HRMN DQ 2

24

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.

C o p y r i g h t 2 0 2 0 . W i l e y .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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Aligning Compensation with Business Strategy 25

THE FOUNDATION: THE COMPENSATION PHILOSOPHY

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

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

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

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

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

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

recognition.

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

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

ALIGNING COMPENSATION WITH BUSINESS STRATEGY

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

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

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

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

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

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

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

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

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

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

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

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

FIGURE 2.1 Sample compensation philosophy.

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Aligning Compensation with Business Strategy 27

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FIGURE 2.2 Guiding a compensation philosophy development meeting.

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

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

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

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

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

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

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

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

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

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

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Compensation Programs – Elements of Compensation 29

COMPENSATION PROGRAMS – ELEMENTS OF COMPENSATION

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

Sidebar 2.1 Pay Transparency

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

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

Visioning Strategic plan

creation

Strategy implementation

planning

FIGURE 2.3 Stragetic planning implementation process.

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

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

UNDERSTANDING BASE PAY

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

• Fixed cost for the organization

• Most employees only receive base pay

• Should re�ect internal and external equity

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

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

• Variable cost to the company

Variable pay

Base pay

FIGURE 2.4 Base pay versus variable pay.

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

FIGURE 2.5 Base pay programs.

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Understanding Base Pay 31

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

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

Job Analysis

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

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

• Based on organizational, group/team or individual performance • Profit-sharing plans • Performance-sharing plans • Group/team incentives • Individual incentives • Short-term incentive plans • Sales incentive plans/commissions • Executive incentive plans • Discretionary bonuses (annual or spot) • Equity-based compensation • Stock options • Stock grants • Restricted stock • Performance unit plans

FIGURE 2.6 Variable pay programs.

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

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

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

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

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

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

Job Evaluation – Internal Equity

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

Market-Driven Systems

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

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Understanding Base Pay 33

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

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

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

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

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

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

Job-Worth Systems

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

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

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

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

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

Market-Driven versus Job-Worth Systems

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

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

Which Approach Is Best?

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

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

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

FIGURE 2.7 Point-factor categories.

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Understanding Base Pay 35

Market Analysis

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

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

Variable Pay

• 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

Ranking Classi­ fication

Point­ factor

Job component

Market pricing

Senior management (n = 616)

3% 6% 16% 2% 74%

Middle management (n = 625)

3% 7% 19% 2% 70%

Professional (n = 625)

2% 7% 20% 2% 69%

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

Administrative (n = 623)

2% 8% 20% 2% 68%

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

FIGURE 2.8 Market-driven systems.

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

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

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

Sidebar 2.2 Conducting Surveys

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

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

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

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

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Salary Ranges or Market Value Ranges 37

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

SALARY RANGES OR MARKET VALUE RANGES

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

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

Sidebar 2.3 Terms Used in Managing Pay

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

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

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

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

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

Bands versus Ranges

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

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

midpoint of the salary or market range. The maximum is the highest rate paid for a position in that grade. Red/green circle: Employees above the maximum of the range will likely have their pay frozen until salary range adjustments bring them back within the range. This is referred to as red-circling. Employees whose starting pay falls below the minimum are referred to as green-circling and typically have their pay levels increased to the range minimum at the next review cycle. Annual adjustments: Typically, ranges are reviewed and updated annu- ally. Most often, the entire range is moved upward by a selected per- centage, although in some cases organizations may elect to increase different salary grades by different levels to fine-tune their relationship to the market or to fix existing problems. Forced distribution: Forced distribution of merit increases to remain within a specific budget is prevalent. In such systems, managers are required to only spend a specific amount, forcing them to distribute merit increases in such a way as not to exceed the budget.

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Ranges and Their Connection Pay Increases 39

comparison for the employee is the comparison to market, or their com- petitive zone. In some organizations, the competitive or market zone is defined as plus or minus 10 percent of the market; other organizations elect to target competitive pay with plus or minus 20 percent. For many line managers and employees, the relatively tight difference between beginning and ending of market reference points implies that pay opportunities have been decreased, in comparison to more traditional salary ranges. Careful communication is key, as is ensuring that the ultimate design meets the organizational strategy.

STYLES OF RANGES

Attraction to salary bands has ebbed and flowed. Organizations using career bands also utilize hybrid approaches such as career banding (banding together several jobs in a family within a band), broad banding (creating ranges within each band that are tied to market data) or using wide ranges (to attempt to reduce the number of grades). Overall, many organizations design their salary ranges and use the decided format for a significant time. Changing between ranges and bands, or between market ranges within bands to regular ranges is infrequent. Thus, the selection of the style of range must be implemented carefully and after much consultation.

Organizations continue to use different ranges that reflect different mar- ketplaces and/or to divide specific job families such as manufacturing, call center, or other specific roles.

RANGES AND THEIR CONNECTION PAY INCREASES

Ranges also are used to determine the size and frequency of merit increases. The most typical tool is a compa-ratio, which represents the individual’s salary divided into the salary range midpoint. Many companies strive to have their consistently high-performing employees paid between 90 percent and 110 percent, or 95 percent to 105 percent, of the midpoint. To accomplish this, high-performing employees with low compa-ratios receive larger pay increases than high-performing employees with higher compa-ratios. This will move the high-performing employee’s pay relatively quickly to the middle zone of the range. However, in organizations with very wide ranges and modest merit budgets of 2.5 percent, it is not uncommon for even a high-performing employee to take five years or more to reach the middle zone of the salary range. A sample compa-ratio-based merit structure based on a 3 percent average is shown in Figure  2.9. In this approach, a high- performing person who happens to be at the bottom of the range, perhaps because they were recently promoted, can expect a pay increase of up to 8 percent while a high-performing individual at the top of the range may only see a 1 percent increase.

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

In this approach, merit dollars are targeted toward both high performers and all employees whose pay falls at the bottom part of the range. However, it has become increasingly difficult to meet these common goals effectively with merit budgets of 2–3 percent. Automated tools ease the administrative burden, yet still leave the most onerous task untouched – determining how to allocate a limited budget. HRBPs play a critical role in helping line manag- ers to make sound merit decisions, rather than succumbing to the pressure to simply offer everyone the same amount. Forced distribution of merit increases to remain within a specific budget are prevalent, testing the pay for performance philosophy used by many organizations. WorldatWork provides important and specific detail on merit increase practices on an annual basis.

Larger companies are implementing a variety of new administrative meth- ods tied to salary range management in order to control the costs associated with base pay. Lump-sum increases for individuals who have reached target pay or the middle portion of the salary range are more common. Other hybrid approaches include partial lump-sum and partial base-pay increases for individuals approaching the midpoint, or the upper portion of a range. Such systems work well to control fixed costs but often lead to turnover as employees look for increases to their base pay.

COMPETENCIES/SKILL-BASED

In the 2000s, organizations began to examine competency and skill-based pay. Competencies can be created to reflect overall organization needs or the specific technical skills required for a position or job family. The major- ity of organizations have moved away from competency-based pay because of the complexities inherent in such systems (see Sidebar 2.4), and are instead focusing on using competencies as a key element in their selection systems, performance management systems, and employee development systems.

Compa-ratio

Salary Increase Matrix using the Compa-ratio Approach

Performance

Outstanding

Above Average

Average

Below Average

Unsatisfactory

0.80–0.89

7.0–8.0%

5.0–6.0%

3.0–4.0%

1.0–2.0%

0%

0.90–0.99

6.0–7.0%

4.0–5.0%

2.5–3.5%

0.8–1.8%

0%

1.00–1.09

5.0–6.0%

3.5–4.5%

2.0–3.0%

0.6–1.6%

0%

1.10–1.20

4.0–5.0%

3.0–4.0%

1.5–2.5%

0.4–1.4%

0%

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

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Variable Pay 41

VARIABLE PAY

Variable pay plans represent the best, most consistent methods to pay for performance, enabling an organization to deliver targeted results while rewarding employees who are responsible for those results.

Designing Annual or Long-Term Incentives

A variable pay plan design is complex and requires a number of steps. Many large organizations have multiple variable pay programs in use at any time, and each program must work with all other programs.

• Target Payout Each plan sets a target payout level that often is expressed as a percentage of pay or midpoint, although it also can be expressed in terms of dollars. Sometimes there is a minimum or maximum amount that will be paid. Occasionally, plans will specify that minimum payouts

Sidebar 2.4 Factors in Assessing Appropriate Total Compensation

Helping people move along in their careers is one of the most important – and rewarding – roles played by HRBPs. One component of this role is to ensure that an employee’s total compensation remains appropriate when the employee changes positions. To make an appro- priate analysis, consider the following questions:

• Is either position eligible for the incentive plan? If so, what is the amount of the potential payouts? Does eligibility or payout tim- ing change?

• Are there any perquisites tied to either position that could change, such as the use of a company car? How much do these perquisites add to the total compensation package?

• Does the new position require a move? What are the provisions of the organization’s relocation policy? Are there different tax implications in the new location? Employees who are transferred between divisions sometimes find that their Social Security with- holding starts again if the divisions are different legal entities. Some locations are subject to state or local income tax; others are not.

• Are there any special pay practices tied to either position that could change?

• What will the employee’s new position in the range be? Will this make the employee eligible for a merit increase sooner?

• Does this change affect eligibility for benefits? Eligibility for the pension plan or 401(k) plan?

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

will occur even if the plan’s performance requirements are not met. Such a design is extremely rare but is sometimes considered in organi- zations that are substituting incentive pay for merit increases or other increases in base pay. In such cases, employees quickly begin to view minimum guaranteed payments as deferred base pay. A more effective approach is to fund the plan based on actual performance, and to set the funding at a level that requires stretch, but not impossible, perfor- mance levels. Maximum payouts are typically designed to control costs and prevent windfalls.

• Performance Criteria The best incentive plans measure and reward behav- iors that are specific, measurable and within the participants’ control. Designing plans that are within the participants’ control often is the most troublesome part of developing or managing an incentive plan. In many cases, the behavior that managers want to encourage is be- yond the employees’ control. The design should create and encourage the line of sight between employees’ day-to-day actions and the plan characteristics. In other words, a job family that cannot influence stock price should not be placed in an incentive plan that pays out based on increases in stock prices.

Financial and operational incentive metrics are common. Balanced scorecard plans reward multiple areas and allow for tighter connection to business strategy as shown in Figure 2.11.

• Duration Each plan sets a time for measurement of performance and payment of bonuses. Typically, incentive plans are most effective when rewards are given soon after the results are measured, although longer time frames tend to be used for higher-level jobs. Management incentive plans generally are paid out annually, with ties to the organization’s fiscal- year results. Lower-level employees, such as hourly workers, may have

1. Spot awards

Spot awards are given as quickly as possible based on superior performance or contribution. Such plans can range from $25 gift cards through formal programs offering 10 percent of base pay. Spot award programs are typically designed by HR and funded by the department.

2. Annual incentives

Annual incentives include the use of formal criteria in order to receive a payout. Typically, goals are cascaded down through the organization.

3. Long-term incentives

Long-term incentives are given only to the highest levels of management. Three- to five-year goals are set out. Payout occurs at the end of the three to five years.

FIGURE 2.10 Types of variable pay.

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Variable Pay 43

quarterly incentives. Typically, incentive plans are most effective when rewards are paid out as soon as possible after the results are measured. Many companies pay out incentives in separate checks to highlight the reward.

Reasons for Failure

Incentive plans typically fail when employees are not motivated or cannot influence results. Lack of motivation may be owing to a number of reasons.

• Award Size Awards that are too small will serve as irritants, not motivators. In general, 10 percent of pay is considered the smallest possible amount that can lead to changes in behavior. As merit budgets decline to the 2- to 3-percent range, this belief is being challenged and a 5-percent payout level is becoming more acceptable.

• Plan Complexity Any plan should be simple and easy to understand. Plans that measure three, four, or more things often fail, either because employees cannot understand what is expected or because employees perceive that their efforts in any one given area will not lead to a sig- nificant reward.

• Control over Results Incentives that are based on the wrong things can lead to an atmosphere of entitlement (i.e., rewards are “automatic”) or windfalls (i.e., rewards are “unpredictable”), not motivation.

• Senior-Level Support Senior managers may change their minds about what behaviors they want to motivate, or they may eventually come to

How can we obtain the �nancial results of the strategic plan and present it to the stakeholders?

What are the operational challenges to achieve better internal and market efficiency?

How can we empower people for innovation and resilience? Share the learning and promote a favorable environment for our strategy?

What are the demands of potential customers and how can we serve them with excellence?

CLIENTS

FINANCE

INTERNAL PROCESSES

LEARNING AND GROWTH

STRATEGIC VISION

BSC-BALANCED SCORECARD

TOP Excel Templates topexceltemplates.com

FIGURE 2.11 Balanced scorecard.

Source: Balanced Scorecard (BSC) + Strategy Map – example template Excel spreadsheet. Retrieved from: https://topexceltemplates.com/free-templates/balanced-scorecard-strategy-map -example-template-excel-spreadsheet/

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

believe that the amount they are paying to motivate performance is too much. In some cases, managers will not want to oversee a plan that creates a total compensation package that is higher than their own. Each of these factors can lead to a plan that is not supported by senior management, and, thus, does not succeed.

Other Considerations with Incentive Plans

Equally, there are many reasons why employees may not feel that they can influence the results, including:

• The plan uses funding measures (such as economic value added) that are complex and difficult to measure.

• The company sets performance targets too high. • A high-performing group or division reports into an underperform-

ing business unit with the business unit-wide performance incentive plan funding.

Incentive plans can be highly effective, but there are as many plans that underperform as plans that perform on target. Working closely with line managers and testing the plan to see how it fits the overall compensation program can minimize the risk of creating a plan that does not perform. Finally, incentive programs are more difficult to take out than to put in, therefore it is important that HRBPs and line managers spend time to think through the ramifications of implementing a plan.

Merit Budget and Pay for Performance

Merit budgets play an important role in organizations, as most employees will only see changes to their pay through merit, or a promotional increase. Compensation departments are responsible for creating merit budgets, determining annual changes or updates to ranges and creating supplemen- tal budgets for promotions and market adjustments.

Merit matrix design is typically based on several factors:

• The degree of market movement for key benchmark positions from the prior year

• Company philosophy related to the market • The company’s ability to pay

Limited changes in market movement will often result in salary ranges that are not increased. Matrix development has been facilitated by Excel templates that develop the framework and allow for analysis of projected costs against the proposed budget.

Salary ranges are reviewed annually and are updated based on market data, comparisons to other organizations, and current position in the range. If the market has not changed substantially salary ranges may not change.

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Variable Pay 45

Organizations often use various methods, including merit budgets, pro- motional budget, and market adjustment budget. These budgets are often managed separately. Some organizations integrate merit and market adjust- ments, and others separate the two, depending on the type of ranges in use and the overall company philosophy.

In all cases, HR and the finance department work together closely to develop merit, market, and/or promotional budgets and to analyze poten- tial costs. Senior management approves the budget prior to implementation.

Overseeing Salary Management

Along with ensuring that salary increases are given on time and that perfor- mance appraisals are accurate and timely, it is important to ensure that overall salary levels are appropriate. Therefore, it is important once a year to review the equity of the organization, division, or group to determine if there are any pay problems that need resolution. Many companies complete this step concurrent with the preparation of the merit matrix. The following steps may be taken:

Analyze the pay for all employees, sorted by salary level and job title. Request the average salary, average compa-ratio and the number of people in each portion of the salary ranges. The report also should detail each per- son’s salary, time of service, last performance rating, date placed in current position, position in the range, last increase amount and next increase date.

Analyze the data. Review the data, using VLOOKUP up and pivot tables to identify potential problems. An employee who has long-term service in the job and solid performance history but is paid at the minimum of the range or at the bottom of his or her competitive zone should be considered for a special increase. In addition, look to see if individuals performing the same job are paid equitably. A report that can help identify problems lists position in the range, sorted by sex and equal employment opportunity (EEO) code. Finally, look to see if there are any “compression” problems (i.e., too little difference between an individual’s pay and that of his or her supervisor). Although the days of maintaining higher salaries simply because of supervisory responsibili- ties are over, compression problems must be reviewed and explained.

Prepare an initial analysis of what kind of special pay adjustments are nec- essary to fix any inequities, including the amount of the increase and timing. Revise as necessary. Decide whether to request special pay increases all at one time, or whether they should be phased in at the time of service anni- versaries or salary reviews.

This analysis is often combined with a diversity program analysis, which reviews actual or perceived inequities between various groups and/or individuals.

Proving the ROI

Compensation systems remain high-priority areas of focus for organizations. Efforts to better tie pay with performance, to target pay toward high performers and mission-critical positions and to prove return on investment

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

(ROI) are all key areas for the future. External scrutiny has become more common, as have requests for pay transparency. In addition, the ongoing pressures between costs and motivation are never-ending. Training in rewards management is a key element for success, as is remaining up to date on market trends through conferences.

THE REGULATORY ENVIRONMENT: THE FLSA AND OTHER LAWS THAT AFFECT COMPENSATION PRACTICES

One of the most important aspects of a compensation system is that it com- plies with existing laws and regulations, and that it be legally defensible in this era of litigation. It is critical for compensation experts and HR profes- sionals to work closely to ensure that the organization’s pay system is defen- sible and that everyone who works with compensation understands the relevant regulations. Figure 2.12 summarizes some of the existing laws that affect compensation practices, the most prominent (for pay program design purposes) being the Fair Labor Standards Act of 1938 (FLSA).

The remainder of this chapter addresses the laws regulating compensa- tion practices.

Rule Details Governing Body

Railway Labor Act Grants the right of non- managerial and airline employees in the private sector to bargain col- lectively with their em- ployers on questions of wages, hours, and work conditions

National Mediation Board

Davis-Bacon Act Establishes wage and fringe-benefit standards for laborers and mechan- ics for federal public con- struction projects that exceed $2,000

US Department of Labor

Walsh-Healey Public Contracts Act

Establishes wage, hour, overtime pay, child-labor and safety standards for employees of manufactur ers or suppliers of goods for federal contracts in excess of $10,000

US Department of Labor

FIGURE 2.12 Compensation regulation.

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The Regulatory Environment: The FLSA and Other Laws 47

Fair Labor Standards Act (FLSA)

Deals with minimum wages, overtime pay, equal pay for both sexes, child labor, and recordkeeping for employees engaged in interstate commerce or in production of goods for interstate commerce, or employed by an enterprise engaged in interstate commerce or production of goods for interstate commerce

US Department of Labor

Equal Pay Act (EPA) Prohibits wage differentials based on sex for employees engaged in commerce or in production of goods for commerce, or who are employed by an enterprise engaged in commerce or production of goods for commerce

Equal Employment Opportunity Commission (EEOC)

Title VII of the Civil Rights Act (Equal Employment Opportunity Act)

Prohibits discrimination based on race, color, religion, sex, pregnancy, or national origin for employers with 15 or more employees and whose business affects commerce; employment agencies; labor organizations engaged in an industry affecting commerce; the federal government; and the government of the District of Columbia

Equal Employment Opportunity Com- mission (EEOC)

Service Contract Act (SCA)

Establishes wage and fringe-benefit standards for employees of suppliers of services to the federal government in excess of $2,500

US Department of Labor

(continued)

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

National Foundation Arts and Humanities Act

Establishes wage and working-condition standards for professionals, laborers, and mechanics directly engaged in working on projects receiving funding from the foundation

US Department of Labor

Age Discrimina- tion in Employment Act (ADEA)

Prohibits job discrimina- tion in hiring, firing, or conditions of employment against individuals aged 40 or older for employers of 20 or more individuals, employment agencies, and labor organizations

Equal Employment Opportunity Com- mission (EEOC)

Americans with Disabilities Act (ADA)

Prohibits discrimination against individuals with disabilities in employment, public services, public accommodations, and telecommunications for employers with 15 or more workers

US Department of Labor (DOL) Equal Employment Opportunity Com- mission (EEOC) Federal Communications Commission (FCC)

Civil Rights Act of 1991

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

Equal Employment Opportunity Commission (EEOC)

Internal Revenue Code

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

Internal Revenue Service (IRS)

Securities and Ex- change Commission (SEC) regulations

Regulate plans that provide employer stock to participants for all publicly held companies

Securities and Exchange Commission (SEC)

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

Vary by state

FIGURE 2.12 (Continued)

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Fair Labor Standards Act of 1938 49

FAIR LABOR STANDARDS ACT OF 1938

The Fair Labor Standards Act of 1938 (FLSA) was born of the Great Depression and Franklin D. Roosevelt’s “New Deal” administration. Roosevelt sent the bill to Congress in 1937 with a message that the United States should be able to give “all our able-bodied working men and women a fair day’s pay for a fair day’s work.”

After a long, hard-fought battle, the FLSA was signed into law on June 25, 1938, and took effect on October 24, 1938. Its primary objective was work- ers’ rights, and it was intended to eliminate detrimental working conditions, establish a minimum wage rate, and protect the educational opportuni- ties of youth.

During his fireside chat right before the implementation of the act in October, Roosevelt commented that, with the exception of only the Social Security Act, the FLSA was the most far-reaching, far-sighted pro- gram for the benefit of the workers that had ever been adopted. He went on to say that, without question, this act started the United States toward a better standard of living and increased purchasing power to buy the products of farm and factory. Roosevelt then admonished some business leaders by saying that the American people should not let any “calamity-howling executive” with an income of $1,000 a day, who has been turning his employees over to the government relief rolls in order to preserve his company’s undistributed reserves, tell you that a wage of $10 a week is going to have a disastrous effect on all American industry. Roosevelt closed his comments about the FLSA by declaring that this type of executive is a rarity with which most business executives most heartily disagree.

Hence, the FLSA became the principal federal statute that affects the design of direct compensation programs. In the beginning, only about one- fifth of the working population was affected by the act, which established a minimum wage of 25 cents per hour and a maximum workweek of 40 hours, or $11 per week. In its current state, after several amendments over the years, the act now covers more than 143 million workers in the United States and the current minimum wage is $7.25, but the maximum workweek is still 40 hours.

Effective January 1, 2020, the act was updated for the first time in more than 15 years, with the following changes:

• Raised the standard salary level to $684 ($35,568 annually) per week • Raised the total annual compensation threshold for “highly compen-

sated employees” to $107,432 per year • Allowed the use of nondiscretionary bonuses and incentive payments

(including commissions), paid at least annually, to satisfy up to 10 per- cent of the standard salary level

• Revised the special salary levels for workers in the US territories and the motion picture industry.

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

What Is the FLSA?

Congress enacted the Fair Labor Standards Act (FLSA) of 1938 to establish a floor for minimum wage (see Figure 2.13), overtime, recordkeeping, and child labor for employers nationwide.

Since it was enacted, a preponderance of case law provided a better understanding of the concept of the FLSA. However, recent amendments and interpretations by the courts have made it extremely important to understand the language of the FLSA. Moreover, because today’s workforce and workplace are very different from what they were in 1938, it has become a challenge to comply with the FLSA while still meeting business needs.

Who Does the FLSA Affect?

The FLSA covers employers who are involved in interstate or foreign com- merce, state and local government employees, federal employees employed by the Library of Congress, the US Postal Service, the Postal Rate Commission, and the Tennessee Valley Authority. Coverage is broadly interpreted and includes nearly all employers of all sizes. The 2020 amendment expanded coverage to include making an additional 1.3 million workers eligible for overtime pay. Certain employees, however, are considered exempt from some of the provisions of the FLSA, including minimum wage, overtime pay, and certain recordkeeping provisions. All other employees – designated as nonexempt – are subject to all of the provisions of the act.

1938 $0.25 per hour

1978 $2.65 per hour

1979 $2.90 per hour

1980 $3.10 per hour

1981 $3.35 per hour

1990 $3.80 per hour

1991 $4.25 per hour

1996 $4.75 per hour

1997 $5.15 per hour

2007 $5.85 per hour

2008 (July) $6.55 per hour

2009 (July) $7.25 per hour

FIGURE 2.13 History of the federal minimum wage.

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Fair Labor Standards Act of 1938 51

The major provisions of the FLSA cover rules for:

• The determination of a minimum wage and a regular rate of pay to be used in the calculation of overtime

• The determination of which activities shall constitute hours worked • Which positions can be classified as exempt • Child labor restrictions • Recordkeeping requirements

What Is Covered?

Minimum Wage

Minimum wage for covered, nonexempt workers is $7.25 per hour (as of July 24, 2009). Certain full-time students, student learners, apprentices, and workers with disabilities may be paid less than the minimum wage under special certifications issued by the US Department of Labor.

Tipped Employees

Tipped employees must be paid a cash wage of at least $2.13 per hour. This rule applies to employees who receive at least $30 per month in tips. However, if an employee’s tips combined with the employer’s contribution of $2.13 per hour does not equal the applicable minimum hourly wage, the employer must make up the difference to meet minimum wage.

Hours Worked

Hours worked are defined as the time when an employee begins, or is required to be available to begin, his or her principal activities of work until the conclu- sion of the employee’s workday (when he or she ceases to perform the principal activities of work). The workday does not necessarily equate to the “scheduled workday” for the employee and can be much longer or shorter.

Workweek

A workweek is defined as seven consecutive, 24-hour periods totaling 168 hours. This is the unit of measurement used to determine compliance with minimum wage and overtime provisions. As defined in FLSA, the following applies to a workweek:

• It can begin on any day of the week and at any hour. • It does not have to coincide with the duty cycle or pay period, or with a

particular day of the week or hour of the day. • Each workweek stands alone and cannot be averaged over two or more

workweeks. • Once the beginning and ending time of the work period is established, it

remains fixed regardless of how many hours are worked within the period.

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

• The beginning and end of the work period may be changed, provided that the change is intended to be permanent and is not designed to evade the overtime requirements of the Act.

Rates of Pay and Overtime Calculations

The FLSA requires overtime pay, at a rate of time and one-half the regular rate of pay, for hours worked in excess of 40 in a workweek. Computing an employee’s regular rate of pay can be complex. In general, the regular rate is the employee’s average hourly earnings for a given workweek.

The regular rate of pay consists of all remuneration for employment, including:

• Base rate • Shift premium • Piece rate • Nondiscretionary bonus • Other regular pay allowances

Types of compensation that may be excluded from the “regular rate” include:

• Discretionary bonuses and gifts • Reimbursement for expenses • Payments for time not worked • Benefit plan contribution • Overtime premiums • Third-party payments for insurance, pensions, etc.

The FLSA also explains how to calculate hourly rates of pay for multiple specific payment contexts (e.g., piecework rates and commissions). While the general rule for overtime pay requires employers to pay at least one-and- one-half times the regular rate of all hours worked over 40 in each week, the Act provides specifics for varying cases.

Child Labor Restrictions

The FLSA was created in part to protect the educational opportunities, health, and well-being of the youth under the age of 18 in the United States. There are restrictions on hours of work for minors under the age of 16 as well as a hazard- ous occupation restriction for all minors under the age of 18. Youths who are over 18 years of age may perform any job for unlimited hours. Provisions for nonagricultural jobs and farm jobs identify permissible jobs and hours, by age.

Nonagricultural jobs: Youth (minors under the age of 18) employment in non-agricultural jobs is subject to the following provisions:

• Minors between the ages of 16 and 17 years may work for unlimited hours in any nonhazardous job

• Minors between the ages of 14 and 15 years may • Work in nonmanufacturing, nonmining and nonhazardous jobs • Work no more than 3 hours on a school day, 18 hours in a school

week, 8 hours on a nonschool day or 40 hours in a nonschool week

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Fair Labor Standards Act of 1938 53

• Not begin work before 7:00 a.m. or end after 7:00 p.m., except for the period June 1 through Labor Day, when evening hours are extended to 9:00 p.m.

• May work up to 23 hours in a school week and 3 hours on a school day (including during school hours), if enrolled in an approved Work Experience and Career Exploration Program (WECEP)

• At any age, minors may deliver newspapers, perform in radio, television, movie or theatrical productions; work for parents in their solely owned nonfarm business or gather evergreens and make evergreen wreaths

Farm Jobs: Youth (minors under the age of 18) employment in farm jobs is subject to the following provisions:

• Minors over the age of 16 years may work for unlimited hours in any job, whether hazardous or not.

• Minors between the ages of 14 and 15 years may work in any nonhazardous farm job outside of school hours.

• Minors between the ages of 12 and 13 years may work outside of school hours in nonhazardous jobs, with a parent’s written consent or on the same farm as the parent.

• Minors under the age of 12 years may work on farms owned or operated by the parent, or with a parent’s written consent, outside of school hours in nonhazardous jobs on farms not covered by minimum wage requirements.

• Minors at any age may be employed by their parents in any work on a farm owned or operated by their parents.

The FLSA identifies restrictions for youth covered by the Child Labor Law. Generally, youth under the age of 18 are prohibited from working in occupations that are identified as hazardous. There are some exceptions that apply to work in agriculture. The following includes hazardous occupations banned for minors under the age of 18:

• Occupations in or about plants or establishments that manufacture or store explosives or articles containing explosive components

• Coal mining and mining other than coal • Forest fire fighting and prevention, timber tract, forestry service, and

occupations in logging and sawmilling • Logging occupations and occupations in the operation of any sawmill,

lath mill, shingle mill, or cooperage stock mill • Exposure to radioactive substances and ionizing radiations • Work involving power-driven hoisting apparatus • Work involving power-driven metal forming, punching, and shear-

ing machines • Work involving the operation of power-driven meat processing machines,

slaughtering, meat and poultry packing, processing, or rendering • Occupations involved in the operation of bakery machines • Occupations involved in the manufacture of brick, tile, and similar

products • Occupations in roofing operations

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

• Work involved with balers, compactors, and power-driven paper prod- ucts machines

• Work involved with power tools, including saws, shears, woodchippers, and cutting discs

• Work involved in wrecking, demolition, and ship breaking • Driving a motorized vehicle • Trenching or excavating

Nursing Mothers

The Patient Protection and Affordable Care Act (PPACA), Section 7, of the FLSA, provides a break time requirement for nursing mothers.

Employers must provide reasonable break times for an employee to express breast milk for one year after the child’s birth. The employer must provide a private location (not a bathroom), for the employee to express breast milk. State law may provide a greater employee benefit.

Only employees who are not exempt from FLSA’s overtime pay require- ments are entitled to breaks to express milk. State law may be different.

Employers with less than 50 employees are not subject to the break time requirement if it would impose an undue hardship.

Employers are not required to compensate nursing mothers for breaks taken for the purpose of expressing milk, if the employee is completely relieved from duty. If employers provide compensated breaks, an employee may use that break time to express milk and must be compensated the same as other employees for that break time.

Recordkeeping Requirements

Employers are required to keep records on wages, hours, and other infor- mation for all employees. These records must be saved for at least three years. No particular form is required nor are time clocks required.

Records required for nonexempt employees include:

• Name, home address, occupation, sex, and birth date if the employee is younger than 19 years

• Hour and day when the workweek begins for the employee • Regular hourly pay rate for any week when overtime is worked • Hours worked each workday and each workweek • Total daily or weekly straight time earnings • Total overtime pay for the workweek • Deductions or additions to wages • Total wages paid each pay period • Date of payment and pay period covered

What Is Not Covered?

The FLSA does require payment for time not worked, such as:

• Vacation pay • Holiday pay

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Fair Labor Standards Act of 1938 55

• Severance pay • Sick pay • Meal periods of 30 consecutive minutes or more, duty-free • Rest periods (breaks) of more than 20 consecutive minutes if the

employee is completely relieved of duties

The FLSA does not mandate the following:

• Time clocks to record hours worked. • Any kind of special pay or premiums for Saturday, Sunday, holiday, or

sixth- or seventh-day work. • That employees be paid at premium rates for hours worked in excess

of eight hours per day, unless the employer chooses and is eligible for the 8/80 option.

• That an employer differentiates between exempt and nonexempt employees in any way other than minimum wage payments, overtime premiums, and records.

• The beginning and ending of a workweek in terms of starting and stopping on a specific calendar day or time.

• Meal period and rest period requirements (Note: The FLSA does man- date the ability to exclude such time in the calculation of regular rate).

• The frequency in which employees receive compensation (Note: Though the FLSA does not set specific intervals for pay periods, most states have regulations regarding the timing and payment of wages).

• Limitations on the number of hours worked in a day or in a workweek (Note: The FLSA does state that any work in excess of 40 hours in the workweek will be treated as overtime and compensated at one-and-one- half times the regular rate of pay).

• Pay for travel time outside of normal work/business hours when travel is overnight.

• That employers compensate employees on an hourly rate (Note: earnings may be determined on a piece-rate, salary, commission or oth- er basis, but the FLSA does require that overtime calculations be based on the regular hourly rate of pay).

• Pay stubs or W-2s. • A notice or reason for discharge or immediate payment of final wages

to terminated employees.

Did You Know?

• Tipped employees can be paid a minimum wage of $2.13 per hour if they receive at least $30 per month in tips.

• Some states have higher minimum wage standards than those required by the FLSA. If a company employs workers in those states, it must comply with state regulations.

• The workday does not necessarily equate to the “scheduled” workday for the employee and can be much longer or shorter.

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

SHERMAN ANTITRUST ACT OF 1890

The Sherman Antitrust Act of 1890, as amended, prohibits every contract, combination or conspiracy in restraint of trade and allows for the imposition of substantial penalties for violations thereof. Named after Sen. John Sherman, the act was proposed to address growing concern over the rapidly increasing prominence of large corporations, corporate trusts, and business combinations in the US economic landscape toward the end of the nineteenth century. Set forth as Title 15, §§ 1–7 of the US Code, the Sherman Act is based on Congress’ constitutional power to regulate interstate commerce and was enacted at a time when the only similar laws were state statutes governing intrastate business.

Though the Sherman Act had immediate potential to aid the federal government in addressing concerns over increasing corporate power, its potential was not realized for several years. Initially, Supreme Court decisions effectively prevented its use by the federal government. Thereafter, Congress gradually put in place the supporting legislation and agencies necessary to successfully challenge anticompetitive activities. This building process began in 1904 when President Theodore Roosevelt launched his “trust-busting” campaigns and the Supreme Court found in favor of the federal govern- ment, dissolving the Northern Securities Company.

The Sherman Act’s reach increased during the Taft and Wilson administrations with the enactment of the Clayton Antitrust Act and the establishment of the Federal Trade Commission in 1914. Further, the

• The FLSA does not require employers to compensate nonexempt employees on an hourly basis.

• “Waiting to be engaged” and “engaged to wait” have different meanings under the FLSA.

• Employees must be paid for all hours worked, even if a supervisor did not approve the time worked.

• Employees must be paid for the time they take to seek medical attention for on-the-job injuries.

• Youth between 14 and 15 years of age cannot start work before 7:00 a.m. and must end work by 7:00 p.m. on any given work- day (the time is extended to 9:00 p.m. from June 1 through Labor Day).

• The FLSA requires employers to keep pay records for at least three years.

• Meal and rest periods are not required under the FLSA. • The FLSA does not mandate overtime pay for more than eight

hours worked in one day. State and local regulations or union contracts may require payment of daily overtime.

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Davis–Bacon Act of 1931 57

addition of supplementary legislation, such as the Robinson-Patman Act during President Franklin Roosevelt’s administration, continued to improve the federal government’s ability to challenge corporate actions on antitrust grounds. Finally, as federal antitrust agencies began broadening their interpretations of the antitrust statutes in the 1980s and 1990s, antitrust enforcement reached new heights, beginning with the 1982 breakup of the AT&T monopoly and culminating with the widely publicized Microsoft case, which ended in 2002.

Virtually since its inception, antitrust has been controversial. Proponents have seen it as a preserver of competition and a protector of consumers, while critics have viewed it as being based on flawed economic assumptions and as a destroyer of free markets and property rights.

Although the law prohibits contracts or conspiracies that result in trade restraint, the specific practices that are illegal are not spelled out in the law. Instead, they are left to the courts to decide, based on the facts and circumstances of each case. For example, the Supreme Court decided long ago that contracts or agreements that restrain trade “unreasonably” are prohibited, with the definition of “unreasonable.”

Enforcing Antitrust

Antitrust enforcement primarily is handled by two government agencies: the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC). The DOJ concerns itself primarily with “conspira- cies,” “monopolies,” and the like, while the FTC directs its attention to “unfair trading practices” in pricing, sales practices, etc. For issues related to the workforce, the Department of Labor is the enforcer.

These two antitrust organizations operate in a somewhat different fashion. The DOJ by itself cannot issue an order to impose a penalty. It must initiate a suit through the courts. The defendant may demand a jury trial. The FTC, however, is an autonomous administrative agency: It is complainant, judge, jury, and prosecutor all in one, and it can issue its own cease-and-desist orders. At no time is there a jury trial in an FTC procedure.

In either type of antitrust action, the defendant may appeal the verdict to higher courts. However, in a case that may involve thousands of pieces of evidence in the form of vouchers, receipts, purchase orders, etc., the courts tend increasingly to rely on “expert” government testimony as to what is “unfair” or “monopolistic.” The Supreme Court, in particular, usually upholds the government’s case.

DAVIS–BACON ACT OF 1931

Under the provisions of this act, passed in 1931, federal contractors and their subcontractors are to pay workers employed directly on the site of the work no less than the locally prevailing wages and fringe benefits paid on

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

similar projects. The Department of Labor maintains a very helpful website with more detailed information related to this act, which is located at https://www.dol.gov/whd/govcontracts/dbra-guidance.htm.

NATIONAL LABOR RELATIONS ACT

The National Labor Relations Act (NLRA) of 1935 was enacted with the intention of creating a better environment for collective bargaining. The NLRA was created to provide a more equitable environment for labor and management dispute resolution, and covers all employers involved in interstate commerce (with the exceptions of airlines, railroads, agriculture and the government). The NLRA guarantees the right of employees to select or reject third-party representation, as well as the rules for bargaining in good faith and controlling against unfair labor practices. The enforcing agency of the NLRA is the National Labor Relations Board (NLRB). It is interesting to note that neither the federal courts nor the US Department of Labor have jurisdiction in matters concerning the NLRB.

WALSH–HEALEY PUBLIC CONTRACTS ACT (PCA)

The Walsh–Healey Act, as amended, provides general employment regula- tions and establishes minimum wage and maximum hours for work on con- tracts for employers holding manufacturing or supply contracts with the federal government in excess of $15,000. Although the law requires employ- ees to be paid the minimum prevailing manufacturing wage established by the Secretary of Labor, the secretary has, as a result of litigation, issued the minimum wage as the “prevailing” wage since the 1960s. The law also estab- lished certain child labor and safety standards. The US Department of Labor (DOL) is the enforcing agency for the Walsh–Healey Act.

SERVICE CONTRACT ACT (SCA)

Passed in 1965, the Service Contract Act applies to federal contracts for ser- vices in excess of $2,500 and requires service contractors to pay minimum wages and fringe benefits as established to be prevailing by the Secretary of Labor. As with the Davis–Bacon Act, pay scales are based on “prevailing” wages, which is typically interpreted by the government as union-equivalent wages and benefits in the local labor market. The act also includes certain safety standards. The US Department of Labor is the enforcing agency of the Service Contract Act.

Recordkeeping and posting requirements, government investigations and hearings, court actions, and blacklisting of violators have been estab- lished as enforcement mechanisms for the Davis–Bacon, Walsh–Healey, and Service Contract Acts.

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Anti-Discrimination Laws 59

THE TAX CUTS AND JOBS ACT OF 2017 (TCJA)

TCJA includes several changes to how executive compensation is treated under the Internal Revenue Code.

The legislation reduces the corporate tax rate from 35 percent to 20 percent and, in doing so, amends or eliminates many current provisions including executive compensation requirements of the current tax code.

Notable changes include:

• Elimination of nonqualified deferred compensation arrangements • Elimination of nonqualified stock options as a long-term incentive vehicle • Elimination of performance-based exceptions to 162(m) or the $1 million

cap on compensation deduction expense

Tax-exempt organizations being subject to a new 20 percent excise tax on compensation over $1 million paid to current or former five highest-paid employees, effective for tax years after Dec. 31, 2017.

ANTI-DISCRIMINATION LAWS

The federal government enacted several statutes in the 1960s that were designed to ensure the fair treatment of specific segments of the population regarding their rights as individuals and employees. The most important of these are the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964.

Equal Pay Act (EPA) of 1963

As early as World War II, the National War Labor Board was created as the arbiter of salary disputes between labor and management. In 1942, it issued an order for salary adjustments to “equalize the wage or salary rates paid to females with rates paid to males for comparable quality and quantity of work on the same or similar operations.” A bill requiring “equal pay for compara- ble work” performed by males and females was introduced in Congress in 1945 and rejected, as were several similar bills for the next 18 years.

The EPA, which prohibits gender-based compensation discrimination, was successfully enacted in 1963. Specifically, the act prohibits an employer from discriminating “between employees on the basis of sex by paying wages to employees . . . at a rate less than the rate at which he pays wage to employees of the opposite sex . . . for equal work on jobs that require equal skill, effort, and responsibility, and are performed under similar working conditions.” There are, however, four exceptions (affirmative defenses). Unequal payments can be based on (1) a seniority system, (2) a merit system, (3) a system that meas- ures quantity or quality of production, or (4) any other factor aside from sex.

The act, an amendment to the Fair Labor Standards Act, was originally enforced by the Wage and Hour Division of the Department of Labor, and employers subject to the FLSA were subject to the provisions of the Equal

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

Pay Act as well. In 1979, the Equal Employment Opportunity Commission (EEOC) became the enforcing agency.

Plaintiffs who file lawsuits under the Equal Pay Act must show that they are paid less than a person of the opposite sex for doing substantially equal work (in the same job family) that requires substantially equal skill, effort, and responsibility and is performed under similar working conditions. Once the prima facie case has been established, the burden shifts to the employer to prove that the pay difference is based on a seniority system, a merit system, a system that measures earnings by quantity or quality of production or some other factor aside from gender.

The bottom line of the Equal Pay Act for pay program design and admin- istration is that if, on the average, men and women are paid different rates when they perform work that is substantially the same, these differences must be shown to be attributable to one of the “allowable differences.”

The effects of the Equal Pay Act have been far-reaching and include the revision of employee benefit programs to eliminate gender-based differen- tials, greater emphasis on written job descriptions, greater emphasis on job-content-oriented procedures for assignment of pay grades and ranges to specific jobs, and greater emphasis on written policies and procedures.

Title VII of the Civil Rights Act of 1964

The most comprehensive of the civil rights statutes, this legislation was cre- ated to prohibit discrimination by employers on the basis of race, color, religion, sex or national origin, in the hiring, firing, training, compensation or promotion of employees. On the last day of debate, sex was added as a prohibited basis of discrimination, creating overlap with the Equal Pay Act.

For cases subject to this overlap on sex-discrimination in pay, the Senate added the Bennett Amendment that (ambiguously) states, “It shall not be an unlawful employment practice under Title VII for any employer to dif- ferentiate upon the basis of sex in determining the amount of the wages or compensation paid to employees of such employer if such differentiation is authorized by the provisions of the Equal Pay Act.” Regardless of how the amendment is interpreted, differences in pay may be defended if attributa- ble to work that is not substantially equal, or is based on seniority, merit, or quantity and quality of work.

The Civil Rights Act is enforced by the EEOC, which was created by the act. Virtually all employers with 15 or more employees are covered.

Employees who file lawsuits under the act must demonstrate either “ disparate treatment” or “disparate impact.” Under “disparate treatment,” the plaintiff must prove that the employer deliberately discriminated, based on the employee’s race, color, religion, national origin, or sex. If this is done, the employer must demonstrate a legitimate nondiscriminatory basis to justify the practice; then, in order to prevail, the employee must prove that any such “justification” is just a pretext for discrimination.

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Anti-Discrimination Laws 61

Under “disparate impact,” the employee must establish a prima facie case showing adverse impact on a protected class. Then the employer must vali- date the challenged practice by demonstrating a business necessity for the practice and proving that no alternative exists that would produce a less adverse impact.

The bottom line of Title VII for pay program design and administration is that pay programs should produce pay rates that treat all classes of employ- ees similarly, and any differences should be attributable to job-related, defensible causes (seniority, performance, and the like). Case law resulting from litigation under Title VII created the concept of “bona fide occupa- tional qualifications” (BFOQ). This concept specifies that job qualifications imposed by employers must be defensible and necessary for an employee to perform the job.

The Pregnancy Discrimination Act of 1978

This Act amends Title VII of the Civil Rights Act of 1964 and prohibits sex discrimination based on pregnancy. Women affected by pregnancy, child- birth, or medical conditions related to pregnancy or childbirth shall be treated the same in all employment-related purposes, including receipt of benefits, as others not affected by pregnancy.

Title VII of the Civil Rights Act of 1991

This amendment to the Civil Rights Act of 1964 addresses several Supreme Court decisions that did not follow established precedents. Some key cases that shaped this Act were Price Waterhouse v. Hopkins (1989) and Wards Cove Packing Co v. Antonio (1989). Decisions made in these cases made it more difficult for plaintiffs to prevail in a dispute.

The 1991 Act clarified each party’s obligations in a disparate impact case (Wards Cove Packing), shifting the burden of proof to the employer. The employer must prove that a challenged practice is job-related and consistent with business necessity.

The update addressed mixed motive cases. In a mixed-motive case (Price Waterhouse) the employer will be found guilty of discrimination if an illegal factor motivated the employment decision.

The Act also provides for a jury trial as well as compensatory and punitive damages in Title VII and ADA claims of intentional discrimination. Caps are placed on the maximum amount of damages awarded based on employer size.

The Act expands the right to challenge discriminatory seniority systems. If an illegal employment practice occurs within a seniority system, the sen- iority system may be challenged at several points in time: (1) when the seniority system is adopted; (2) when the individual is subjected to the sys- tem; or (3) when the individual is negatively impacted by the system.

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

Age Discrimination in Employment Act (ADEA) of 1967

The Age Discrimination in Employment Act, passed in 1967 and amended several times, protects workers aged 40 and older from employment dis- crimination. The ADEA applies to private employers with at least 20 employ- ees, state and local governments, employment agencies, labor organizations, and the federal government. While it prohibits discrimination in all terms and conditions of employment, it has been applied mainly in cases involving retirement, promotions, and layoff policies.

The purpose of the act is to “promote employment of older persons based on their ability rather than age, to prohibit arbitrary age discrimination in employment, and to help employers and workers find ways of solving prob- lems arising from the impact of age on employment.”

The law prohibits mandatory retirement (with some exceptions, gener- ally involving public safety), limiting or classifying employees in any way related to their age (such as with maturity curves), reducing any employee’s wage in order to comply with the act, and indicating any preference based on age in employment advertising. Individual state laws sometimes are more restrictive than the federal law.

There are several statutory exceptions to the ADEA:

• Bona fide executives who are entitled to $44,000 per year or more in  retirement benefits from employer contributions. Mandatory retire- ment at age 65 is allowed.

• Elected (or high-level appointed) officials in the government are not covered. • Bona fide occupational qualifications (BFOQ), defined as an occupa-

tional qualification that is reasonably necessary to the normal operation of the employer’s business. Employers may discriminate on the basis of age if it is reasonably necessary to the normal operation of the business

• Bona fide seniority system • Firefighters and law-enforcement officials • Bona fide benefit plan • Reasonable factors other than age

The EEOC has been charged with the enforcement of the act since July 1979. The plaintiff must prove that he or she is a member of a protected group and that he or she has been adversely affected by a personnel policy or action (prima facie case). Once this is established, the burden shifts to the employer, who may argue that the adverse treatment occurred based on considerations other than age or that the decision or policy was rightly based on age (e.g., if age is a BFOQ for the job).

Executive Order 11246

This presidential order, signed by President Johnson in 1965 and amended since that time, requires companies holding federal contracts or subcon- tracts in excess of $15,000 not to discriminate in their employment practices

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Anti-Discrimination Laws 63

(which include pay practices) on the basis of race, color, religion, sex, sexual orientation, gender identity, or national origin. Additionally, there is a requirement to take affirmative action to ensure that employment decisions are made in a nondiscriminatory manner. Executive Order 11246 also pro- hibits employers from taking adverse employment actions when applicants and employees discuss information about pay.

For service and supply contracts in excess of $50,000, contractors must also develop and implement written affirmative action plans that include goals and objectives of increasing minority and female participation in their workforce.

This executive order is enforced by the Office of Federal Contract Compliance Programs (OFCCP) in the US Department of Labor. The OFCCP also investigates complaints of discrimination and conducts on-site compli- ance reviews to determine federal contractors’ compliance with the mandates.

Rehabilitation Act of 1973

The act covers persons employed by, or seeking employment from, federal departments and agencies or businesses performing federal contract work in excess of $2,500. Recipients of federal assistance are also protected from discrimination based on any mental or physical disability that substantially limits one or more major life activities. Section 503 of the Act applies to pri- vate industry and Section 504 applies to institutions receiving federal grants. Discrimination in employment is prohibited in all terms and conditions of employment, which certainly includes compensation. The standards for determining employment discrimination under the Rehabilitation Act are the same as those used in title I of the Americans with Disabilities Act.

The act is enforced by the OFCCP, which requires covered employers to utilize affirmative action to employ and advance qualified disabled individu- als. The act also requires employers “to make reasonable accommodation to the known physical or mental limitations of an otherwise qualified, handi- capped applicant, employee or participant.” Further, the act requires the elimination of physical barriers, to ensure that the “facility is readily acces- sible to and usable by qualified handicapped individuals.”

Charges under the Act proceed in the same way as for Title VII. If, for example, a human resource policy or action has an adverse effect on a disa- bled person, the employer must then show that the adverse treatment was based on considerations other than the disability (e.g., seniority or perfor- mance) or that the disability was a legitimate basis for such policy or action. This last defense is rare in compensation cases.

Vietnam Era Veterans Readjustment Act (VEVRAA)

The Vietnam Era Veterans Readjustment Act, as amended, requires compa- nies doing business with the federal government to take affirmative action to recruit, hire, and promote veterans, including disabled veterans and recently

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

separated veterans. Employers may not discriminate in the employment and advancement in employment of protected veterans.

The act is enforced by the OFCCP, which investigates complaints and checks for compliance with the act during on-site investigations.

Americans with Disabilities Act (ADA) of 1990

The Americans with Disabilities Act (ADA) of 1990 was enacted to include any company involved in interstate commerce with 15 or more employees. A charge of discrimination must be filed within 180 days of the alleged dis- criminatory act. The Act is enforced by the EEOC.

A disability is defined as an impairment that substantially limits or restricts a major life activity such as hearing, seeing, speaking, breathing, performing manual tasks, walking, caring for oneself, learning, or working. Any employee or job applicant who meets the following criteria may be covered under the ADA:

• Has a physical or mental impairment that substantially limits one or more of the major life activities

• Has a record of any such impairments • Is regarded as having such impairments • Is associated with anyone having such impairments

This provision is designed to protect any qualified individual, whether or not they are disabled, from disability-related discrimination. The individual must be qualified for the job and must be able to perform the essential functions of the job. A definition of essential functions should include the following criteria:

• Reason the position exists is to perform the function • Limited number of other employees available to perform the function • Degree of expertise or skill required to perform the function

Under the ADA, if an employer can reasonably accommodate a request by a disabled employee (or applicant), the person is required to accept it. A reasonable accommodation is any change or adjustment to a job or work environment that permits a qualified applicant or employee with a disability to participate in the job application process, to perform the essential func- tions of a job, or to have the benefits and privileges of employment equal to employees without disabilities. Failure to provide reasonable accommoda- tion to a qualified individual with a disability is a violation of the ADA, unless to do so would impose an undue hardship on the operation of the business. The Act identifies three criteria to measure reasonableness of accommodations:

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

• Budgetary constraints • Type of operation

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• The composition • The makeup of the workplace

3. Nature and cost of accommodations

Americans with Disabilities Act Amendments Act (ADA Amendments Act) of 2008

The ADA Amendments Act was enacted to restore the intent and protec- tions of the 1990 American with Disabilities Act. Supreme Court decisions (Sutton v. United Air Lines and Toyota Motor Manufacturing, Kentucky, Inc., v Williams) made under the ADA narrowed the scope of protection intended by the ADA.

The ADA Amendments Act made several significant changes to the defi- nition of “disability” to ensure the definition would be broadly interpreted and applied without extensive analysis by an employer. The amendment expands the definition of “major life activities” by providing a nonexhaus- tive list of major life activities that specifically includes the operation of major bodily functions. The Act makes it easier for employees to show that their disability influences one of their “major life activities.”

Uniformed Services Employment and Reemployment Rights Act (USERRA) of 1994

USERRA prohibits employment discrimination against a person based on past military service, current military obligations or intent to serve. USERRA applies to those who perform duty, voluntarily or involuntarily, in the “uni- formed services,” as well as the reserves. Employers cannot deny employ- ment, reemployment, retention in employment, promotion, or any benefit of employment to a person based on a past, present, or future service obliga- tion, regardless of the size of the organization.

The Act establishes a five-year cumulative total of military service with a single employer, with some exceptions. The purpose of the law is to mini- mize disruption to people in uniformed services as well as employers by providing for prompt reemployment on completion of service. The law is also aimed at minimizing disadvantages to civilian careers resulting from uniformed service.

Employee rights under this Act include:

• Continuation of position, seniority, status, and pay rate as if there had not been a break in employment, with the same seniority, status, and pay.

• Reasonable efforts (training or retraining) must be made to enable returning service members to qualify for reemployment.

• While the individual is performing military service, the individual is entitled to the same rights and benefits afforded to other individuals on nonmilitary leaves of absence.

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

• If performing military duty longer than 30 days, the individual may elect continuation of employer sponsored health care for up to 24 months and may be responsible for up to 102 percent of the full premium.

• If performing military duty less than 31 days, health care coverage is provided as if the individual remained employed.

• Pension plans are protected, with individuals treated as if they had con- tinuous service with the employer.

USERRA covers nearly all employees, including part-time and probation- ary employees. The Act applies to virtually all US employers, regardless of size. The US Department of Labor’s Veterans’ Employment and Training Service (VETS) administers USERRA.

Genetic Information Nondiscrimination Act (GINA) of 2008

The Act protects employees or applicants against discrimination based on genetic information in any aspect of employment, including hiring, firing, pay, job assignments, promotions, layoffs, training, fringe benefits, or any other term or condition of employment. Genetic information should not be used in an employment decision because it is not relevant to an individual’s current ability to do the job.

The Act prohibits discrimination against employees or applicants based on an individual’s genetic tests, tests of an individual’s family members, and information relating to an individual’s family medical history.

Genetic information about applicants, employees, or family members must be kept confidential and in a separate medical file apart from the per- sonnel file.

The EEOC enforces Title II of GINA, which focuses on genetic discrimi- nation in employment.

Lilly Ledbetter Fair Pay Act of 2009

The law extends the time frame for filing pay discrimination claims brought under Title VII, ADEA, ADA, and the Rehabilitation Act. The law creates a rolling time frame for filing wage discrimination claims taking the position that each paycheck containing discriminatory compensation is a separate violation regardless of when the discrimination began.

This law overturned the Supreme Court’s decision in Ledbetter v. Goodyear Tire & Rubber Company, which restricted the time period for filing complaints of employment discrimination regarding compensation.

This Act covers employer decisions about base pay or wages, job classifica- tions, career ladder or other noncompetitive promotion denials, and failure to respond to requests for raises.

The EEOC enforces this Act.

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