that are commonly used today are described. Because Management by Objectives (MBOs) is still a useful element included in many appraisal processes, a description is included.

Ranking compares employees with each other to determine the relative ordering of the group on some performance measure (usually a measure of overall performance). There are three methods common for ranking employees:

· the straight ranking procedure

· the alternative ranking, which ranks people first at extreme ends of the distribution (best and worse) and then works toward the middle of the scale

· the third method is the paired-comparison ranking that forces raters to make ranking judgments about discrete pairs of people

Company Spotlight: General Electric

Jack Welch, former CEO of General Electric, had a view of what was known within the company as “rank and yank.” Rank and yank required managers to force-rank employees according to some determined distribution; for example, 20 percent as the top tier of performers, 70 percent as the middle tier, and 10 percent as the bottom tier. Employees in the bottom 10 percent are given a chance to improve but are terminated if they do not improve into the 70 percent middle tier. In addition, the merit increase differs for the three groups, with the 10 percent group most likely receiving no increase in pay (Milkovich & Newman, 2008, p. 351).

The
rating format evaluates employees on some absolute standard rather than relative to other employees. Each performance standard is measured on a scale whereby appraisees can check the point that best represents the employee’s performance, on a continuum from good to bad. Anchors may be adjectives, behaviors, or outcome. One popular example of the outcome rating is
management by objectives (MBOs). MBOs are both a planning and an appraisal tool, with different variations across firms.

Whether the decision is to use pay for performance, or individual- or team-based appraisals, the assessment must be aligned with the culture of the organization. For example, some organizations value specific criteria for performance, others prefer individual performance over teams, and still others prefer a team-based approach and see the full organization as their preferred approach to accomplishing goals. In addition, the objectives of the organization must be clearly identified so that both individual and team performance can be linked to organizational objectives.

Topic 4: Regulatory Aspects of Monetary Rewards

Monetary rewards (base and variable pay) must comply with many governmental regulations. In addition, retirement plans are subject to federal regulations. Some of the federal regulations will be briefly described, including the Fair Labor Standards Act (FLSA), Employee Retirement Income Security Act (ERISA), the Davis-Bacon Act, the Equal Pay Act of 1963, the McNamara-O’Hara Service Contract Act, Americans with Disabilities Act (ADA), and the Walsh-Healy Public Contracts Act.

One of the major federal laws affecting compensation is the
Fair Labor Standards Act (FLSA). To meet FLSA requirements, employers must keep accurate time records and maintain those records for three years. In addition, FLSA established a minimum wage, discourages the oppressive use of child labor, and encourages limits on the number of hours employees work per week through overtime (if nonexempt from overtime). The exempt and nonexempt status of employees is also defined by FLSA.

Table 2.2 Key Provisions of FLSA

· determination of a minimum wage and a regular rate of pay to be used in the calculation of overtime

· the determination of which activities shall constitute hours worked

· who is classified as exempt

· child labor restrictions

· record keeping requirements

(Source: WorldatWork, 2007, page 113)

The
Employee Retirement Income Security Act (ERISA) of 1974 influences the retirement reward in that if an employer decides to provide a pension, specific rules must be followed. The plan must vest after five years of employment.

Various legislative efforts have addressed the issue of wage discrimination on the basis of gender. The
Equal Pay Act of 1963, which applies to both men and women, prohibits using different wage scales for men and women performing essentially the same job. Pay differences can be justified on the basis of merit, quantity or quality of work, experience, or other factors besides gender.

Many
states and municipalities have enacted modified versions of federal compensation laws. If a state has a higher minimum wage than that set under the FLSA, the higher of the two becomes the required minimum wage in that state or municipality.

The
Americans with Disabilities Act (ADA) requires that organizations identify the essential job functions that are the fundamental duties of a position. These do not include the marginal functions of the positions. Marginal job functions are those duties that are part of a job but are incidental or ancillary to the purpose and nature of the job. An important part of job analysis is obtaining information about what duties are being performed and what percentage of the employee’s work time is devoted to each duty. This information is used in determining actions as a business necessity.

Federal contractors have specific compliance requirements. Several compensation-related acts apply to firms with contracts with the United States government.
The Davis-Bacon Act of 1931 affects compensation paid by firms engaged in any federal construction projects valued at more than $2,000. It deals only with federal construction projects and requires that the “prevailing” wage be paid. The prevailing wage is determined by a formula that considers the rate paid for a job by a majority of the employers in the appropriate geographic area. Two other acts require firms with federal supply or service contracts exceeding $10,000 to pay a prevailing wage. Both the
Walsh-Healy Public Contracts Act and the
McNamara-O’Hara Service Contract Act apply only to those who are working directly on a federal government contract or who substantially affect its performance (Mathis & Jackson, 2008, p. 373).

Topic 5: Compensation Philosophy of Market Positioning and Link to Total Rewards

The decision of the market positioning (if the organization will match, lag, or lead the market in compensation) depends on several factors. Some of the leading factors are the ability of the organization to pay, the culture of the organization, the need to recruit, the need to retain employees, competition in the market place, the risk of union involvement and the desires of the organization toward unionization, and what factors motivate the employees who hold the requisite knowledge, skills, and abilities. Of course, in addition to these leading factors, the organization must be in compliance with all federal, state, and local laws and must be viewed as fair by the current or potential employees. All of these considerations are taken into account when the decision is made on how to position the compensation for jobs performed in relation to the competition.

The link of the market positioning of compensation in total rewards is that the decision about compensation is only one, albeit very important, decision and cannot be made in isolation. The other two important elements of total rewards of non-monetary and other elements of the work experience must be considered interdependently. Prior to an organization making these decisions, management must know what is important to those individuals who hold the needed KSAs required for the organization to produce its products or to provide its services. In module 3 the other important elements will be discussed. In module 4, we will come back to the decisions that will be made in all three elements as we look at how to design and communicate a total rewards approach to compensation management.

Topic 6: Conclusions

In this module, one of three core elements of total rewards, that of monetary rewards, was discussed in some depth. Monetary rewards must be viewed internally and externally by employees as being fair. If not, the ability to attract, retain, and motivate them is at risk. Therefore, many tasks to ensure fairness are performed within organizations. These include the work flow analysis, job analysis, job specification, job description, and internal and external evaluation, all leading to a determination of market positioning. The pay and pay practices must be viewed not only as being equitable, but must also comply with many federal regulations.

There are three major categories of employees in organizations: hourly, salaried, and executive. Both the pay and the appraisal process are tailored for each of these categories. The appraisal process is one of the most obvious methods to align the employees’ work outcomes and the way they achieve the outcomes. Therefore, performance appraisals are an important component of the total rewards approach to compensation management, and to an organization reinforcing behavior that links to the organization’s objectives.

While many of the topics discussed in this module are task or administrative in nature, the tasks and data are an essential element in establishing the compensation philosophy of the organization. The data also forms a foundation for the philosophy of the total rewards approach to compensation. The activities described in this module are the determination of what KSAs will be required to achieve the organization’s objectives. The data from the activities highlighted in this module contribute greatly to the strategic decisions for the design of total rewards, to be discussed in module 4.

Be prepared to discuss in the classroom, if your professor requests, what the key factors are when deciding the market positioning of compensation. Also, be prepared to share why the market positioning decision is not done in isolation, but rather is made interdependently with the non-monetary rewards and the other elements of the work experience.

References

Bernardin, H. J. (2003).
Human resource management: An experiential approach. McGraw Hill.

Christofferson, J.; and King, B. (2006). “The ‘IT’ factor: A new total rewards model leads the way.” Workspan, http://www.worldatwork.org.

Flannery, Hofrichter, and Platten. (1996). “People, performance, and pay: Dynamic compensation for changing organizations.” The Free Press.

Huselid, M.; Becker, B.; and Beatty, R. (2005).
The Workforce Scorecard. Boston: Harvard Business School Press.

Lawler, E. E. III (1971).
Pay and Organizational Effectiveness: A Psychological View. U.S.: McGraw-Hill.

Lawler, E. E. III (2000).
Rewarding excellence: Pay strategies for the new economy. San Francisco: Jossey-Bass.

Maslow, A. H. (1954).
Motivation and personality. New York: Harper.

Mathis, R. L.; and Jackson, J. H. (2006).
Human resource management. South-Western: Thompson.

Mathis, R. L.; and Jackson, J. H. (2008).
Human resource management. South-Western: Thompson.

Milkovich G. T.; and Newman, J. M. (2008).
Compensation. McGraw-Hill Irwin.

The WorldatWork (2007).
The WorldatWork handbook of compensation, benefits & total rewards: A comprehensive guide for HR professionals. New Jersey: John Wiley and Sons.

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3
Special Considerations

Because total rewards encompasses everything the employee

perceives to be of value from the employer, value should be created

for all compensation, benefits, work-life, performance and recog-

nition, and development and career opportunity programs. One

of the best ways to create value is to ensure that programs meet

employees’ needs and that employees are fully aware of everything

the employer offers. Remember: An underused program is an inef-

fective employee incentive for which the organization must still

pay. Instead, the desire is for employees to:

• Understand that business success generates more opportunities for

employees to experience personal career growth and individual

reward.

• Link the organization’s goals with employees’ individual efforts so

they recognize the achievement of those goals not only as higher

company profits, but as higher profits for themselves as well.

No matter how rich a total rewards program might be, these

goals cannot be achieved without effective communication. (See

“Total Rewards Communication Goals.”)

Total Rewards Communication Goals

• Persuade employees to change behaviors and choices.

• Build trust between employer and employees.

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AN: 543248 ; Rogers, Susan, Marcotte, Scot.; Communicating Total Rewards : How-To Series for the HR Professional
Account: s4264928.main.eds

Book Name: Rogers, S., & Marcotte, S. (2010). Communicating total rewards :
How-to series for the HR professional. WorldatWork Press.

Link: https://eds-s-ebscohost-com.ezproxy.umgc.edu/eds/ebookviewer/ebook/
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Communicating Total Rewards4848

Compensation
There are several innate challenges to communicating compensation

programs. Not surprisingly, the lowest level of employee satisfaction

revolves around understanding pay systems. This problem is further

complicated by the great variance of corporate cultures and HR

philosophies. Most importantly, compensation is an emotional issue.

(See “Compensation Communications Strategy.”) Employees’ sense

of self-esteem may be attached to pay, including merit increases

and incentive plans.

Because the value of compensation may be affected by employees’

perceptions of their self-worth, employers should provide employees

with comfort that their pay is based on the value of the jobs, not

the value of individuals. Also, total rewards professionals should

be particularly sensitive to how pay changes are communicated.

Knowledge or perception of pay in the marketplace also may affect

employees’ spheres of experience. Employees often will search

for data to fill the void when little or no information is provided

regarding pay. Unfortunately, their findings may be inaccurate or

incomplete.

Employer communication has an enormous influence on employee

knowledge about pay systems and employee feelings about their

pay systems, employers, jobs and themselves. Depending on an

organization’s total rewards and compensation philosophy, it may

choose to develop communication campaigns for base pay, vari-

able pay and performance management programs. (See “What to

Communicate about Compensation.”)

Compensation Communications Strategy

• Is knowledge about pay systems open or closed?

• Will salary grades and ranges be made available to employees?
If so, how?

• Will merit ranges and performance standards be published?

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49Special Considerations

What to Communicate about Compensation

Base Pay

• Salary administration programs, grades and bands

• Merit policy and timing of increases

Variable Pay

• Eligibility

• Objectives linked to business strategy, payout terms and eligibility

• Targets, quarterly progress and expected payouts

• Vesting, risks and tax implications for equity plans

Total Compensation

• Combined value of both fixed and variable pay components

• Modeling tools to help employees see how individual effort can
translate to increased total compensation

Performance Management

• Objectives, policies and expected behaviors

• Specific rewards for various levels of performance

Benefits
While compensation communication often is procedural, benefits

communication tends to be explanatory, educational and centered

around events. Employment-oriented communication occurs after an

event related to an individual’s employment. Needs-centered commu-

nication occurs at the time of an individual need.

With the high cost of benefits, effective communication is essential

to help employees and employers manage costs while still retaining

the highest value from their plans. Good communication can positively

influence plan participation, usage and costs. For example, educa-

tion regarding urgent care may prevent emergency rooms overuse.

However, there are many challenges to communicating benefits.

In the past, employers led employees to view benefits as an entitle-

ment instead of in the broader context of total rewards. So, the

shifting of benefits costs to employees has affected employee trust

and requires extra sensitivity.

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Communicating Total Rewards5050

Benefits information also can be complex. There are technical

details, complicated formulas and, often, multiple considerations.

In addition, legal requirements govern the documentation, admin-

istration, financing and communication of benefits plans.

Finally, employers must communicate benefits programs to an

audience larger than their current employees. Spouses, family

members, retirees, and new and former employees also may need

to receive and understand benefits information. The employee is

not always the one making the benefits decision or who is using

the plan most. So consider audience demographics carefully when

deciding on communication delivery.

Work-Life
Work-life is composed of offerings in the total rewards package that

address employees’ unique individual needs. These offerings are

important to employees but may be less tangible than compensa-

tion and traditional benefits:

• Caring for dependents

• Supporting health and wellness

• Creating workplace flexibility

• Financial support programs

• Creative use of paid and unpaid time off

• Community involvement programs

• Culture change initiatives.

Work-life programs satisfy intrinsic needs, such as control over one’s

work environment. (See “What to Communicate about Work-Life.”)

What to Communicate about Work-Life

• Program objectives

• Eligibility

• Benefit for employees

• Benefit for the organization

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51Special Considerations

Details of work-life programs often are distributed in an organi-

zation’s employee handbook, recruiting materials and orientation

materials. They also might be promoted in special announcements,

such as the introduction of a tuition reimbursement program or a

new training program.

These programs may be recommunicated based on internal or

external events (i.e., during high-stress times, many organizations

remind employees about employee assistance programs).

Performance and Recognition
Performance and recognition programs are unique to each organi-

zation, thus each must be designed and implemented with unique

characteristics. What works for one organization’s employees may

not work well in a different organization. However, there are some

basic principles to follow when deciding how these elements will

be used to support the business strategy and meet organizational

goals:

• Performance involves the alignment and subsequent assessment of

organizational, team and individual effort toward the achievement

of business goals and organizational success. Organizational, team

and individual performance are assessed to identify what was

accomplished and how it was accomplished.

• Recognition acknowledges or gives special attention to employee

actions, efforts, behavior or performance.

Development and Career Opportunities
Development and career-opportunity programs allow employees to

continually upgrade and build new skills. Employee performance

levels and personal job satisfaction can increase.

• Development comprises learning experiences designed to enhance

employees’ applied skills and competencies. Development engages

employees and encourages them to perform more effectively.

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Communicating Total Rewards5252

• Career opportunities involve a plan for an employee to pursue

his/her career goals and may include advancement into a more

responsible position. The organization supports career opportunities

internally so that talented employees are deployed in positions that

enable them to deliver their greatest value to their organization.

Special Situations
The employee population or an organization’s development may

force total rewards professionals to take circumstances into account

when developing a communication campaign.

Mergers and Acquisitions

Along with downsizing, rightsizing and restructuring, mergers and

acquisitions present significant communication challenges. Total

rewards professionals should take extra care when preparing for

and anticipating employee concerns during such a time of signifi-

cant organizational change. Planning and professional execution

of the communication strategy for any restructuring is essential.

Employees are especially hungry for information during times of

change, so communicate early and often. (See “Communicating

Negative Change.”)

Communicating in a Union Environment

The No. 1 reason employees unionize is perceived lack of manage-

ment response to employee concerns. Consequently, a unionized

Communicating Negative Change

• Be honest and open.

• Tell employees about the situation the employer faced.

• Outline the alternatives and choices.

• Explain how and why the business decision was made.

• Give employees a coping strategy.

• Provide facts early and often.

• Make information accessible; offer resources for answering questions.

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53Special Considerations

audience may have a sphere of experience that makes it less recep-

tive to communication from management than other employees.

Also, the organization may have differing total rewards programs

for unionized and nonunionized workers. Therefore, special care

must be taken to properly communicate total rewards programs

within a union environment, including keeping managers — who

may have both union and nonunion employees reporting to them —

informed about all total rewards issues that affect their employees.

And, of course, the number of versions and method of delivery

might vary if contractual agreements have been negotiated for

benefits that differ by group.

Global Communications

What is considered appropriate in one country may not be appro-

priate for employees in other countries. Be sensitive to:

• Word-for-word translations, mistranslations and colloquialisms

• Local written and spoken variations within language groups

• Cultural customs, including greetings, gestures and public

manners

• Different cultural preferences for written vs. face-to-face

communication

• Compensation, benefits, work-life, performance and recognition,

and development and career-opportunity expectations unique to

each country (e.g., team compensation, different holidays and work

days)

• Different communications processes that may take longer due to

translation, legal review, obtaining and evaluating feedback and

physical distribution.

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Communicating Total Rewards5454

See “Case Study: Global Communications” for an example of

how one company’s effective communications helped employees

understand the big picture, their role in achieving organizational

goal and what was in it for them.

Case Study: Global Communications

A multinational semiconductor manufacturer with 20,000 employees in
20 countries set out to align all employees worldwide with the organiza-
tion’s new streamlined business strategy aimed at enhanced global
competitiveness. The strategy was to reinforce a competitive, high-
performing global culture through a new performance management
structure. Incentive compensation at all levels in the organization would
be directly affected by the new strategy, requiring changes in culture
and metrics in every global operation. Key objectives included:

• Prepare all managers worldwide to use a new performance manage-
ment system by the launch date.

• Ensure consistent information and policies were disseminated from
hubs in the United States, Italy, Japan, Puerto Rico and Singapore.

• Tailor content and delivery strategy to reflect the cultural perspec-
tives, needs and preferences of the international audience.

• Create ongoing communication and training materials to reinforce the
new approach and ensure compliance.

• Develop an effective and engaging brand for the new system to rein-
force the change in business strategy.

Solution

The communication strategy to support the rollout started with
collecting employee feedback from key global locations. This feedback
was used to shape messages and content. Localization teams were
established in each key global location to provide input and guide
the development of materials. This “global-local” strategy allowed
the company to develop a full suite of highly engaging communica-
tions materials and management training tools that were localized for
language and culture, yet globally consistent. Key features of the rollout
included:

• A communication program delivered in five languages supporting
employees in the Americas, Europe and Asia

• A name, tagline and graphic identity for the performance management
program

continued on page 55

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55Special Considerations

Case Study: Global Communications (continued)

• Presentations in local languages to facilitate face-to-face dialogue
between managers and employees

• An interactive CD-ROM dedicated to the concept of variable pay

• A performance management news magazine and posters to reinforce
program identity

• An employee Web portal with content to support rollout and its
ongoing use

• Interactive and paper-based management training programs for
performance planning, goal setting and cascading, incentive pay and
performance management tools. Global brand guidelines that clearly
outline the look and feel, design standards, document sizes for the
Americas, Europe and Asia, and translation and Web usage guidelines

• Translation productivity tools to ensure consistent use of terminology
and efficient reuse of translated content.

Results

This highly successful program helped secure global buy-in and
acceptance of the new performance management program at all levels.
It achieved better employee understanding of most important perfor-
mance criteria and how they relate to overall business operations and
performance.

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Book Title: UMGC. (n.d.). Module 3: Core Elements of Non-monetary Rewards and Work Experience

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Commentary

Module 4: Designing and Implementing a

Total Rewards Program

Topics

Topic 1: Core Steps of Designing a Total Rewards Philosophy

Topic 2: Segmentation of the Workforce

Topic 3: Implementing the Total Rewards Philosophy

Topic 4: Communicating/Marketing Total Rewards

Topic 5: Conclusions

Topic 1: Core Steps of Designing a Total Rewards Philosophy

Nine core steps in the strategic marketing approach of designing a total rewards program and

implementing it are summarized in table 4.1 below. In this first topic, the focus is on steps 1-5

(the designing steps) and each is described in sequence. The remaining steps (6-9) are addressed

in topic 3. The steps are presented in a sequential manner, but the organization may perform

some of the steps concurrently. The steps may also vary if the organization is a start-up

organization, one that is long established, or if a total rewards strategy is already in place.

Table 4.1 Core Steps in Designing and Implementing Total Rewards

Designing:

Step 1: Understand the organization

Step 2: Define the requisite KSAs required for success

Step 3: Identify current and potential employees’ “drivers”

Step 4: Design a total rewards philosophy statement

Step 5: Assess financial costs and plans with key leadership

Implementing:

Step 6: Pilot the total rewards assumptions

Step 7: Develop timeline, obtain vendors, assign duties

Step 8: Implement plan

Step 9: Communicate and market

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Step 1: Understand the Organization

Providing rewards for the purpose of attracting, retaining, and motivating employees with the

requisite KSAs in order to enable the organization’s success is the ultimate goal of the total

rewards approach. Therefore, an understanding of the organization’s business objectives,

mission, vision, values, and business model is essential in the process of designing and

implementing a total rewards program. Achieving this understanding begins with how the

business creates marketable products, services, or expertise, and markets, sells, and delivers

them, along with a review of the organization’s mission, vision, values, and culture (Kaplan,

2005). Also important is being familiar with the business model, revenue generation strategy, the

business life cycle, business design, the current brand impact, and geographic requirements.

Organizations achieve their success in various ways; some take a centralized approach while

others take a decentralized one. Some organizations have socially conscious values they hold

important, while others do not. Some organizations are in the infancy stage of their growth,

others are stagnant, and still others are experiencing huge growth. Many organizations are

structured as not-for-profit, some are for-profit, some are publicly traded, and others are privately

held; and then there are government agencies and the military. There are tremendous differences

among these organizations, and their differences and uniqueness must be examined.

Some of the questions helpful in understanding the organization and leading to an effective

design of the total rewards strategy are listed in table 4.2 below. Although more questions may

need to be asked to reach a good understanding of the organization, these are a good start:

Table 4.2 Questions for Understanding the Organization

1. What are the vision, mission, and objectives of the organization? Will any of them

change in the next three

years?

2. What are the values of the organization? What social values have been demonstrated

outside the organization? On what does the organization want to have an impact? Are

there written values and, if so, are they demonstrated?

3. What is the culture of the organization?

4. How does the organization generate revenues today? Will that change over the next three

years?

5. What business cycle is the organization in (stagnant, growth, decline)? Are any mergers,

acquisitions, downsizing, or global expansion planned?

6. What business design supports the organization’s ability to make money? (For example,

is the design a cost-savings or a market-leader approach?)

7. Does the organization have an existing employment brand?

8. If so, what is the value of the organization’s employment brand today in attracting and

retaining employees?

9. Where does the organization want to be geographically?

10. Does the organization have a clear marketing brand and, if so, what is it and how is it

viewed by the public?

The questions presented in table 4.2 are best asked in person and directly to senior management.

Asking the questions in person will allow for follow-up questions and clarification. In addition,

existing documents describing the items mentioned, such as the vision, mission, business

objectives, and values, are likely available and should be gathered. The purpose of this step is to

understand as much about the organization as possible because the success of the organization is

the end result being sought.

Step 2: Define the Essential KSAs Required for Success

This step makes explicit what knowledge, skills, and abilities (KSAs) are required to accomplish

the business objectives, not only for today but also in the future. It aligns the total rewards

strategy with the business strategy. The specific KSAs (and the people who possess them) are the

target for recruitment, retention, and motivation. The organization may already have the KSAs

identified by level of employee (i.e. leadership, management, general employee population) and

by business function (i.e. marketing, finance, accounting, operations, human resources, customer

service, research and development). If so, they will need to be validated, keeping the current and

future business objectives and business model in mind. If the KSAs are not already identified,

the steps of job analysis, job description, job specification, and job evaluation (discussed in

module 2) are used to identify them. The KSAs are grouped by KSA set, which is a type of

segmentation by KSAs needed by job function (such as sales, accounting, service, research) and

by level within the organization. The segmentation by KSA set is important because employees

or potential employees of each KSA set may have different drivers for wanting to work for and

remain with the organization (Kaplan, 2005). Of course, other segmentation may occur as well.

In table 4.3, questions about the KSAs are posed that need to be answered.

Table 4.3 Questions About Knowledge, Skills, and Abilities (KSAs)

1. What KSAs are required by level and by function to generate revenues (at each stage)?

This question should be asked of major KSA sets within the organization by level and

function.

2. Will the KSAs needed by level and function change in the near future? How about in

three years?

3. Are there gaps in the existing KSAs that need to be addressed?

4. What has been the turnover by KSA level and function?

5. For each KSA set (by level and function), where are they located geographically? Are

there any cultural differences by KSA set?

The KSA questions can be answered through personal or electronic interviews or surveys. After

the study is done it needs to be verified by the key leadership of each function and each level of

the organization.

Step 3: Identify Current and Potential Employees’ “Drivers”

The research in this step leads to the identification of the “drivers,” which are the composite

wants, needs, and preferences of current and potential employees. As in consumer product

marketing, in which the product is designed based on the consumer’s drivers, the reward program

will be designed based on the employee’s drivers. This step requires internal and external

research and an evaluation of the two. Internally, what is working (or not) in attracting, retaining,

and motivating employees is explored. Externally, what is attractive to the larger population is

studied, including other organizations, geographic locations in which the organization may be

expanding, and demographic groups that may not be in the workforce currently but will be in the

near future.

A. Internal Research

It is important to include in the research the current demographic and psychographic composition

of the current population of employees and potential employees, again by level and job function.

Table 4.4 provides some of the questions to be answered internal to the organization.

Table 4.4 Questions for Internal Research

1. What challenges for recruitment are foreseen in the labor market?

2. What challenges of retention are foreseen within the organization?

3. What is the composition demographically of the current employees? What is the current

geographic disbursement of employees?

4. What is the retention rate overall, and what is the rate by specific KSA set (by level and

function), by department, by

division, by geographic location, by demographic?

5. What is the time to hire a specific KSA set (by level and function), by department, by

division, by geographic location, by demographic?

6. What is the level of satisfaction, in general, of the employees? What is the level of

satisfaction of the employees with each of their rewards?

7. If given a list of rewards (monetary, non-monetary, and work experience), what is the

most important to the current employees in order to retain and motivate them? There may

be items that are relatively inexpensive, or even cost neutral, that are important to

attraction, engagement, and retention. Having the employees rank their preference for

rewards is an effective way to gain this information, in addition to determining price

points if the employee is asked to pay for a benefit (insurance, for example).

8. Have current employees been tempted to leave in the past six months? If so, what caused

them to think about leaving? What would entice them to leave today?

The data may be gathered though a variety of means: telephone surveys, electronic surveys,

individual interviews, focus groups, or paper-and-pencil surveys. After the information is

gathered, the organization can use statistical modeling techniques that allow analysis of other

existing employee data to better understand employee preferences. This statistical modeling will

help to identify trends by the various categories (level, functional job groups, and demographics).

It will also point out inconsistencies in the answers. For example, what employees really care

about, as measured by things such as making a decision to leave the company, are sometimes

different than what they say they care about. The statistical modeling provides human resources

professionals with more robust information on which to design their total rewards program. If

statistical modeling is unavailable the team working on the total rewards program design can

read through all the data, synthesize the key findings, and validate it with focus groups of

employees at all levels of the organization.

B. Research External Data

Reliable normative data, such as Mercer’s What’s Working data on country- and region-specific

employee perceptions and attitudes about work, help to determine how the information you have

gathered internally compares to external data. Information may also be gained from the Bureau

of Labor Statistics; WorldatWork; through local, state, and national Society for Human Resource

Management Societies; and through partnering with other organizations to benchmark data and

practices. Ideally, the same information about reward preferences of potential employees and

what would cause them to leave their current jobs to work for another organization would be

obtained. This information can be gained through a variety of methods, such as published

reports, focus groups, written or electronic surveys, telephone interviews, etc. Some

organizations that conduct employee satisfaction surveys for large firms share a composite of the

results. Telephone interviews or focus groups allow the facilitator to ask probing or follow-up

questions easier than can be done in a written survey. Table 4.5 poses some of the questions that

need to be answered external to the organization.

Table 4.5 Questions External to the Organization

1. What are outside experts’ reports about challenges for recruitment by job function and

geographic location?

2. What demographic trends are reported (increases, decreases by segments)?

3. What are psychographic trends for reward preferences by demographic segment?

4. What is the economic forecast domestically and globally?

5. What rewards are your competitors offering? What is the competitors’ experience with

attracting, retaining, and motivating employees? The competitive market survey for
rewards was described in an earlier module. Most organizations conduct this survey on an

annual basis, so it may already be current and available.

C. Compare Internal and External Research

After the internal and external data is gathered, the two sets are compared for consistencies and

inconsistencies. As with the other two steps, statistical modeling programs are available to help

synthesize the data and identify trends, consistencies, or inconsistencies. The computer programs

are also helpful in identifying existing challenges versus future ones, based on such things as

population changes, growth of the current organization, expansion into new markets,

introduction of new products and services, downturn in the economy, and changes in the

business model.

Table 4.6 Comparative Questions

1. Is the internal data consistent with the external data?

2. What, if anything, differs?

3. What issues are there with recruitment, retention, and motivation internal to the

organization that may be influenced by the external population?

4. Given the internal and external research, what challenges must we address through the

rewards programs in order for the organization to be successful?

Step 4: Design a Total Rewards Philosophy Statement

The design of the total rewards philosophy statement is what Kaplan (2005) calls a total rewards

road map. A total rewards philosophy is a statement of the total offerings of rewards, what some

refer to as the employment brand of the organization. This is a formulation of the total rewards

strategy from a big picture perspective, one that determines the general areas of focus by

segment of the population. The resulting portfolio of rewards is designed to align the rewards

strategy and the business strategy, to reach the goal of attracting, retaining, and motivating

employees with the requisite KSAs to achieve the business objectives.

Given what was learned through the internal and external research, the organization is now ready

to propose what rewards would attract, retain, and motivate the employees most needed for the

company to be successful. They will need to determine the mix of the monetary, non-monetary,

and work experience elements to attract, retain, and motivate respective employees by level and

by job function or other segments they have identified as important. These are decided with the

culture and values of the organization in mind. Other decisions will be made regarding items

such as what rewards will be designed for each segment, eligibility, how the rewards will be

earned and awarded (performance versus entitlement, individual versus team, fixed versus

flexible, offered to all, part time or full time), competitive positioning of compensation and

benefits, and if the rewards will be administered internally or externally (through outsourcing),

and the timing of the introduction of the rewards. The organization will also need to ensure that

pertinent laws and regulations affecting rewards and their administration are followed. First,

however, a draft total rewards philosophy statement is prepared so that the financial costs and

commitment can be measured. This step also begins the process of setting baseline

measurements for the key objectives of the rewards philosophy. Table 4.7 below, from the

Constellation Energy Web site (2008), shares excerpts of a sample total rewards philosophy

statement.

Table 4.7 Total Rewards Philosophy Statement: Constellation Energy

We believe our employees are the brightest stars in our constellation. That’s why we invest

almost $1 billion annually in total rewards. At Constellation, total rewards is more than just pay.

It is the combination of pay, benefits, learning and development, and the work environment.

Together, these elements help make Constellation a great place to work. By integrating our total

rewards offering, Constellation delivers to employees a work experience that rewards their

contributions, supports their work and life needs, and provides the opportunity to learn and to

grow.

Pay: Our total compensation philosophy is to pay employees competitively and to vary rewards

based on individual and company performance.

Benefits and Time Off: We offer competitive benefits to our employees on a partnership basis,

including health care choices, a retirement plan, insurance coverage choices, and flexible

spending accounts.

Development: Professional advancement is important to everyone at Constellation. Employees

who continuously update their skills are more satisfied with their work and contribute more to

our collective success.

Work Environment and Community: A positive work environment, opportunities to give back

to the communities where we live and work, and the ability to balance work and life demands are

important to all of us.

Diversity: We’re equally proud of the success of our programs that promote minorities and

women, and we continually reaffirm our commitment to equal employment opportunities.

Source: Constellation Total Rewards Statement. (2008). Retrieved May 4, 2008, from

http://www.constellation.com/portal/site/constellation/menuitem.37364b5370ec64875fb6061002

5166a0/

Step 5: Assess Financial Costs and Discuss Costs/Objectives/General Plan with Key

Leadership

Rewards can be a very large percentage of an organization’s operating expenses. In fact, for

many it is the largest single expense. The step of assessing the financial implications puts the

expense into perspective and helps to gain concurrence and buy-in of the top leadership and

management of the organization. Although costly, offering the right rewards can maximize the

reward dollars spent. Offering the right rewards, while at the same time eliminating those ones

that employees may not value, ensures that time and money is not wasted. Key leadership must

be involved in the total rewards initiative throughout the process of designing and implementing

them, but at specific times the commitment must be checked. Prior to the final decisions being

made, as with the implementation of any large and important initiative, it is crucial that the

decisions are officially agreed upon. It is advisable to keep a written record of the decisions

made in case reference is needed later.

Topic 2: Segmentation of the Workforce

Before the final steps of implementing the total rewards plan are addressed, the use of

segmentation will be described to ensure an understanding, because it is a key activity and

perhaps one that is new to some human resource professionals. Segmentation is a term used in

marketing (as well as other disciplines) to refer to how the population divides according to

differentiating factors. In human resources, the segments can be psychographics (individual

personality preferences) such as career goals, desired schedules, and the need or preference for

certain benefits or work experience. Segmentation can also be made by demographics, level of

the organization, or job function. Segmentation by demographic group can include, for example,

men, women, age groups, ethnicity, marital status, or education.

Organizations use segmentation of the population to target their marketing efforts to groups of

consumers who may purchase products or services. The organization offers unique features in its

products or services that the targeted population prefers (for example, minivans for families,

pickup trucks for farmers, or alternative fuel vehicles for the cost conscious or environmentally

conservative). They also design their marketing efforts to reach the targeted audience by creating

advertisements that appeal to the particular segment they are targeting. To communicate the

unique features of the product or service, key messages and the medium for the communication

are chosen to reach and appeal to the targeted population. In the same way, an organization can

segment the internal and external workforce population, determine the unique features

(monetary, non-monetary, and work experience) desired by each, and design a total rewards

program customized for the individual segments of the organization or the individuals they are

seeking to hire.

There are many ways in which segmentation of the workforce can be achieved. Three examples

follow. The first is suggested by Mercer (2007), the second by Erickson and Gratton (2007) in a

Harvard Business Review article. The third is an example from a fast food company dealing with

a problem of very high turnover of employees. Keep in mind that how employee groups are

segmented will likely be unique to each organization. Specific job families, geographies, or skill

sets do not consistently map to specific workforce segments across organizations. Rather,

segments that appear in an organization will depend entirely on the role of different employee

groups of the organization, its geographic disbursement, its individual values, culture, or

business model. The way segments are identified may also vary outside the organization.

Table 4.8

Segmentation by Value Created

In a study by Mercer (2007), they found the following segments to be beneficial as they

attempted to segment the employees. They found the employees could be grouped into categories

that were either performance drivers, performance enablers, or legacy drivers.

Segmentation by Value Created

• Performance Drivers

• Performance Enablers

• Legacy Drivers

Performance drivers are employees who directly create value for the organization. This

segment could include employee groups or functions such as marketing in consumer products

companies, research scientists in pharmaceutical organizations, chefs in restaurants, or athletes in

the National Football League (NFL).

back to tab

The identification of the segments is only the first step in the research process. The individual

employees will also need to be interviewed or surveyed to determine if there are common

rewards in each segment the organization could offer in order to fulfill their needs and desires.

Table 4.9

Segmentation by Drivers for Engagement

Segmentation: by Drivers for Engagement. Another set of segments comes from authors

Erickson and Gratton (2007), who were able to see segments differentiated by roles the

employees wanted the organization to play for them. Their studies suggested that work played

six general roles, which correspond to six types of employees, and were based on psychographic

characteristics. Each worker segment, they found, cares deeply about several aspects of the

employee-employer relationship and little about the others.

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Segmentation by Drivers for Engagement

• Expressive Legacy

• Secure Progress

• Individual Expertise and Team Success

• Risk and Reward

• Flexible Support

• Low Obligation and Easy Income

Expressive legacy.These employees care about creating something with lasting value. What

appears to engage them are autonomy, entrepreneurial opportunities, creative opportunities, and

stimulating tasks that enable continual learning and growth.

back to tab

In this example, as in the first, segments have been identified, but in this case some of the drivers

have been used to separate the groups. The organization would need to conduct further study to

see if the segments fall into certain demographics, geographics, KSA sets, functional job

categories, or levels in the organization. It may be discovered that, for example, certain age

groups fall into a specific category or possibly that individuals in specific job categories such as

accountants, human resource professionals, sales staff, customer service representatives, or

information technology specialists fall into identifiable categories. If so, this information would

be very helpful in planning the rewards philosophy.

Table 4.10

Segmentation by Specific Desires

Segmentation: by Specific Desires. A third example of segmentation of employees is similar to
the others and continues to demonstrate that there are various groups that can be identified

through segmentation. A study was conducted in a fast food company to discover how they could

improve their recruitment, hiring, and retention of employees. The organization was facing a

very large turnover problem, which was not only creating recruitment and training costs to soar,

but also hindered the ability to serve customers due to a constant shortage of employees. The

following segments of employees were identified through a series of focus groups with existing

employees. This last example of segmentation is more of the unique set that organizations may

see surface when they perform their own research. The segments fell into groups of employees

who were stay-at-home mothers, those who were fast food junkies, and those who wanted an

entry point for a broader hospitality career.

Segmentation by Specific Desires

• Stay-at-home Moms

• Entry Point for Broader Hospitality Career

• Fast Food Junkies

Stay-at-home Moms. One segment of the existing employee population was mothers with

children who were away at school during the day. These employees wanted only part-time hours,

on weekdays, between the hours of mid-morning to mid-afternoon. They were dependable

employees as long as they were not asked to come in early or to stay late. Most were interested

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not so much in benefits but in earning extra money, as long as it didn’t interfere with the family

schedule.

back to tab

In this example, total rewards were designed to target each of the three core segments. The

organization was able to design work experiences that satisfied the stay-at-home moms, the entry

point career employees, and the fast food junkies. The turnover was dramatically reduced and the

cost savings were substantial. One of the interesting points of this real-life example is that it was

done in the 1980s, before the total rewards model was prevalent. The organization merely

applied the strategic marketing approach they knew so well to the issue of attracting and

retaining employees.

Topic 3: Implementing the Total Rewards Philosophy

Step 6: Pilot the Total Rewards Philosophy Assumptions, Internally and Externally

The first five steps addressed the design stage of the process. Steps 6 through 9 will focus on

implementation. After preliminary decisions have been made for the total rewards philosophy, a

pilot of the rewards strategy is done in order to help validate if the decisions will yield the

intended results. The pilot can be done through focus groups of employees, as well as with

potential employees. At this time the key objectives, baselines for the evaluation metrics, and

commitment for implementation are double checked. The objectives and the metrics will be used

not only to measure the success of the programs, but will also be used as a form of

communication and decision making should revisions be required. Examples of metrics can

include quantitative and qualitative measures such as reducing turnover, reducing time to hire,
increased production or services, more satisfied employees, more satisfied customers, or ability

to expand or introduce new products (or other key objectives of the business plan).

Step 7: Develop Timeline, Obtain Vendors, Assign Duties for Implementation

For every initiative, whether it is a new total rewards program or changes to an existing one, a

plan will need to be established to indicate the projected timeline, as well as listing all the major

tasks to be completed, who in the organization will be accountable for each task, and the due

date the task is to be completed. A sample timeline is presented in table 4.11, which indicates

many of the tasks that will be taken in the implementation stage.

Table 4.11 Sample Timeline of Activities for Implementation

Activity Due Date Person Accountable Comments

Pilot Total Rewards Philosophy Statement

Revise Philosophy

Statement if Needed

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Activity Due Date Person Accountable Comments

Select Team for Implementation

Assign Due Dates, Accountability

Decide on Eligibility and Waiting Periods

Establish Baselines for Measurement

Ensure Computer Systems are Ready

Develop Admin Guideline

Secure Final Approval

Select Vendors or Outsourced Providers

Begin Communication

Provide Training to Key Employees

Begin Enrollment of New Benefits

Evaluate, Report Metrics

Topic 4: Communicating/Marketing Total Rewards

With the change in the way organizations look at their rewards, there is also the need to change

the way the rewards are communicated. Communication now takes a broader focus on educating

the workforce about the true value of its total rewards package and to foster a greater

appreciation for these programs. Ultimately, the goal of the communication is increased

employee satisfaction, reduced turnover, increased acceptance rates, and fulfillment of the

organizations’ business goals (Black, 2007).

Charlton Consulting Group, Inc., a benefits communications consultancy, found that only 5
percent of 128 companies surveyed said that their employees fully understand and appreciate the

value of their total compensation packages. More than a third of the companies said that their

employees do not understand the value of their total compensation at all, according to a 2006

research report from the firm titled “How to Ensure Your Employees Value Their Benefits

Packages” (Black, 2007).

In order to be effective, communication and marketing to employees needs to use a variety of

communication channels. Organizations cannot reap the full benefits of a well-designed total

rewards strategy if employees are unaware of all the elements offered and the value of the

rewards in monetary terms. Communicating and marketing of the rewards package may be more

obvious in the recruitment efforts, because that is when potential employees are thinking about

what is important to them and at that time they have the best opportunity to compare various

organizations’ rewards. According to Mercer’s survey (2007), HR leaders in both North America

and South America report that they are using at least three vehicles to communicate with

employees, particularly if they have changed their total rewards strategies within the past three

years. The most popular methods include individual meetings, hard-copy personalized

statements, and presentations to employees made by leadership. Many organizations, however,

are using electronic means through the Internet and intranet. Different means apply when

recruiting, rather than educating the current employees, is the goal, but in each situation more

than one means will help to ensure that all are reached with the messages effectively.

Whether it is via electronic or hard copy, one of the effective means is the total rewards

philosophy statement (Smolkin, 2007). This document, which was referenced earlier in step 4, is

the document that is shared with top leadership in order to gain concurrence on the plan for

implementation. The total rewards philosophy statement expresses the organization’s values and

beliefs about the rewards offered. The purposes of the statement are: to communicate

commitment and expectations to employees, to serve as a reference point to evaluate the

effectiveness of the total rewards program, to reinforce the values and culture of the

organization, and to communicate and reinforce the organization’s business objectives

(WorldatWork, 2007).

In developing a communications plan, it is important to consider specific employee audiences

already identified through the segmentation steps, key messages to convey, how those messages

will be disseminated, how much money is available, a timeline for implementation, and how to

gather employee feedback to the communication. The communication must be customized to the

specific internal and external audiences. For example, the communication to the executive team

may include more of the results of the rewards program and the relevance to the business

objectives. Management or supervisor communications may include specific information about

the departments or areas they manage or supervise. The widespread employee population will

have information specific to them, including new offerings, updates, and information about the

rewards for their households. Communication is designed for the recruitment audiences, the

newly hired audience, the audience when enrolling in programs, and the total audience of current

employees for ongoing reminders and information (WorldatWork, 2007). In some cases there are

other audiences, such as the board of directors, union representatives, and retired employees.

A few reminders about good communication plans are listed in table 4.12 below.

Table 4.12 Communication tips

• Know the audience and seek to frame the message and the medium for those you most

need to attract. For example, an organization will frame its message differently and will

use different mediums for the communication if it is an executive they are seeking to

attract versus a computer specialist.

• Key messages: have a clear vision of what you want to accomplish.

• Communicate the employment value proposition; state what is in it for them.

• Keep messages simple, consistent, and timely.

• Begin as soon as all reward elements have been designed and approved.

• Communicate continuously.

• Focus on each of the main elements of the total rewards: monetary, non-monetary, and

work experiences.

• Select credible and respected spokespeople to deliver key messages.

• Quality of presentation counts; take the time needed to ensure error-free and effective

communication products.

The widespread use of the Internet has resulted in the portal becoming the hub of benefits

understanding. Timeliness and interactivity are the chief advantages of online total rewards

statements. The Internet also provides the opportunity for greater personalization and the

capability to link to additional resources, thereby expanding the scope of communication.

However, many means of communication are available today. Some of the most popular ones are

listed below in table 4.13.

Table 4.13 Examples of Communication Methods

• Audiovisual: video, audio, teleconferences

• Print: brochures, booklets, letters, bulletin boards, paycheck stuffer, question-and-answer

columns

• In person: small and large meetings, one-on-one counseling, manager/employee sessions

• Electronic: interactive computer programs, e-mail, telephone response systems,

personalized total rewards statements online, Internet, and intranet

Many organizations use a personal benefits statement to annually communicate to all their

employees the rewards they are offered, which ones they participate in, and the value of the

rewards. The statement can be delivered electronically, in print, or on a web site. It is an

excellent document that the employee can share with members of the family and is also an

excellent reminder of the total value of the rewards for the individual employee. In addition, it is

a way to communicate the costs of the rewards to the employer and is a method for employees to
verify their enrollment in benefits and to have a permanent record of their holdings in their

retirement plans, deferred compensation, and stock programs, if eligible for them. Our next

Company Spotlight, on Avaya, describes how they use the total rewards statement to increase the

appreciation of the value of their programs.

Company Spotlight: Avaya

Avaya is a leader in communications software services. It pioneered voice mail, interactive voice

response, skills-based call routing, audio conferences, and the virtual LAN. Avaya serves one

million customers, including 90 percent of the Fortune 500 companies. It employs 20,000 people

in 50 countries and has 2,500 business partners. Thus, an online total rewards approach was a

natural. It proved the solution to getting employees to appreciate the value of their benefit

programs.

Avaya’s online total rewards approach was implemented after a survey showed that most of its

employees were largely unaware of the value of their benefits and didn’t know where to look for

information about their benefits. To remedy the situation, Avaya created an online benefits web

site, My Total Rewards, which is integrated into the existing employee service center portal. The

site contains personalized, comprehensive statements that give employees information not only

about their pay and benefits, but also what the company pays to provide the benefits that add up

to the total rewards package. Avaya recently added a benefits summary page and a retirement

income replacement tool to its site. Employees gave the company site high marks for helping

them understand their benefits, and the site won an award from the Profit Sharing/401(k) Council

of America.

Of course, employers need to go beyond total rewards statements since the concept of Total

Rewards goes beyond the traditional view of rewards as the monetary and non-monetary

rewards, but also the value that results from the employment relationship, or work experience.

Communication ideally would include not only compensation and benefits, as is the case of

Avaya, but also other key items such as recognition, balance of work/life, culture,

career/professional development, advancement opportunities, and work environment (Black,

Nov. 2007).

Topic 5: Conclusions

A total rewards approach to compensation management is strategically planning a targeted

reward package to successfully attract, retain, and motivate segmented populations of employees

who possess the right KSAs needed for accomplishing the organization’s business objectives.

This module described the steps for designing and implementing a total rewards program. The

steps were divided between those of designing, which include: 1. understanding the organization,

2. defining the requisite KSAs required for success, 3. identifying current and potential

employees’ “drivers,” 4. designing a total rewards philosophy statement, and, 5. assessing

financial costs and plans with key leadership. The steps for implementing the plans include: 6.

piloting the total rewards assumptions, 7. developing a timeline, obtaining vendors, and

assigning duties, 8. implementing the plan’s programs, and, 9. communicating and marketing.
Segmentation of the population is a vital part of the process for designing a total rewards

program. Because of its importance and because it may be a skill new to many human resource

professionals, a description of it was provided along with three examples.

After the planning and implementation come the remaining important aspects of a total rewards

approach. The remaining activities include designing and tracking metrics, evaluating the results

of the total rewards programs against the metrics established, and making any necessary

revisions. These activities are all described in the remaining module of this course, module 5.

Also included in our final module are pitfalls to consider when implementing and

communicating total rewards programs, and global considerations for reward design.

References

Black, Ann. “Total Rewards.” Benefits & Compensation Digest. Vol. 44, Issue 11, pp. 32-36.

Excerpt from the book Communicating Employee Benefits, Changing Methods and Changing

Minds and Effective Benefits Communication. Nov., 2007.

Christofferson, J.; and King, B. (2006). “The ‘IT’ factor: A new total rewards model leads the

way.” Workspan, http://www.worldatwork.org

Constellation Total Rewards Statement. Retrieved May 4, 2008, from

http://www.constellation.com/

Erickson, T.J.; and Gratton, L. (March, 2007). “What it means to work here.” Harvard Business

Review.

Kaplan, S. (2005). “Total rewards in action: Developing a total rewards strategy.” Benefits &

Communication Digest. Vol. 42, Issue 8, p 32-2.

Manas, T.; and Graham, M. (2003). Creating a total rewards strategy: Toolkit for designing

business-based plans. New York: American Management Association, AMACOM.

Maslow, A. H. (1954). Motivation and personality. New York: Harper.

Mercer. (2007). “Compensation trends of the future: Designing a sustainable global total rewards

strategy.” White paper. Retrieved MArch 1, 2008, from http://www.mercer.com

Salopek, J. (2008). “Retention buzz.” Training and Development. Alexandria: Jan. Vol 21, Issue

1, pp. 23-25.

Smolkin, S. (2007). “Total reward statements promote attraction, retention.” Employee benefit

news. Canada: Vol 4, Number 4, pp. 27-28, Jul-Aug.

WorldatWork. (2007). The WorldatWork handbook of compensation, benefits & total rewards: A

comprehensive guide for HR professionals. New Jersey: John Wiley and Sons.

1
Why Communication Is

Essential to Total Rewards

Employers spend significant money each year on total rewards. Yet,

when employees are unaware of the programs, employers fail to

realize the full return on their total rewards investment.

The underlying objective of a total rewards program is to drive

workforce behavior to achieve organizational success. This means

employees must know what is expected of them and understand

how their behavior affects the rewards they can earn. Studies

show employees who understand their employer’s total rewards

program are more likely to be engaged in the workplace and to

work together to accomplish goals. This can only be achieved

through a strategic communication approach.

This book on communicating total rewards provides a basic

overview of total rewards communication, including:

• The total rewards model and how to communicate it in your

organization

• Strategies for effective communication

• An eight-step process for communication

• Special considerations in communicating each total rewards

element

• How to brand, manage and measure your communication.

Leveraging the strength of a total rewards package through effec-

tive communication is one of the most important challenges for the

HR professional. Use this book as a starting point to understand

the factors that need to be considered when communicating total

rewards.

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EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 8/30/2022 5:19 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS
AN: 543248 ; Rogers, Susan, Marcotte, Scot.; Communicating Total Rewards : How-To Series for the HR Professional
Account: s4264928.main.eds

Book Name: Rogers, S., & Marcotte, S. (2010). Communicating total rewards : How-to series for the
HR professional. WorldatWork Press.

Link:
https://eds-s-ebscohost-com.ezproxy.umgc.edu/eds/ebookviewer/ebook/
bmxlYmtfXzU0MzI0OF9fQU41?sid=d347b3b4-c47c-4c49-bfee-
eef3a002af5b@redis&vid=1&format=EB&rid=9

Communicating Total Rewards6

The

Total Rewards Model

Total rewards represent the value proposition for employees and

employers. It includes all of the tools available to an employer to

attract, motivate and retain employees. An effective total rewards

strategy results in satisfied, engaged and productive employees

who, in turn, create desired business performance and results.

(See Figure 1.)

There are five elements of total rewards, each of which includes

programs, practices, elements and dimensions that collectively

define the organization’s investment in employees. In exchange,

employees give their time, talent, efforts and results.

• Compensation. Compensation is the cash provided by an employer

to an employee for services rendered (i.e., time, effort and

skill). It includes both fixed and variable pay tied to levels of

performance.

• Benefits. Benefits refers to the programs an employer uses to

supplement the cash compensation an employee receives. These

health, income protection, and savings and retirement programs

provide security for employees and their families.

F
IG

U
R

E
1

Total Rewards Model

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7Why Communication Is Essential to Total Rewards 7

• Work-life. Work-life is a philosophy as well as a specific set of organi-

zational practices, policies and programs that actively supports efforts

to help employees achieve success both at work and home.

• Performance and recognition. Performance is the alignment of

organizational, team and individual efforts toward the achieve-

ment of business goals and organizational success. It includes

establishing expectations, skill demonstration, assessment, feedback

and continuous improvement. Recognition acknowledges employee

actions, efforts, behavior or performance. It meets an intrinsic

psychological need for appreciation of one’s efforts and can support

business strategy by reinforcing certain desired behaviors.

• Development and career opportunities. Development comprises

learning experiences designed to enhance employees’ skills and

competencies. Development engages employees to perform better

and engages leaders to advance their organizations’ people strategies.

Career opportunities involve plans to help employees advance their

career goals and may include opportunities for advancement. The

company supports internal opportunities so that talented employees

are deployed in positions that enable them to deliver their greatest

value to the organization.

Building Line of Sight
The only way to reap the full value of your total rewards program is

to make the connection between total rewards programs and your

organization’s vision, mission and business strategy. If communicated

effectively, total rewards helps build line of sight for employees

between what they do every day and the organization’s overall

objectives. The HR practitioner’s goal is to build the business case

for how and why the organization’s programs support its strategic

goals. Done effectively, communication will:

• Drive business performance. Employers find that carefully designed

and communicated total rewards programs motivate employees and

increase profitability. It is proven that companies with effective

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Communicating Total Rewards8

communication practices have a higher market value, higher total

return to shareholders and lower turnover rates.

• Link business goals with personal outcomes for employees. Increased

profitability can lead to higher bonuses, increased benefits or

additional work experience programs.

• Define the relationship between employees and the employer.

Communication often is the reason an employee makes or breaks

that relationship.

• Lead to understanding and valuing. Employees cannot value or

appreciate what they don’t know about or understand. A company’s

return on investment for the total rewards program is directly

influenced by the effectiveness of its communication.

See Figure 2 and “It Pays to Connect.”

F
IG

U
R

E
2

Total Rewards Design Process

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9Why Communication Is Essential to Total Rewards 9

It Pays to Connect

Do you know your organization’s vision and mission? Do you communi-
cate them?

Only 50 percent of organizations effectively explain to employees
the purpose of their jobs and the company’s mission and business
strategy, according to a 2005 survey by Right Management Consultants
of Boston and the International Association of Business Communicators
Research Foundation. As a result, only about 33 percent of companies
reported employees are effectively aligned to the business vision and
mission.

Disconnects between what organizations communicate during the inter-
view process on topics such as job description, company culture and
values, and what new employees actually experience, are among the
top reasons for turnover.

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Communicating Total Rewards10

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