14 Health Reports, Vol. 29, no. 4, pp. 14-22, April 2018 • Sta

14 Health Reports, Vol. 29, no. 4, pp. 14-22, April 2018 •
Statistics Canada, Catalogue no. 82-003-X
Health-adjusted life expectancy in Canada • Research Article
Abstract
Background: Over the past century, life expectancy at birth in
Canada has risen substantially. However, these gains in the
quantity of life say little about gains
in the quality of life.
Methods: Health-adjusted life expectancy (HALE), an indicator
of quality of life, was estimated for the household and
institutional populations combined every
four years from 1994/1995 to 2015. Health status was measured
by the Health Utilities Index Mark 3 instrument in two national
population health surveys, and
was used to adjust life expectancy. The percentage of the
population living in health-related institutions was estimated
based on the Census of Population.
Attribute-deleted HALE was calculated to determine how
various aspects of health status contributed to the differences
between life expectancy and HALE.
Results: HALE has increased in Canada. Greater gains among
males have narrowed the gap between males and females. The
ratio of HALE to life
expectancy changed little for males, and a marginal
improvement was observed for females aged 65 or older.
Mobility problems and pain, the latter mainly
among females, accounted for an increased share of the burden
of ill health over time. Exclusion of the institutional population
significantly increased the
estimates of HALE and yielded higher ratios of HALE to life
expectancy.

Interpretation: Although people are living longer, the share of
years spent in good functional health has remained fairly
constant. Data for both the household
and institutional populations are necessary for a complete
picture of health expectancy in Canada.
Keywords: Gender differences, health expectancy, Health
Utility Index, morbidity, mortality, summary measures of health
Authors: Tracey Bushnik ([email protected]) and Michael
Tjepkema are with the Health Analysis Division and Laurent
Martel is with the Demography
Division at Statistics Canada, Ottawa, Ontario.
Health-adjusted life expectancy in Canada
by Tracey Bushnik, Michael Tjepkema and Laurent Martel
Over the past century, life expectancy at birth in Canada has
risen substantially to 79.8 years for males, and 83.9 years
for females.1,2 These increases in the quantity of life say little
about the quality of life. How quality of life is keeping pace
with the increase in life expectancy is an important health
indicator.3,4
Health expectancy is a summary indicator that incorporates
information on mortality (such as life expectancy) and health
status (such as morbidity) into a single estimate that can be
considered a measure of quality of life.5-7 Health expectancy
rep-
resents the number of years of life lived in good health that
could
be expected,4 based on the average experience in a population if
current patterns of mortality and health states persisted.3,7,8
Several Canadian studies have estimated health expectancy
using various measures of health status (such as health utility

indices, prevalence of disability, incidence of disease) and data
sources.3,9-15 The most recent study found that, in general, the
health expectancy of the population living in private households
was relatively stable from 1994 to 2010, and that absolute gains
in health expectancy were due mainly to a decrease in mortality
with little change in morbidity.14 However, a limitation of this
and many other studies is exclusion of the institutional popula-
tion, who are more likely to be in ill health; excluding them
may
create an overly optimistic picture of population health.16
This study calculates health-adjusted life expectancy (HALE)
for the combined household and institutional population every
four years from 1994/1995 to 2015. Trends over time in health
status, life expectancy, and HALE are examined. Health status
is
estimated using the Health Utilities Index Mark 3 (HUI3)
instru-
ment,17 which has been used for previous estimates of HALE in
Canada.10,12-15 The study also discusses how HALE has
changed
relative to life expectancy. To better understand how specific
aspects of health status contribute to differences between HALE
and life expectancy, attribute-deleted HALE is estimated and
assessed over time.
Methods
Data sources
National Population Health Survey and Canadian
Community Health Survey
Estimates for the HUI3 are derived from responses to the
1994/1995 and 1998/1999 National Population Health Survey
(NPHS), and the 2001, 2005, 2009/2010 and 2015 Canadian
Community Health Survey (CCHS). Information about the
NPHS and the CCHS is available at www.statcan.gc.ca, and is

summarized briefly here.
The target population of the NPHS Household component was
residents of private households in the ten provinces, excluding
residents of Indian Reserves, Crown Lands, some remote areas
in Ontario and Quebec and health institutions, and full-time
members of the Canadian Forces. The selected household/
selected person response rates for the 1994/1995 and 1998/1999
NPHS were 88.7%/96.1% and 87.6%/98.5%, respectively. The
target population of the 1994/1995 NPHS Institution component
consisted of residents of health institutions (long-term, at least
four beds, and residents not autonomous) sampled in five geo-
graphic regions (Atlantic Provinces, Quebec, Ontario, Prairie
Provinces, and British Columbia) from three types of institu-
tion: institutions for the aged; cognitive institutions; and other
rehabilitative institutions. The selected institution/selected resi -
dent response rates in 1994/1995 were 95.5%/93.6%.
The CCHS covers the population aged 12 or older in the ten
provinces and three territories. Residents of Indian Reserves,
Crown lands, certain remote regions and institutions and full -
time members of the Canadian Forces are excluded; together
these exclusions represent less than 3% of the target population.
The combined household/selected person response rates for the
2001, 2005, 2009/2010, and 2015 CCHS were: 84.7%; 78.9%;
72.3% and 57.5%.
mailto:[email protected]
http://www.statcan.gc.ca
15Statistics Canada, Catalogue no. 82-003-X • Health Reports,
Vol. 29, no. 4, pp. 14-22, April 2018
What is already

known on this
subject?
■ Life expectancy has increased
substantially in Canada over the past
century
■ Life expectancy describes quantity
of life, whereas health-adjusted life
expectancy (HALE) describes quality
of life
■ As of 2010, there has been little
evidence of a faster increase in
HALE than in life expectancy among
the household population.
What does this study
add?
■ Between 1994/1995 and 2015, HALE
increased in Canada.
■ The gap between males and females
in life expectancy and in HALE
narrowed because of greater gains
by males.
■ Males spent a larger share of their
years of life in good functional health,
compared with females.
■ The percentage of years in good
functional health was relatively
unchanged over time for males, with
a marginal improvement for females

aged 65 or older.
■ The importance of sensory problems
declined, while mobility problems
and pain accounted for an increased
share of the burden of ill health.
■ Excluding the institutional population
significantly increased estimates of
HALE, resulting in higher ratios of
HALE to life expectancy, particularly
for people aged 65 or older.
49,747 (2015 - excludes the territories).
As well, 2,283 out of 2,287 institu-
tional respondents had a valid HUI3
in 1994/1995, 713 of which had been
imputed.
Census of Population
The Census of Population enumerates
the entire population, which consists
of Canadian citizens (by birth and by
naturalization), landed immigrants and
non-permanent residents and their fam-
ilies living with them in Canada (detailed
information is available at www12.
statcan.gc.ca/census-recensement/2016/
ref/index-eng.cfm). The census collected
information on dwelling type (private or
collective); type of collective dwelling
was used to estimate the percentage of
the population living in health-related
institutions in 1996, 2001, 2006, 2011,
and 2016.

Life tables
Life tables use provincial and territorial
mortality data from the Vital Statistics–
Death Database and population estimates
to calculate life expectancy at birth and at
different ages, death probabilities, prob-
abilities of survival between two ages,
years of life lived, and the number of
survivors at different ages.18 Life expect-
ancy and HALE were estimated for each
survey year using complete (by single-
year-of-age) life table data for males and
females for 1993-to-1995, 1997-to-1999,
2000-to-2002, 2004-to-2006, 2009-to-
2011, and 2013-to-2015.2
Measures
Health Utilities Index Mark 3 (HUI3)
The Health Utilities Index Mark 3
(HUI3) measures eight attributes of
self-reported health status: vision,
hearing, speech, ambulation, dex-
terity, emotion, cognition, and pain.17
A respondent’s attribute levels—from
normal to highly impaired—are sum-
marized by a weighted scoring function
into a single value representing their
overall health state. The value can range
from -0.36 (state worse than death; death
represented by 0) to 1.00 (best possible
health state).
This study uses data from respondents
with a valid HUI3. In general, the
household non-response rate for HUI3

was less than 1% in any survey year,
resulting in the following sample sizes
for this analysis: 15,989 (1994/1995);
16,408 (1998/1999); 129,834 (2001);
30,809 (2005); 121,606 (2009/2010) and
Institutional population
For this study, the institutional popula-
tion was defined as individuals living in
the following types of health-related col-
lective dwellings on census day: general
and specialty hospitals (including
chronic care, short- or long-term care);
nursing homes; residences for senior cit-
izens; group homes or institutions for the
physically handicapped and treatment
centres; and group homes and institutions
or residential care facilities for people
with psychiatric disorders or develop-
mental disabilities. Individuals not living
in such dwellings were considered to be
in the household population.
Statistical analysis
Health-adjusted life expectancy
(HALE)
To estimate HALE, mean HUI3 scores
by sex and age group were tabulated
for the household population in each
survey year and the institutional popu-
lation in 1994/1995. Age groups were:
0 to 11 (for the household population
in 1994/1995 and 1998/1999, the mean
value for 4- to 11-year-olds was assigned
to the entire 0-to-11 age group, and the

mean value from 1998/1999 was carried
forward to all subsequent years), 12 to 14
(HUI3 is available in the CCHS starting
at age 12), 15 to 24, 25 to 34, 35 to 44,
45 to 54, 55 to 64, 65 to 74, 75 to 84, and
85 or older. Survey weights were applied
so that the mean HUI3 estimates were
representative of the health status of the
underlying target populations by sex and
age group, and bootstrap weights were
applied so that the standard errors were
estimated taking into account each sur-
vey’s complex design.19
The percentages of people living in
private households and in health-related
institutions were estimated by sex and
age group using census data. Mean HUI3
scores (by sex and age group) for the
household population (HUI3 household)
in each survey year were multiplied by the
percentage in households by sex and age
group estimated from each census year
as follows (survey year*census year):
1994/1995*1996; 1998/1999*1996;
2001*2001; 2005*2006; 2009/2010*2011
www12.statcan.gc.ca/census-recensement/2016/ref/index-
eng.cfm
eng.cfm
eng.cfm

and 2015*2016. For the institutional
population, the mean HUI3 scores (by
sex and age group) in 1994/1995 (HUI3
institution) were carried forward to all
subsequent survey years, multiplied by
the percentage by sex and age group in
health-related institutions estimated from
each census year as shown above. The
resulting two values—HUI3 household
and HUI3 institution—were summed to
provide overall HUI3 scores by sex and
age group for each survey year. The vari-
ance of the overall HUI3 score by sex
and age group was estimated from the
sum of the variance of HUI3 household
multiplied by the square of the percentage
in households and the variance of HUI3
institution multiplied by the square of the
percentage in institutions.
HALE was estimated for each survey
year using a modified version of the
Sullivan method.20 The life expectancy
information from each three-year set of
complete life tables by sex was weighted
by the number of life-years lived at a par-
ticular age x using the mean HUI3 for that
age. The sum of the adjusted life-years
beyond age x was then divided by the
number of survivors at that age to yield
HALE by age and sex.6 The variance of
HALE was estimated using the method
proposed by Mathers,21 which takes sto-

chastic fluctuations in the observed death
probabilities and the mean global HUI3
scores into account.
Attribute-deleted HALE
Attribute-deleted HALE for the house-
hold and institutional populations was
estimated for 1994/1995 and 2015 to
determine how much of the difference
between HALE and life expectancy
was ascribed to each HUI attribute. To
produce attribute-deleted HALE, the
overall HUI3 score was recalculated for
the household and institutional popu-
lations separately six times, each time
assigning a perfect score (1.0) to one
attribute but leaving the others at their
actual levels. Vision, hearing, and speech
were combined into “sensory.”
There were no missing values for the
household population in 1994/1995 or
2015, but for the 1994/1995 institutional
population, missing values for each
attribute—vision (n = 271), hearing (n =
117), speech (n = 60), ambulation (n =
20), dexterity (n = 50), emotion (n = 185),
cognition (n = 95), and pain (n = 137)—
were assigned the average score by sex
and age group from those with complete
data for that attribute. The HUI3 esti-
mates for the institutional population in
1994/1995 were carried forward to 2015.
The attribute-deleted HUI3 estimates

for the household and institutional popu-
lations in each survey year were summed
to provide an overall attribute-deleted
HUI3 score by sex and age group in
1994/1995 and 2015.
Sensitivity analyses
The estimates of HUI3 for the insti-
tutional population that were used to
calculate HALE in 2015 were adjusted to
reflect three scenarios: 0.03 added to each
institutional respondent’s HUI3 score
from 1994/1995; 0.03 subtracted from
each HUI3 score; and the score replaced
by HUI3 values derived from the 2012
interRAI assessments of the nursing
home population in Ontario.22 The
amount 0.03 was selected because it is the
smallest difference in HUI3 that reflects
a meaningful change.23 Adjusted mean
values of HUI3 (up, down, and replaced)
were estimated by sex and age group, and
then multiplied by the percentage of the
population living in institutions in 2016
and combined with the HUI3 values for
the CCHS household population in 2015
for an overall HUI3 estimate. HALE in
2015 was then recalculated. A second
sensitivity analysis excluded the HUI3
estimates for the institutional population
from the HALE estimated at each period,
thereby limiting the results to the house-
hold population.
Results

Health status of household and
institutional populations
In 2015, the average HUI3 of men and
women in the household population
who were younger than 65 was similar
to that in 1994/1995 (Table 1). For those
aged 65 or older, the average HUI3 in
2015 was higher than in 1994/1995.
Owing to the increased likelihood of
institutionalization with advancing age,
estimates for household residents are less
representative of the older population. In
Table 1
Mean HUI3 scores, by sex and age group, household and
institutional population,
Canada, 1994/1995, 1998/1999, 2001, 2005, 2009/2010 and
2015
Sex/Age
group
Household population
Institutional
population
1994/1995 1998/1999 2001 2005 2009/2010 2015 1994/1995
Mean SE Mean SE Mean SE Mean SE Mean SE Mean SE Mean
SE
Males
15 to 24 0.889 0.007 0.940 0.005 0.915 0.002 0.897 0.005 0.913
0.002 0.892 0.006 0.556 0.192
25 to 34 0.900 0.006 0.943 0.004 0.919 0.003 0.915 0.004 0.916
0.003 0.902 0.004 0.193 0.060

35 to 44 0.897 0.006 0.922 0.006 0.903 0.002 0.900 0.006 0.904
0.003 0.898 0.004 0.331 0.050
45 to 54 0.872 0.007 0.894 0.006 0.879 0.003 0.883 0.007 0.882
0.003 0.873 0.004 0.308 0.081
55 to 64 0.847 0.010 0.873 0.008 0.858 0.004 0.861 0.007 0.865
0.004 0.852 0.006 0.345 0.072
65 to 74 0.816 0.010 0.806 0.011 0.832 0.004 0.856 0.007 0.850
0.003 0.849 0.006 0.219 0.038
75 to 84 0.753 0.019 0.740 0.023 0.753 0.008 0.771 0.013 0.788
0.006 0.782 0.010 0.146 0.024
85 or older 0.592 0.053 0.644 0.056 0.591 0.019 0.619 0.042
0.627 0.024 0.614 0.033 0.170 0.030
Females
15 to 24 0.882 0.007 0.933 0.004 0.907 0.002 0.895 0.005 0.906
0.003 0.872 0.005 0.584 0.181
25 to 34 0.895 0.006 0.912 0.009 0.908 0.002 0.904 0.005 0.918
0.002 0.900 0.004 0.138 0.070
35 to 44 0.889 0.006 0.910 0.005 0.888 0.002 0.898 0.005 0.898
0.003 0.878 0.005 0.155 0.065
45 to 54 0.839 0.009 0.875 0.009 0.862 0.003 0.874 0.005 0.863
0.004 0.850 0.007 0.305 0.079
55 to 64 0.828 0.009 0.849 0.009 0.845 0.003 0.850 0.006 0.849
0.003 0.836 0.006 0.265 0.070
65 to 74 0.787 0.014 0.823 0.009 0.826 0.004 0.836 0.007 0.832
0.003 0.825 0.006 0.196 0.038
75 to 84 0.708 0.016 0.727 0.016 0.729 0.006 0.758 0.012 0.762
0.006 0.762 0.009 0.157 0.025
85 or older 0.571 0.036 0.572 0.033 0.588 0.014 0.584 0.028
0.629 0.012 0.620 0.019 0.097 0.016
HUI3 = Health Utility Index Mark 3
SE = standard error
Sources: 1994/1995 and 1998/1999 National Population Health
Survey; 2001, 2005, 2009/2010 and 2015 Canadian Community
Health Survey.

Vol. 29, no. 4, pp. 14-22, April 2018
2016, 5.7% of men and 9.1% of women
aged 75 to 84, and 23.1% of men and
35.6% of women aged 85 or older lived
in health-related institutions.
According to the 1994/1995 NPHS,
the average HUI3 of the institutional
population was substantially lower
than that of the household population
(Table 1). For men aged 75 to 84, average
HUI3 was .146 for the institutional popu-
lation versus .753 for the household
population; for men aged 85 or older, the
figures were .170 versus .592. Similar
differences were observed for women in
these age groups: .157 versus .708, and
.097 versus .571.
Life expectancy and HALE
Between 1994/1995 and 2015, life
expectancy and HALE increased among
both sexes and at all ages (Appendix
Table A). Male life expectancy at birth
rose from 74.9 to 79.8 years, and HALE,
from 65.0 to 69.0 years (Figure 1).
Females’ life expectancy at birth
Figure 1

Life expectancy and health-adjusted life expectancy (HALE) at
birth, by sex, household and institutional populations combined,
Canada, 1994/1995, 1998/1999, 2001, 2005, 2009/2010 and
2015
Health Survey; 1996, 2001, 2006, 2011 and 2016 Census
of Population; life tables for 1993-to-1995, 1997-to-1999, 2000-
to-2002, 2004-to-2006, 2009-to-2011 and 2013-to-2015.
years
Males
years
Females
Life expectancy HALE
60
64
68
72
76
80
84
1994/1995 1998/1999 2001 2005 2009/2010 2015
60

64
68
72
76
80
84
1994/1995 1998/1999 2001 2005 2009/2010 2015
Figure 2
Increase in life expectancy and health-adjusted life expectancy
(HALE) between 1994/1995 and 2015 at selected ages, by sex,
household and institutional populations combined, Canada
Sources: 1994/1995 National Population Health Survey; 2015
Canadian Community Health Survey; 1996 and 2016 Census of
Population; life tables for 1993-to-1995 and 2013-to-2015.
age
Males
age
Females
Life expectancy HALE
Increase in years Increase in years
0 1 2 3 4 5
At birth

20
35
45
55
65
75
85
0 1 2 3 4 5
At birth
20
35
45
55
65
75
85

increased from 80.9 to 83.9 years, and
HALE, from 67.8 to 70.5 years.
Among males, the absolute increase
was greater for life expectancy than for
HALE (Figure 2). For example, during
the past 20 years, at age 65, men gained
3.3 years of life expectancy and 2.7 years
of HALE. By contrast, among females,
the absolute increase in life expectancy
and HALE was similar but lower than for
males. Consequently, the gap between
males and females in years of life expect-
ancy and HALE has narrowed over time.
HALE relative to life expectancy
The ratio of HALE to life expectancy—
the percentage of years spent in good
functional health—changed marginally
between 1994/1995 and 2015 (Figure 3).
Change among males was negligible
at all ages, whereas among females, a
modest gain was apparent at age 65 or
older. Nevertheless, at all ages and at all
time points, a smaller share of females’
remaining years was spent in good health
compared with males. For example,
in 1994/1995 and in 2015, at age 20,
females could expect to spend 81% of
their remaining years in good health; the
percentage for males was 85%.
Attribute-deleted HALE
The HUI3 is comprised of six health

attributes: sensory, mobility, dexterity,
emotion, cognition, and pain. The rela-
tive importance of each in explaining
the difference between HALE and life
expectancy (years of ill health) varied by
age and sex, and over time. At age 20,
for both sexes, pain was a greater source
of diminished health in 2015 than it had
been in 1994/1995 (Table 2). The relative
importance of mobility also increased
slightly, while that of sensory problems
declined.
At age 65, mobility became a more
important source of diminished health for
males; mobility and pain became more
important for females (Table 2). Sensory
problems declined in relative importance
for seniors of both sexes.
When estimates of attribute-deleted
HALE were restricted to the household
population, in both periods (1994/1995
and 2015), the percentage of years in ill
health due to pain was higher at both ages
(at age 20 and at age 65), while the per-
centage assigned to the combined effect
of multiple attributes (the residual) was
lower (results not shown).
Sensitivity analyses
Recalculating HALE in 2015 by
assuming a 0.03 increase or a 0.03
decrease in individual HUI3 for the insti-
tutional population from 1994/1995, or

by using the HUI3 based on the 2012
interRAI assessments, had little effect on
HALE, even at the oldest ages (results not
shown). Recalculating HALE excluding
the institutional population, however,
resulted in increased values, particularly
among females (results not shown). It
also yielded higher ratios of HALE to
life expectancy for both sexes (Figure 4).
The exclusion had little effect on ratios
at birth or at age 20, but at older ages,
it resulted in a larger share of remaining
years in good functional health.
Figure 3
Ratio of health-adjusted life expectancy (HALE) to life
expectancy (LE) at selected
ages, by sex, household and institutional populations combined,
Canada, 1994/1995,
1998/1999, 2001, 2005, 2009/2010 and 2015
HALE/LE
Survey; 2001, 2005, 2009/2010 and 2015 Canadian
Community Health Survey; 1996, 2001, 2006, 2011 and 2016
Census of Population; life tables for 1993-to-1995, 1997-to-
1999,
2000-to-2002, 2004-to-2006, 2009-to-2011 and 2013-to-2015.
Males
At birth
Age 20

Age 35
Age 45
Age 55
Age 65
Age 75
Age 85+
Females
At birth
Age 20
Age 35
Age 45
Age 55
Age 65
Age 75
Age 85+
0.35
0.45
0.55

0.65
0.75
0.85
1994/1995 1998/1999 2001 2005 2009/2010 2015
0.35
0.45
0.55
0.65
0.75
0.85
1994/1995 1998/1999 2001 2005 2009/2010 2015
Vol. 29, no. 4, pp. 14-22, April 2018
Table 2
Difference (years) between life expectancy and health-adjusted
life expectancy at
ages 20 and 65, by sex and HUI3 attribute, household and
institutional population
combined, Canada, 1994/1995 and 2015
Attribute

and sex
Age 20
Attribute
and sex
Age 65
1994/1995 2015 1994/1995 2015
Years % Years % Years % Years %
Males Males
Overall† 8.6 100.0 9.4 100.0 Overall† 4.1 100.0 4.7 100.0
Cognition 2.3 26.7 2.4 25.5 Sensory 1.0 24.4 1.0 21.3
Pain 1.8 20.9 2.2 23.4 Pain 0.8 19.5 0.9 19.1
Sensory 1.7 19.8 1.5 16.0 Cognition 0.8 19.5 0.9 19.1
Emotion 1.2 14.0 1.1 11.7 Mobility 0.4 9.8 0.6 12.8
Mobility 0.5 5.8 0.7 7.4 Emotion 0.3 7.3 0.3 6.4
Dexterity 0.1 1.2 0.1 1.1 Dexterity 0.1 2.4 0.1 2.1
Residual‡ 1.0 11.6 1.4 14.9 Residual‡ 0.7 17.1 0.9 19.1
Females Females
Overall† 11.9 100.0 12.1 100.0 Overall† 6.6 100.0 6.7 100.0
Cognition 2.7 22.7 2.8 23.1 Sensory 1.4 21.2 1.0 14.9
Pain 2.6 21.8 3.2 26.4 Pain 1.2 18.2 1.4 20.9
Sensory 2.2 18.5 1.7 14.0 Cognition 1.2 18.2 1.1 16.4
Emotion 1.3 10.9 1.1 9.1 Mobility 0.8 12.1 1.1 16.4
Mobility 0.9 7.6 1.2 9.9 Emotion 0.4 6.1 0.4 6.0
Dexterity 0.2 1.7 0.1 0.8 Dexterity 0.1 1.5 0.1 1.5
Residual‡ 1.9 16.8 2.0 16.5 Residual‡ 1.5 22.7 1.6 23.9
† sum of differences assigned to each attribute, plus residual
‡ contribution of combined effects of multiple attributes
HUI3 = Health Utilities Index Mark 3
Note: Percentages may not add up to 100 due to rounding.
Sources: 1994/1995 National Population Health Survey and
2015 Canadian Community Health Survey; 1996 and 2016

Census
of population; life tables for 1993-to-1995 and 2013-to-2015.
The present study measured health
expectancy using the Health Utilities
Index Mark 3 (HUI3) instrument, which
assigns an overall score to a respondent’s
self-reported level of impairment associ-
ated with sensory (vision, hearing, and
speech), ambulation, dexterity, emotion,
cognition, and pain. Over time, sensory
problems accounted for a smaller share
of the burden of ill health for both sexes,
while mobility problems increased in
relative importance. A decline in the
prevalence of sensory problems has also
been reported in the United States,31 as
has an increase in mobility disability.32
The present study found that pain
accounted for a greater share of ill health
among females, whereas Stewart et al.27
reported a decrease in pain prevalence
between 1987 and 2008. This differ-
ence might reflect how pain was defined.
The Stewart study pertained to pain that
interfered with normal work, but pain in
the present study prevented activities in
general.
If morbidity is compressed into a
shorter period before death, the impact
is less severe than if longer life involved
many years of costly care and treat-
ment of illness and disability.31 The
present study found that the ratio of
HALE to life expectancy remained rela-

tively stable for people younger than
65, which suggests neither compression
nor expansion of morbidity relative to
life expectancy. For females aged 65 or
older, the ratio increased marginally, as
their self-reported health status improved
slightly over time. Cutler et al. reported
an improvement in the ratio of disabil-
ity-free life expectancy to life expectancy
between 1991 and 2009 for men and
women aged 65 or older in the U.S., with
greater improvements among women.31
Findings from other studies are mixed.
Although it has been suggested that more
populations worldwide are spending
more time with functional health loss,5
Freedman et al. reported improvements
between 1982 and 2011 in the percentage
of years expected to be lived without a
disability for males in the United States
and little change for females.26 By con-
trast, in Canada, Steensma et al. found
little change for either sex in the per-
centage of life spent in an unhealthy state
Discussion
Over the past 20 years, life expectancy
and HALE increased in Canada, and the
gap between the sexes narrowed because
of greater gains by males. In 2015,
HALE at birth was 69.0 years for males
and 70.5 years for females, increases
of 4.0 and 2.7 years, respectively, since
1994/1995. Throughout the period, the
ratio of HALE to life expectancy—the
share of years in good functional health—

was higher for males than for females.
However, there was little change in this
ratio over time for males, but a marginal
improvement among women aged 65 or
older. The importance of sensory prob-
lems as a source of diminished health
declined for both sexes, while mobility
and pain, the latter among females,
accounted for a higher percentage of the
burden of ill health.
The well-documented increase in
life expectancy in Canada is due in
large part to a decline in late-life mor-
tality since the 1950s.24,25 That HALE
also increased has been reported in
Canada and elsewhere,14,26,27 although
how much of the improvement that can
be attributed to reductions in morbidity
versus mortality depends on the health
expectancy indicator. A study based on
the HUI3 reported that gains in HALE
came primarily through improvements in
mortality,14 whereas studies using other
measures found that declines in symp-
toms and impairments27 or in disability
prevalence26 accounted for some of the
improvement.
The present study found differences
in life expectancy and HALE between
males and females. Narrowing of the life
expectancy gap between the sexes has
been attributed to factors that include a
reduction in violent deaths among male

teenagers and young adults, better treat-
ment for cardiovascular diseases, and
increasing similarity in women’s and
men’s behaviour, notably, smoking,
drinking, and work-related stress.1 That
males spend a greater share of their lives
in good functional health compared with
females has been reported in many coun-
tries.26,28-30 Women may live longer with
illness because their health problems are
less lethal, whereas men may be more
likely to suffer from conditions that lead
to earlier death.29
between 1994 and 2010.14 Data from the
Canadian Chronic Disease Surveillance
System, on the other hand, suggest that
from 2000 to 2011, a growing percentage
of people were living with diseases
including ischemic heart disease, chronic
obstructive pulmonary disorder, and dia-
betes, all of which decreased in incidence
among those 50 or older, but increased
in prevalence.33 These seemingly con-
tradictory findings point to the difficulty
of drawing definitive conclusions from
studies with different data sources, target
populations, reference periods, and indi-
cators of health expectancy.34

Strengths and limitations
This study has many strengths. HUI3 is
a continuous scale, which makes it less
sensitive to measurement error than
dichotomous estimates of health status
such as prevalence of disability. Data
were available over a 20-year period.
HALE was estimated not only for the
household population, but also incorpor-
ated the health status and the percentage
of people in health-related institutions,
thereby providing a more complete
picture of health expectancy. Without the
institutional population, HALE would
have been significantly higher, particu-
larly at age 65 or older.
At the same time, the lack of recent
estimates of the health status of the
institutional population is a limitation
and a major data gap. Although this
population is included in administrative
databases that collect information about
diseases and chronic conditions, national
information about their health-related
quality of life is not regularly collected.
Life expectancy and HALE for the year
2015 were based on life table data for the
2013-to-2015 period, which was the most
recent available. Variations in the collec-
tion modes of the NPHS and the CCHS,
and declining CCHS response rates
could affect health-related estimates over
time.35,36 Although applying the survey

weights ensured that the sample was rep-
resentative of the target population, bias
might exist if non-respondents differed
systematically from respondents.
Conclusion
Life expectancy and HALE have
increased over time in Canada. The gap
between males and females has narrowed
because of greater gains by males during
the past 20 years. The ratio of HALE
to life expectancy has remained stable,
which suggests neither a reduction nor
improvement in overall functional health
relative to life expectancy. Mobility prob-
lems and pain, the latter mainly among
females, now account for a greater per-
centage of the burden of ill health. Future
years of data for both the household and
institutional populations are necessary to
provide further insight into the compon-
ents of and trends in health expectancy.
Acknowledgements
The authors gratefully acknowledge the
help of Philippe Finès who provided the
syntax to produce the variance estimates
for HALE. ■
Figure 4
Ratio of health-adjusted life expectancy (HALE) to life
expectancy (LE) at selected
ages, with and without institutional population, by sex, Canada,
1994/1995,
1998/1999, 2001, 2005, 2009/2010 and 2015
HALE/LE

Survey; 2001, 2005, 2009/2010 and 2015 Canadian
Community Health Survey; 1996, 2001, 2006, 2011 and 2016
Census of Population; life tables for 1993-to-1995, 1997-to-
1999, 2000-to-2002, 2004-to-2006, 2009-to-2011 and 2013-to-
2015.
Males
Females
At birth
(household only)
At birth
Age 20
(household only)
Age 20
Age 65
(household only)
Age 65
Age 85+
(household only)
Age 85+
At birth
(household only)
At birth

Age 20
(household only)
Age 20
Age 65
(household only)
Age 65
Age 85+
(household only)
Age 85+
0.35
0.45
0.55
0.65
0.75
0.85
1994/1995 1998/1999 2001 2005 2009/2010 2015
0.35
0.45
0.55

0.65
0.75
0.85
1994/1995 1998/1999 2001 2005 2009/2010 2015
Vol. 29, no. 4, pp. 14-22, April 2018
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https://open.canada.ca/data/en/dataset/9525c8c0-554a-461b-
a763-f1657acb9c9d
a763-f1657acb9c9d
a763-f1657acb9c9d
Appendix
Table A
Life expectancy (LE) and health-adjusted life expectancy
(HALE) at selected ages, by sex, Canada, 1994/1995,
1998/1999, 2001, 2005,
2009/2010 and 2015
1994/1995 1998/1999 2001 2005 2009/2010 2015
Years SE Years SE Years SE Years SE Years SE Years SE
Males
At birth LE 74.9 0.02 76.0 0.02 76.9 0.02 77.9 0.02 79.1 0.02
79.8 0.02
HALE 65.0 0.07 67.4 0.07 67.3 0.04 68.1 0.06 69.3 0.04 69.0
0.06
Age 20 LE 55.9 0.02 56.8 0.02 57.7 0.02 58.7 0.02 59.8 0.02
60.5 0.02
HALE 47.3 0.06 49.3 0.06 49.3 0.03 50.2 0.05 51.3 0.03 51.1

0.05
Age 35 LE 41.7 0.02 42.5 0.02 43.4 0.02 44.3 0.02 45.5 0.02
46.1 0.02
HALE 34.6 0.06 35.8 0.06 36.1 0.03 37.2 0.05 38.1 0.03 38.2
0.04
Age 45 LE 32.5 0.02 33.2 0.02 33.9 0.02 34.9 0.02 36.0 0.02
36.6 0.02
HALE 26.3 0.06 27.2 0.06 27.6 0.03 28.7 0.05 29.5 0.03 29.6
0.04
Age 55 LE 23.6 0.02 24.2 0.02 25.0 0.02 25.9 0.02 26.9 0.02
27.6 0.02
HALE 18.5 0.05 19.1 0.06 19.7 0.03 20.7 0.05 21.5 0.03 21.7
0.04
Age 65 LE 15.9 0.02 16.3 0.02 17.0 0.02 17.7 0.02 18.6 0.02
19.2 0.02
HALE 11.8 0.05 12.0 0.06 12.6 0.02 13.5 0.04 14.2 0.03 14.4
0.04
Age 75 LE 9.7 0.02 9.9 0.02 10.3 0.02 10.8 0.02 11.5 0.02 12.0
0.02
HALE 6.4 0.05 6.5 0.06 6.8 0.02 7.3 0.05 7.9 0.03 8.0 0.04
Age 85
or older
LE 5.4 0.02 5.3 0.02 5.5 0.02 5.7 0.02 6.1 0.02 6.4 0.02
HALE 2.7 0.07 2.8 0.08 2.7 0.03 3.0 0.06 3.2 0.04 3.3 0.05
Females
At birth LE 80.9 0.02 81.4 0.02 81.9 0.02 82.6 0.02 83.5 0.02
83.9 0.02

HALE 67.8 0.08 70.1 0.07 69.8 0.03 70.6 0.06 71.3 0.04 70.5
0.05
Age 20 LE 61.7 0.02 62.1 0.02 62.5 0.02 63.2 0.02 64.0 0.02
64.5 0.02
HALE 49.8 0.07 51.6 0.07 51.5 0.03 52.3 0.05 53.0 0.03 52.3
0.05
Age 35 LE 47.0 0.02 47.4 0.02 47.8 0.02 48.5 0.02 49.3 0.02
49.8 0.02
HALE 36.7 0.07 38.1 0.06 38.1 0.03 39.1 0.05 39.5 0.03 39.2
0.04
Age 45 LE 37.5 0.02 37.8 0.02 38.2 0.02 38.9 0.02 39.7 0.02
40.1 0.02
HALE 28.2 0.07 29.3 0.06 29.6 0.03 30.4 0.05 30.8 0.03 30.7
0.04
Age 55 LE 28.3 0.02 28.6 0.02 29.0 0.02 29.6 0.02 30.4 0.02
30.8 0.02
HALE 20.4 0.06 21.2 0.05 21.5 0.03 22.2 0.04 22.7 0.03 22.7
0.04
Age 65 LE 19.8 0.02 20.0 0.02 20.3 0.02 20.9 0.02 21.6 0.02
22.0 0.02
HALE 13.2 0.06 13.8 0.05 14.1 0.02 14.7 0.04 15.2 0.02 15.3
0.03
Age 75 LE 12.5 0.02 12.5 0.02 12.7 0.02 13.2 0.02 13.8 0.02
14.1 0.01
HALE 7.1 0.05 7.3 0.05 7.5 0.02 8.0 0.04 8.4 0.02 8.5 0.03
Age 85
or older
LE 6.8 0.02 6.7 0.02 6.8 0.01 7.0 0.01 7.4 0.01 7.6 0.01

HALE 2.7 0.05 2.7 0.04 2.8 0.02 3.0 0.04 3.3 0.02 3.3 0.03
SE = standard error
Health Survey; 1996, 2001, 2006, 2011 and 2016 Census of
Population;
life tables for 1993-to-1995, 1997-to-1999, 2000-to-2002, 2004-
to-2006, 2009-to-2011 and 2013-to-2015.
Statistics Canada information is reproduced with the permission
of the Minister of Industry,
as Minister responsible for Statistics Canada. Information on
the availability of data from
Statistics Canada can be obtained from Statistics Canada's
Regional Offices, www.statcan.ca,
or by calling 1-800-263-1136.
Can a company focused on happiness be successful? Zappos, an
online retailer, is proving it can. Tony Hsieh, CEO of Zappos
says, “It’s a brand about happiness, whether to customers or
employees or even vendors.” Its zany corporate culture and
focus on customer satisfaction has made Zappos both
successful and a model for other companies. Zappos has built a
culture of integrity in all of its activities. The company provides
an incredible example of managing ethics and social
responsibility by addressing challenges and responding to stake-
holder issues.
This case examines how the company’s focus on stakeholder
happiness contributed to its success. First, we examine the
history of Zappos, its core values, and unique business model.
Next, we analyze its corporate culture and how it influences its
relationships with employees, customers, the environment, and

communities. We then look at some of the challenges the
company faced and how it plans to move into the future.
HISTORY
Nick Swinmurn founded Zappos in 1999 after a fruitless day
spent shopping for shoes in San Francisco. After looking online,
Swinmurn decided to quit his job and start a shoe website that
offered the best selection and best service. Originally called
ShoeSite.com, the company started as a middleman, transferring
orders between customers and suppliers but not holding any
inventory (a “drop ship” strategy). The website was soon
renamed Zappos, after the Spanish word for shoes (zapatos).
In 2000 entrepreneur Tony Hsieh became the company’s CEO.
Hsieh, 26 at the time, was an early investor in Zappos, having
made $265 million selling his startup company to Microsoft in
1998. Hsieh was not initially sold on the idea of an Internet
shoe store, but he could not help but become involved. After
becoming CEO, Hsieh made an unconventional decision to keep
Zappos going, even selling his San Francisco loft to pay for a
new warehouse and once setting his salary at just $24.
Zappos struggled for its first few years, making sales but not
generating a profit. The dot-com crash forced Zappos to lay off
half its staff, but the company recovered. By the end of 2002,
Zappos had sales of $32 million but was still not profitable. In
2003 the company decided in order to offer the best customer
service, it had to control the whole value chain—from order to
fulfillment to delivery—and began holding its entire inven-
tory. Zappos moved to Las Vegas in 2004 to take advantage of a
larger pool of experienced call-center employees. The company
generated its first profit in 2007 after reaching $840 milli on in
annual sales. Zappos started to be recognized for its unique
work environment and responsible business practices, as well as
its approach to customer service.
In 2009 Amazon bought the company for $1.2 billion. Although
Hsieh rejected an offer from Amazon in 2005, he believed this
buyout would be better for the company than management from
the current board of directors or an outside investor. Amazon

agreed to let Zappos operate independently and keep Hsieh as
CEO (at his current $36,000 annual salary). Hsieh made $214
million from the acquisition, and Amazon set aside $40 million
for distribution to Zappos employees. After the acquisition, the
company restructured into 10 separate companies organized
under the Zappos Family. Zappos was able to keep its unique
culture and core values.
CORE VALUES
Zappos has 10 core values that guide every activity at the
company and form the heart of the company’s business model
and culture.
Deliver WOW through service.
Embrace and drive change.
Create fun and a little weirdness.
Be adventurous, creative, and open-minded.
Pursue growth and learning.
Build open and honest relationships with communication.
Build a positive team and family spirit.
Do more with less.
Be passionate and determined.
Be humble.*
These core values differ from those of other companies in
several ways. In addition to being untraditional, the core values
create a framework for the company’s actions. This is
exemplified in the company’s commitment to its customers’ and
employees’ well-being and satisfaction.
ZAPPOS’S CUSTOMER-FOCUSED BUSINESS MODEL
The Zappos business model is built around developing long-
term customer relationships. Zappos does not compete on price
because it believes customers want to buy from the business
with the best service and selection. The company strives to
create a unique and addicting shopping experience, offering a
wide selection of shoes, apparel, accessories, and home
products, free shipping to the customer, free shipping and full

refunds on returns, and great customer service. Everything at
Zappos comes down to customer service, exemplified by its
tagline “Powered by Service.”
Shopping and Shipping
Zappos strives to make the shopping experience enjoyable. The
website is streamlined for an easy shopping experience.
Products are grouped in specialized segments, with some (like
outdoor products) on their own mini-sites. Customers view each
product from multiple angles thanks to photographs taken at
the company’s studio, and Zappos employees make short videos
highlighting the products’ features. Zappos analyzes how
customers navigate the site to improve features, adapt search
results, and plan inventory.
The spirit of simplicity, innovation, and great service extends to
Zappos’s inventory and distribution systems as well. Zappos has
one of the few live inventory systems on the Web. If the Zappos
website displays an item, it is in stock. Once the company sells
out of an item, the listing is removed from the website. This
reduces customer frustration. Its inventory and shipping
systems are linked directly to the website via a central database,
and all its information systems are developed in-house and
customized to the company’s needs. Its warehouses operate
around the clock, which allows it to get a product to the
customer faster. Fast shipping creates an instant gratification
similar to shopping in a physical store.
Most companies have a negative view toward returns, but
Zappos has the opposite mentality. It sees returns as the ability
to maintain customer relationships and to increase its profits.
Zappos offers a 100 percent satisfaction guaranteed return
policy. If customers are not satisfied with a purchase, they can
return it within 365 days for a full refund. The customer prints a
prepaid shipping label that allows all domestic customers to
return the product for free. This return policy encourages
customers to order several styles or different sizes and return
the items that do not work out.

While this strategy seems expensive, it actually works to
Zappos’s advantage. The average industry merchandise return
rate is 35 percent, but the company’s most profitable
customers tend to return 50 percent of what they purchase. The
customers who have the higher return percentages are the most
profitable because they experienced Zappos’s customer service
and return policy, which creates loyalty to the company. These
customers are likely to make purchases more often and to spend
more on each purchase. This is what helps make Zappos so
successful.
Customer Service
What makes the Zappos business model unique is the company’s
focus on customer service. The company established a method
of serving customers and handling their issues distinctive from
the rest of the industry. Zappos believes great customer service
is an opportunity to make the customer happy.
Customers are encouraged to call Zappos with any questions.
The number is displayed on every page of the website.
According to Hsieh, Zappos encourages people to call the
company because more interaction with customers increases
their personal connections with the organization. Customer
service representatives actively use social media sites such as
Facebook and Twitter to respond to customer issues. Zappos
also offers an app for customers to download. To encourage
them to use the app, Zappos offers users 1-day free shipping
simply for downloading the app to their devices.
Another key aspect of its customer service model is that nothing
is scripted. Zappos employees have free rein in their decision
making and are expected to spend as much time as they need to
“wow” customers. They help customers shop, even on their
competitors’ websites, encourage them to buy multiple sizes or
colors to try (since return shipping is free), and do anything it
takes to make the shopping experience memorable.
Zappos’s customer service representatives develop relationships
with customers and make them happy. Stories about great

customer service include customer support calls that last for
hours, sending flowers to customers on their birthdays, and
surprise upgrades to faster shipping. Some extreme cases
included Zappos hand-delivering shoes to customers who lost
luggage and to a groom who forgot the shoes for his wedding.
Zappos has even sent pizzas to the homes of customers who
tweeted to the company about being hungry.
Zappos believes great customer experiences encourage
customers to use the store again. In addition, its long-term
strategy is based on the idea that great customer service will
help it expand into other categories. While around 80 percent of
company orders come from shoes, the markets for housewares
and apparel are much larger. The company says it will expand
into any area it is passionate about and meets customers’ needs.
The company considers word-of-mouth marketing to be the best
way to reach new customers. With over 75 percent of purchases
made by repeat customers, it is evident that the Zappos mission
to “provide the best customer service possible” works well for
the company. Zappos has also engaged in forms of buzz
marketing to spread the word. At one of the annual “Life is
Beautiful” festivals in Las Vegas, Nevada, Zappos developed a
Porta Party. This Zappos-branded mobile restroom included 40-
inch waterproof television mon- itors, a “selfie station,” and
prizes such as gum, whistles, and glow sticks given each time
the user flushed. This fun and unusual public relations initiative
was a hit among consumers and fit in well with the firm’s zany
culture.
TRANSPARENCY
Transparency is a critical part of the Zappos model.
Transparency is an ethical principle that involves maintaining
open and truthful communication. Employees receive detailed
information about the company’s performance and are
encouraged to share information about the company. Zappos
believes employees should develop open and honest relation-
ships with all stakeholders in the hope this will assist in

maintaining the company’s reputation. Hsieh uses Facebook
and Twitter to share information with employees and customers
(he has 2.84 million followers on Twitter). When Zappos laid
off 124 employees in 2008, Hsieh announced the decision via
Twitter and later blogged about it. Although some companies
hesitate to open themselves to public criticism, Zappos feels it
has nothing to hide. In fact, most of the public posts on its
social media sites are praise from customers.
ZAPPOS INSIGHTS
The Zappos business model is so successful the company offers
tours and workshops. Its three-day culture camp costs $6,000
and teaches participants about the Zappos culture and how to
develop their own successful corporate cultures. The company
also created Zappos Insights, an online service that allows
subscribers to learn more about Zappos’s business practices
through blogs and videos. These programs have high profit
potential for the company because they are built on what
Zappos already does best.
CORPORATE CULTURE
The corporate culture at Zappos sets it apart from nearly every
other company. It even caught the attention of Amazon CEO,
Jeff Bezos, who described the company’s corporate culture as
one-of-a-kind. Zappos’s unorthodox culture is the work of CEO
Tony Hsieh, an innovative and successful entrepreneur. Hsieh
built the culture on the idea that if you can attract talented
people and employees enjoy their work, great service and brand
power nat- urally develops. This culture is built on an ethical
foundation that respects all stakeholders. All aspects of
Zappos’s operations are built on integrity.
WORK ENVIRONMENT
Zappos is famous for its relaxed and wacky atmosphere.
Employee antics include nerf ball wars, office parades, ugly
sweater days, and donut-eating contests. The headquarters fea-

ture an employee nap room, a wellness center, and an open mic
in the cafeteria. Other quirky activities include forcing
employees to wear a “reply-all” hat when they accidentally send
a company-wide email. This environment isn’t just fun; it’s also
strategic. According to Zappos, “When you combine a little
weirdness with making sure everyone is also having fun at
work, it ends up being a win-win for everyone: Employees are
more engaged in the work that they do, and the company as a
whole becomes more innovative.”
Hiring and Training
The key to creating a zany work environment lies in hiring the
right people. The job application features a crossword puzzle
about Zappos and asks potential employees questions about
which superhero they’d like to be and how lucky they are. They
may also check how potential employees treat people like their
shuttle driver. Zappos is looking for people with a sense of
humor who can work hard and play hard. Potential employees
go through both cultural and technical interviews to make sure
their character fits with a high-integrity company. However,
even Hsieh admits finding great employees is tough. He
believes pursuing too much growth at once harms the company
if the organization starts caring more about the quantity of new
employees rather than the quality. Zappos gets approximately
30,000 job applications annually.
All new employees attend a five-week training program that
includes two weeks on the phones providing customer service
and a week filling orders in a warehouse. To make sure new
employees feel committed to a future with the company, Zappos
offers $2,000 to leave the company after the training (call ed
“The Offer”). Amazon has adopted a similar practice.
Even after the initial training is over, employees take 200 hours
of classes with the company—covering everything from the
basics of business to advanced Twitter use—and read at least
nine business books a year.

Benefits
Another aspect of Zappos that is unique is the benefits it
provides to its employees. The company has an extensive health
plan that pays 100 percent of employee medical benefits and on
average 85 percent of medical expenses for employees’
dependents. The company provides employees with dental,
vision, and life insurance. Other benefits include a flexible
spending account, prepaid legal services, a 40 percent employee
discount, free lunches and snacks, paid volunteer time, life
coaching, and a car pool program.
Along with the extensive benefits package, Zappos developed a
compensation model for its “Customer Loyalty Team” (call -
center representatives) that incentivizes employee development.
At Zappos the goal is to answer 80 percent of customer
inquiries within 20 seconds, although employees are encouraged
to take the time needed to ensure quality service. Initially,
employees were paid $11 per hour for the first 90 days. After 90
days, the employee moved to $13 per hour. To move beyond $13
an hour, employees had to demonstrate growth and learning by
completing specific skill set courses that allow employees to
specialize in certain areas of the call center. Employees were
given freedom to choose the shifts they wanted based on
seniority. Although the reasoning for Zappos’s compensation
model is to motivate employees and promote personal growth,
the base pay was less than the national hourly average of $15.92
earned by call-center representatives.
Zappos determined that the pay structure and the process for
employee shift sign- ups were inefficient for the company’s
needs. With Hsieh’s encouragement the company adopted
scheduling software called Open Market. Under this new
system, call-center employees would be given 10 percent time
flexibility to pursue their own projects. Employ- ees could
decide when to work, but the compensation system was
revamped to mimic the surge-time pricing of popular ride-
sharing service Uber. With this compensation system, call -
center employees working during periods of high demand would

receive higher pay. In other words, Zappos’s hourly
compensation for its call-center employees would be based on
demand. Zappos hopes to expand this system to all departments
eventually. For seniority-based jobs, this system holds risks.
For instance, seniority-based incentives also take into account
company loyalty, camaraderie with coworkers, and dedication
that are also important to work productivity. However, Zappos
believes the system works well for its call-center employees
because many employees are employed for shorter periods.
Work-Life Integration
One of Zappos’s core values is “Build a positive team and
family spirit,” so the company expects employees to socialize
with each other both in and out of the office. In fact, managers
spend 10–20 percent of their time bonding with team members
outside of work. Zappos outings include hiking trips, going to
the movies, and hanging out at bars. Hsieh says this increases
efficiency by improving communication, building trust, and
creating friendships.
Along with creating friendships, employees are encouraged to
support each other. Any employee can give another employee a
$50 reward for great work. Zappos employees com- pile an
annual “culture book” comprising essays on the Zappos culture
and reviews of the company. The culture book helps employees
think about the meaning of their work and is available unedited
to the public. This is based on the principle of transparency.
As with its customers, the foundation of Zappos’s relationships
with its employees is trust and transparency. The company
wants its employees, like its customers, to actively discuss any
issues or concerns that come up. Hsieh does not have an office;
he sits in an open cubicle among the rest of the employees. He
believes “the best way to have an open- door policy is not to
have a door in the first place.” Zappos’s management is open
with employees by regularly discussing issues on the company
blog.
However, this positive work environment comes with the

expectation employees will work hard. Employees are evaluated
on how well they embody the core values and inspire others;
Zappos fires people who do great work if they do not fit with
the culture of the company. This helps maintain a culture of
integrity. The organization wants employees to be dedicated to
the firm and believes appropriate conduct will not occur unless
employees share the same visions and values of the
organization.
Zappos’s New Structure
In 2015 Tony Hsieh made a controversial decision to completely
change the structure of the organization. For the past year the
company had been transitioning toward an organizational
structure that abandons the top-down managerial hierarchy in
favor of a redistri- bution of power. Called a Holacracy, this
organizational structure places empowerment at the core of the
organization. Employees become their own leaders with their
own roles. To be effective, a Holacracy requires periodic
governance meetings where each employee understands his or
her roles and responsibilities. Teams hold tactical meetings run
by a facilitator to discuss key issues. While governance
meetings focus on clarity and role structure, tactical meetings
are used to “sync and triage next actions.” It is believed that
this dis- tributed authority increases clarity and transparency
and decreases cognitive dissonance by recognizing tensions
before they become a problem. As Zappos continues to grow,
there is a risk its expansion will make it harder to manage
employees and control productivity. Hsieh cites statistics that
demonstrate how growth often causes innovation and
productivity per employee to go down. However, he also claims
that when cities double in size, productivity and innovation per
resident increases by 15 percent. Hsieh believes the key to
sustainable growth at Zappos is to operate more like a city than
a business. This is why he decided to restructure the
organization. He feels the best way to handle growth is to
become a Teal organization, starting out by using the Holacracy

structure and evolving from there. In his book Reinventing
Organizations, Frederic Laloux uses a color scheme to describe
the development of human organizations, with Teal being the
highest. The concept of a Teal organization is based on three
premises: self-management developed through peer
relationships, involving the whole person in the work, and
allow- ing the organization to grow and adapt instead of being
driven. A Teal organization is structured under the premise
that all units will work “together to support the whole.” For
Zappos this involves adopting a new structure promoting self-
organization and self-management.
The transformation of Zappos’s organizational structure started
off slowly. However, Hsieh believed this slow transition
hindered the company’s transformation toward self-
organization and self-management. He therefore sent an email
to all 1,500 employees to inform them the organization was
going to take immediate action to transform Zappos into a Teal
organization. This involved eliminating bosses and the
traditional functions of finance, technology, marketing, and
merchandising to create approximately 500 task- oriented
circles structured around specific businesses. Managers became
employees and no longer engaged in traditional management
functions, although their salaries stayed the same throughout
2015.
Hsieh handled the email carefully, making sure to praise
traditional managers for their past contributions but stating they
are no longer required for a Teal organization. He real - ized
there would likely be much resistance from managers and other
employees who did not agree with the new system. To address
these concerns, Hsieh extended “The Offer.” Zappos agreed to
provide employees who wanted to leave severance pay for three
months. Approximately 18 percent of employees chose to take
the package.
This has had strong implications for Zappos in the short term,
and the transition has been difficult for the organization. For
instance, one glitch in the software Zappos uses to help manage

its Holacracy structure accidentally removed Hsieh from the
CEO position. The bylaws of a Holacracy structure require that
when CEOs are removed, the job is auto- matically opened and
the firm must accept cover letters from applicants for the
position. Zappos practiced transparency with consumers and
informed them about the glitch, as well as the fact that the firm
would be accepting cover letters for the position of CEO for a
two-week period. Tony Hsieh continued to be the CEO of the
firm.
In 2016 Zappos fell off the Fortune magazine’s list of 100 Best
Companies to Work For, the first time in eight years. Employee
surveys showed that scores had gone down on 48 out of 58
questions. However, Hsieh believes employees must be
committed to the changes and that it will pay off in the long
term. It is clear that this new organizational approach has
divided up the company, but Hsieh believes this approach is
necessary to handle the company’s growth and maintain the
same quality service and zany culture that has made it so suc-
cessful. He has expressed regret only that the structure change
was not implemented sooner.
Zappos takes an unconventional approach to corporate social
responsibility (CSR) and philanthropy. Many companies have
CSR programs dedicated to a certain area or cause such as
education, but Zappos prefers to support a variety of programs
based on the needs of communities and the interests of
employees.
Philanthropy
Zappos is involved in a variety of philanthropic efforts.
Programs include donating shoes and gifts as well as giving gift
cards to elementary school students. Zappos donates money to
organizations such as the Shade Tree, a nonprofit that provides
shelter to women and children, and the Nevada Childhood
Cancer Foundation. The company even partnered with Britney
Spears to hold an event at the zoo to raise money for the

foundation. Zappos also has a donation request application
available on its website.
Sustainability
Zappos started a campaign to improve the company’s impact on
the environment. A group of employees created the initiative,
known as Zappos Leading Environmental Awareness for the
Future (L.E.A.F). The campaign focuses on several
environmental efforts, including a new recycling program,
community gardens, and getting LEED certification for the
company. For instance, Zappos created an annual children’s art
contest that awards prizes for the best drawing involving a
recycling-based theme. The winner was awarded a $50
Zappos.com Gift Card. Like the rest of the company, L.E.A.F. is
open, with its progress posted on its Twitter account and blog.
Another area on the company’s blog is a section on
sustainability. Here, the company highlights new products that
are organic or manufactured using environmentally friendly
procedures. The postings also list ways customers can live more
sustainable lifestyles, including tips on how to throw an eco-
friendly party and green product recommendations.
Recognition
In addition to being the number one online shoe retailer, Zappos
has been recognized for its innovative business practices. The
company appeared on several prestigious lists including
Fortune’s Best Companies to Work For for eight consecutive
years, Fast Company’s 50 Most Innovative Companies,
BusinessWeek’s Top 25 Customer Service Champs, and
Ethisphere’s World’s Most Ethical Companies. The company
continues to get recognized for its efforts in creating an
environment and business model that encourages transparency
and strong relationships among all stakeholders.
ETHICAL CHALLENGES FOR ZAPPOS
Like any company, Zappos faced some challenging business and

ethical issues in the past. When these issues occur, Zappos
handles situations in a professional and efficient manner.
However, the transparency at Zappos makes some business and
ethical issues more complex as the company strives to solve
problems while keeping its stakeholders informed.
Laying Off Employees
Zappos is known for its commitment to its employees, but the
company faced hard economic times that demanded tough
decisions. In October 2008, Sequoia Capital, a venture capital
firm that was a controlling investor in Zappos, met to discuss
the problems presented by the economic downturn and its effect
on their portfolio companies. Sequoia Capital instructed Zappos
to cut expenses and make the cash flow positive. As a result,
Hsieh made the difficult decision to lay off 8 percent of
employees. This was not a desired event but was required by
Sequoia Capital.
Zappos strived to handle the layoffs in a respectful and kind
manner. Hsieh sent an email notifying employees of the layoff
and was honest and upfront about the reasons behind the
decisions, even discussing the move on Twitter. Employees who
were laid off received generous severance packages, including
six months of paid COBRA health insurance coverage.
Because of the company’s honesty and transparency, employees
and customers were more understanding of the tough decision
Hsieh and Zappos had to make.
Acquisition by Amazon
In 2009 Zappos was acquired by e-commerce giant
Amazon.com. Many Zappos customers were confused by the
unexpected move and expressed concerns about the future of the
company’s culture and customer service. Most CEOs would not
feel any obligation to address customer concerns over the
acquisition, but Tony Hsieh values the support of Zappos
employees and customers.
Shortly after the acquisition, Hsieh issued a statement about

why he sold Zappos to Amazon. In the statement, Hsieh
discussed the disagreement between Zappos and Sequoia Capital
over management styles and company focus. Specifically, Hsieh
said, “The board’s attitude was that my social experiments
might make for good PR but that they didn’t move the overall
business forward. The board wanted me, or whoever was CEO,
to spend less time on worrying about employee happiness and
more time selling shoes.” Hsieh and Alfred Lin, Zappos’s CFO
and COO, were the only two members on the board committed
to preserving the company’s culture. The board could fire Hsieh
and hire a new CEO who focused more on profits.
Hsieh decided the best way to resolve these issues was to buy
out the board, but he could not do this on his own. After
meeting with Amazon CEO Jeff Bezos, Hsieh committed to a
full acquisition, as long as Zappos could operate independently
and continue to focus on building its culture and customer
service. Many customers were concerned Amazon was not a
good fit for Zappos, but Hsieh addressed those concerns, stating
Amazon and Zappos have the same goals of creating value for
the customer but different ways of how to do it. He also
assured customers Zappos would continue to maintain its unique
corporate culture. Although consumers were not pleased with
the acquisition, they at least understood why it occurred.
Moreover, Hsieh’s commitment to his beliefs and management
style resonated with consumers.
More than Shoes Campaign
To bring awareness to the fact Zappos sells more than just
shoes, Zappos created a marketing campaign in 2011 designed
to catch people’s attention. The company released several
advertisements that featured people who appeared to be naked
doing daily activities such as running, hailing a cab, and driving
a scooter. The creative advertisements had certain parts of
models’ bodies blocked off with a box that said “more than
shoes.
The campaign received criticism from several groups because of

their “sexual nature.” However, the catch with these ads was
that the subjects of the ads were not actually nude; they wore
bathing suits or small shorts that were later covered by the box.
Because of the negative attention, Zappos pulled the ads and
released an apology that explained the pro- duction process.
Technical Difficulties
Also in 2011 Zappos experienced some technical difficulties
that resulted in delays and problems in customers’ orders and
shipments. Zappos upgraded one of its processing systems,
and in the process many orders were deleted or delayed. Some
orders had the incor- rect shipping information, and products
were shipped to the wrong location. Although this upset several
customers, Zappos handled the problems and reassured
customers that it would get them their merchandise as soon as
possible. The company also offered different perks, depending
on the circumstances of each customer experience.
Another problem Zappos encountered was that every item from
6pm.com, one of its websites, was priced at $49.95 for six hours
in 2010. The company shut down the website for a few hours to
solve the problem. Zappos honored all the orders from the
pricing mis- take, which resulted in a $1.6 million loss.
Theft of Customer Information
In 2012 hackers broke into Zappos’s computer system, and the
company had to respond to the theft of 24 million customers’
critical personal information. The stolen data included
customers’ names, email addresses, shipping and billing
addresses, phone numbers, and the last four digits of their credit
cards. Zappos immediately addressed the situation by sending
an email to customers notifying them of the security breach.
Zappos assured customers the servers containing their full
credit card information were not hacked. Its next move was to
disconnect its call center, reasoning that the expected amount of
calls would overload the system.
While Zappos has a reputation for delivering customer service

that is unmatched by any competitor, some customers were
unhappy with how Zappos handled the hack- ing. Many
customers were upset by their information being hacked, but the
situation was made worse by the company’s action of
disconnecting its call center. Although this situation caused
problems for Zappos and blemished its customer service record,
the company has worked to restore its reputation.
THE FUTURE OF ZAPPOS
Zappos remains committed to serving its customers and
employees. So far, the company has retained its unique culture
and continues to expand into new product categories. In one
interview, Hsieh talked about the growth of Zappos and how he
believes expanding into the clothing and merchandise market
will help the company to grow. Hsieh says “the sky is the limit”
for Zappos, and growing and expanding into many different
types of businesses is Zappos’s future. Hsieh continues to look
for talented and creative individuals. He has pledged $1 million
in partnership with Venture for America to bring at least 100
graduates to the Las Vegas area over a five-year period. As
Zappos expands, it will have to work harder to hire the right
people, avoid ethical issues, and maintain its quirky culture.
The company’s new organizational structure and compensation
system for its call-center employees are major steps to expand
without compromising Zappos’s unique culture. Although many
employees ended up leaving the company, Zappos believes these
moves are the right ones to make and will enable the firm to
continue growing both in employees and productivity.
Ethical leadership is a key factor in the success of any
company, and for Zappos having Tony Hsieh as a leader is a
strong indicator for future success. Hsieh expressed that he will
do whatever it takes to make his employees, customers, and
vendors happy. The future for any company looks bright when
its leadership is committed to such strong values. How - ever,
Zappos needs to make sure it continues to focus on its
stakeholders and its long-term vision with or without Hsieh.

Ultimately, Zappos intends to continue to deliver happiness to
its stakeholders. Hsieh says, “At Zappos, our higher purpose is
delivering happiness. Whether it’s the happiness our customers
receive when they get a new pair of shoes or the perfect piece of
clothing, or the happiness they get when dealing with a friendly
customer rep over the phone, or the happiness our employees
feel about being a part of a culture that celebrates their
individu- ality, these are all ways we bring happiness to
people’s lives.”

14 Health Reports, Vol. 29, no. 4, pp. 14-22, April 2018 • Sta

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