HRMN 395-Week 2: Core Elements of Monetary Rewards & Core Elements of Non-monetary Rewards and Work Experience

Please see the attached documents


Don't use plagiarized sources. Get Your Custom Essay on
HRMN 395-Week 2: Core Elements of Monetary Rewards & Core Elements of Non-monetary Rewards and Work Experience
Just from $13/Page
Order Essay

– Please use APA (7th edition) formatting 

– All questions and each part of the question should be answered in detail (Go into depth)

– Response to questions must demonstrate understanding and application of concepts covered in class

– Responses MUST be organized (Should be logical and easy to follow)

– Use in-text citations and resources per discussion from the school materials  

– The use of course materials to support ideas is HIGHLY RECOMMENDED

“Need at minimum 3 pages”

Read Chapter 2 & Module 2 for discussions 1 & 2

Discussion #1

What is the difference between base pay and variable pay? Give examples from your own organization. Use at least one resource from the course readings.

Discussion #2

What are three top elements to consider when setting compensation and why? Support your answer with the literature. Use a minimum of one reference from course materials. 

Read Chapter 8 & Modules 3 for discussions 3 & 4

Discussion #3

Select the three benefits that you believe to be most important. Explain why you think they are important. Use at least two resources from the class. 

Discussion #4  

Select one benefit and compliance issue identified in Module 3 and share why you feel it is a potentially risky one of which all organizations need to be aware. Use a minimum of one reference from the class materials.  

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

UMGC. (n.d.). Module 3: Core Elements of Non-monetary Rewards and Work Experience




Module 3: Core Elements of Non-monetary Rewards and Work Experience


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


Retirement Savings


Training and Development

Performance Feedback

Life Insurance


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, 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:

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 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 ( 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 ( 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



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.


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



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 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.


· 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


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.


Aon. (2002). “Benefit Preferences Survey.”

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,

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. (2008). “Job Satisfaction Survey Reveals Why Employees Move On.” Retrieved 4/9/08 from

National Council of Nonprofit Associations. “The United States Nonprofit Sector.” Retrieved 4/22/08 from

Society for Human Resource Management. (2004). “SHRM Benefits Survey.”

Society for Human Resource Management. (2005). “Job Satisfaction Survey.”

The American Cancer Society. (2008). “Employee Benefits at the American Cancer Society.” Retrieved April 23, 2008, from

U.S. Bureau of Labor Statistics. Retrieved April 22, 2008, from “Aligning a Multi-Generational Workforce With Your Business Goals.” Retrieved April 23, 2008, from “Employer Branding and Recruitment Marketing.” (2008.) Retrieved April 23, 2008, from

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:


Module 2: Core Elements of Monetary Rewards


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


Retirement Savings


Training and Development

Performance Feedback

Life Insurance


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.


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,

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.


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.


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.





























EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 8/22/2022 4:06 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.

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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

• Flexible benefits expanded, addressing the needs of a diverse

• 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)

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

Elements of Benefits 199

Income Protection
Plans (Mandatory)

• State and Federal Unemployment

• Workers’ Compensation

Social Security

• State Temporary Disability Insurance (New Jersey,

New York, Hawaii, Rhode Island, California)

Income Protection
Plans (Mandatory)
• State and Federal Unemployment
• 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


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)


EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

200 Benefits Basics

Income Protection
Programs (Non-

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

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

Pay for Time
Not Worked

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)

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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


• 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.


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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

Government Regulation of Benefits Plans 203


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

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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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)

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

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

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

FIGURE 8.4 Regulations of employee benefits.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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
Commission (SEC)

Plans that provide
employer stock to
participants – 

Securities and Exchange
Commission (SEC)

State insurance

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

State insurance

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

Department of
the Treasury

The Patient Protection
and Affordable Care
Act of 2010

Transformed the
regulation of
financing in the
United States

Department of
Health and
Human Services

FIGURE 8.4 (Continued)

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

• 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”

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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


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.


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

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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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

• $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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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 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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

• 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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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

• 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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

• 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.


• Open-ended

• Gatekeeper

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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


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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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 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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

Retirement Plans 229


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

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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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

Date of employment
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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

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
Company stock

FIGURE 8.7 Sample 401(k) plan.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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



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 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

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.”

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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.


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).

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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,

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/22/2022 4:06 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to


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.





























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

Book Title:

Aligning Compensation with Business Strategy 25


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


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.


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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

• 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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

Compensation Programs – Elements of Compensation 29


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 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.

Strategic plan




FIGURE 2.3 Stragetic planning implementation process.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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


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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

• 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





Senior management
(n = 616)

3% 6% 16% 2% 74%

Middle management
(n = 625)

3% 7% 19% 2% 7


(n = 625)

2% 7% 20% 2% 69%

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

(n = 623)

2% 8% 20% 2% 68%

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

FIGURE 2.8 Market-driven systems.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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 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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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 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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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.


Salary Increase Matrix using the Compa-ratio Approach






Below Average

























FIGURE 2.9 Salary increase matrix using the compa-ratio approach.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

Variable Pay 41


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?

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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

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

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

What are the operational challenges to
achieve better internal and market

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?







TOP Excel Templates

FIGURE 2.11 Balanced scorecard.

Source: Balanced Scorecard (BSC) + Strategy Map – example template Excel spreadsheet.
Retrieved from:

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

Balanced Scorecard (BSC) + Strategy Map – example template Excel spreadsheet

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

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


EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

National Foundation
Arts and Humanities

Establishes wage and
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

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)
Commission (FCC)

Civil Rights Act
of 1991

Establishes two standards
of discrimination under
Title VII: disparate
treatment and dispa-
rate impact

Equal Employment

Internal Revenue

Defines deductibility
and tax treatment of
compensation for all
employees and all

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

State laws Affect minimum wage,
hours, overtime pay,
discrimination, and taxes
for various employers

Vary by state

FIGURE 2.12 (Continued)

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

Fair Labor Standards Act of 1938 49


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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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

• 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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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,

• 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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

• Occupations in roofing operations

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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


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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.


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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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


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.


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.


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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

Anti-Discrimination Laws 59


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.


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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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

1. The size of the business
2. Number (or type) of facilities

• Budgetary constraints
• Type of operation

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

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.

EBSCOhost – printed on 8/21/2022 2:25 PM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS. All use subject to

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
The price is based on these factors:
Academic level
Number of pages
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Confidentiality Guarantee

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more

24/7 Support

Our specialists are always online to help you! We are available 24/7 via live chat, WhatsApp, and phone to answer questions, correct mistakes, or just address your academic fears.

See our T&Cs
Live Chat+1(978) 822-0999EmailWhatsApp

Order your essay today and save 30% with the discount code ESSAYHELP