Imagine that you are a resident of Ashfordton, a community whose c.docx

Imagine that you are a resident of Ashfordton, a community
whose characteristics are described below. You have come
together with your neighbors for a special meeting to devise a
plan for helping the community become carbon-neutral by 2050,
meaning that by that time, no net carbon dioxide emissions will
be produced by residents as a whole.
Fortunately, you have all showed up to the meeting with lots of
knowledge you gained from last week’s class discussion. Now it
is time to put your thinking cap on and get to work! Your plan
should consist of the following elements:
· Energy conservation measures (e.g., promoting carpooling by
adding special lanes to local highways) and
· Steps to move toward sustainable energy production (e.g.,
installing solar panels on town government buildings)
Reducing energy consumption will help, but some actions will
have to involve switching to other power sources for buildings
and vehicles as well.
This week’s discussion will take place in an online app called
“Tricider.” There, you will be able to post your ideas for plan
components, and also share pros and cons of different proposals
during the week. Finally, you will be able to vote on what you
think should be in the plan.
For directions on how to use the Tricider app, please review the
linked Help Guide. In Tricider, you will be expected to do the
following:
· Post at least two separate and unique ideas. Include your full
name for each one.
· Post at least six different pros and cons for your classmates’
proposed ideas.
· Vote on what you feel are the top three ideas in the list. (Do
not vote before Friday.)
Please note: You are welcome to post questions and comments
to this board for this instructor; however, this discussion board
does not have any posting requirements of its own, and no

additional credit will be given for posts made here.
Below, the Instructor will post both
· The Ashfordton description you will be using for this activity
and
· The link you will be using to access Tricider for the activities
below.
Ashfordton:
Population: 850,000
Avg. High Temp (Dec): 67oF
Avg. High Temp (June): 90oF
Annual Precipitation: 50 in.
Urban Area: 116 sq. mi.
Main Power Source: natural gas
Overview:
The community of Ashfordton is located on the banks of the
Bridgepoint River at an elevation close to sea level, in a flat
landscape with pine forests and lakes. Not far from an ocean
coast, the city is home to several military bases; its economy is
also supported by business involved in banking, insurance, and
healthcare. Winters are generally mild, while summers can be
quite hot and humid.
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Learning Objectives
After reading this chapter, you should be able to:
1. Discuss the origins of federal laws related to
compensation.
2. List and explain critical earlycompensation laws.
3. Discuss the progression of minimum wage
standards and the laws that are critical in its
implementation today.
4. Cite and explain antidiscrimination laws that impact
the workplacetoday.
5. Cite and explain compensation law that impacts
families and those with disabilities.
6. Discuss the difference between mandatory and
discretionary bene�its.
7. Cite and explain laws that guide nonwage
bene�it rewards today.
2 Compensation and the Law
Stockbyte/Exactostock-1491/Superstock
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Introduction
Who pays when a worker gets hurt on the job?
What is the minimum that a worker has to be
paid?
When can a company pay one person differently
than another person?
Where can a worker turn during times of
job loss?
Why do we have Social Security?
Questions such as theseare answered in part by laws
and regulations that have been created over time in
response to factors such as key historical events
and changes in society’s norms and priorities.
Companies
also answer thesequestions using their own business
strategies,goals, and culture as guides, all
while
staying within the framework dictated by the

legal system.
Some laws and regulations directly impact
compensation and bene�its, whereas others are
more broad in
nature and impact general human resource
practices. Given that the legal system has its
own professionals
—lawyers and judges—and is very complex in and of
itself, this chapter will not attempt to cover
all
employment law. Instead, we will focus on the
key laws that impact the creation, implementation,
and
maintenance of compensation and bene�it programs.
However, an overview of the broader business
regulatory environment is needed to better
understand the in�luence this environment has
on
compensation and bene�its, so a brief overview will be
covered for theseareasas well.
While this chapter is written with a focus on
laws and regulations in the United States,
every country has
its own legal history and philosophy with regard
to compensation and bene�its. To be an
effective
compensation and bene�its professional, you will need to
have a solid understanding of the speci�ic laws
and regulations of the country in which your
company operates.
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The Art Archive/Superstock
The Great Depression caused a large
number of people to lose their jobs.
2.1 Origins of Laws Impacting Reward Systems
For the �irst150 years after the founding of the
United States, the workplacewent largely
unregulated.
While therewere incidents of workers banding
together to try to improve their situation, such as
�ighting
for higher wages or better working conditions,
theseincidents were typically isolated and temporary.
For
example, a printer’s union was formed in New
York City in 1778 that achieved its goal of higher
wages, but
the �irstlargenational union, the National Labor
Union, was not formed until 1866, almost 90
years later
and just after the CivilWar. The National Labor Union
was successfulin persuading Congress to require
an
eight-hour workday that applied to all federal
employees; however, the union lasted less
than 10 years and
was dissolved in 1874. The regulations and laws
that emanated from the efforts of labor
unions were
patchwork, addressing a particular grievance at a

particular time.This began to change during
the 1930s
in response to the economic conditions of the
time.
Throughout the 1920s, therewas a sense of
euphoria in the aftermath of World War I, the
end of an
in�luenzaepidemic, and sustained economic prosperity.
During this time period, known as “The
Roaring
Twenties,” therewas excessive spending on new
inventions and leisure activities. The nation’s
total wealth
more than doubled between 1920 and 1929, and the
stock market more than quadrupled in value
due to
speculation. This all came to abrupt end in
October 1929 when the stock market
crashed. The Great
Depression, the worst economic crisis in United
States history, had begun.
Following the stock market crash, investors lost
tremendous amounts of money, with many
losing all that
they had. People began to panic, especially when
rumors started that the banks were failing.
This caused
“runs on the banks” where people would
attempt to withdraw the cash they had placed in
the banks for
safekeeping. The banks, however, did not have the
money available to pay all demands—the money
had
been loaned out and was not sitting in the banks’

vaults—so banks collapsed
(https://www.youtube.com/watch?v=_Er69b4HMl8) .
This created a downwardspiral of failing
companies that had to lay off workers who
then were unable to
afford their homes, food, and otherpurchases.
This resulted in a huge drop in demand for
companies’
goods, so many employerswent out of business
and the vicious cycle continued.
The Great Depression lasted throughout the
1930s and
was characterized by failing companies, high
unemployment, plunging tax revenues, reduced
consumer spending, and severe homelessness. At its
height in 1933, close to a quarter of
the American
workforce was unemployed and an additional 25% of
the remaining workforce had their wages
and hours
drastically reduced. The unemployment rate was over
15% for most of the decade.
The severity of the economic downturn induced the
government to pass federal laws in an attempt to
boost
the potential for economic recovery and get people
back
to work. It took World War II to move
the United States
fully out of the Great Depression, and the war
itselfled
to changes in the workplace through factors
such as

wage and price controls. The laws passed during
the
1930s and 1940s represented a categorical
shift in the way government dealt with business in
the United
States.
https://www.youtube.com/watch?v=_Er69b4HMl8
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Let’sbegin by taking a look at someof the
laws passed during this time period that would
directly impact
compensation systems as well as broader economic
and business practices. We’ll then explore
relevant
laws, with a focus on those that in�luence
compensation systems, that have occurred sincethen on
up to
the modern day. Of course, due to the constantly
evolving legal landscape, an overview of laws is
not a
substitute for consulting with a legal professional
who is up to date with the most current
legislation.
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2.2 Early Compensation Law
Throughout the Industrial Revolution and during
the midst of the Great Depression, large
numbers of
people were seeking work at any wagethey could
get. As such, workers had little or no
in�luenceon their
wages. Paired with rapidchanges in technology
and a societal shift from a primarily agrarian
economy to
one based on manufacturing, regulations and laws
did not keep pace with changes in the workplace.
As
mentioned previously, that began to change
during the Great Depression. Following are
key laws that were
passed in the 1930s that built the foundation
for addressing issues such as minimum
standards on how
much workers should be paid and how to help
needy groups such as the elderly and poor.
Davis-Bacon Act of 1931
Under the Davis-Bacon Act
(http://www.dol.gov/whd/contracts/dbra.htm) , employers,
for the �irst time,
were required to provide laborers and mechanics on
covered federally �inanced or assisted construction
contracts in excess of $2,000 (approximately
$36,600 in today’s dollars) the right to receive
at least the

locally prevailing wagerate (the de�inition of the
locally prevailing wagerate was left vague in
the law, but
it essentially meant the typical wagebeing
paid in a particular area). This act offered a
benchmark for
future federal and state wages and bene�its related
to government contracts and even the private
sector.
Norris-LaGuardia Act of 1932
The Norris-LaGuardia Act
(http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?
article=3121&context=fss_papers) outlawed the practice of
employersmandating that workers pledge not to
join a laborunion (also called yellow-dog
contracts). The act curtailed the use of court
injunctions that
employershad been using to stop union strikes,
picketing, and boycotts. Although it had few
enforcement
powers, the act was one of the �irst federal
labor laws supporting organized labor, and it
marked a
signi�icant change in laborreform. Its passage
fostered a trendtoward more favorable government
labor
policies, including compensation practices, in the years
to come.
The National Labor Relations (Wagner) Act of 1935
With passage of the Norris-LaGuardia Act, the
groundwork was laid for an even more important
laborbill

—the National Labor Relations Act of 1935
(http://www.nlrb.gov/resources/national-labor-relations-act)
(also called the Wagner Act).The Wagner Act
continued the mission of reforming and regulating
labor
relations. Unions acquired fundamental rights and
powers, including the right of collective bargaining,
which is good-faith negotiations between an
employer and a group of employees aimed at
reaching
agreements related to employment issues, and
the recognition of unfair labor practices, which
are
tactics used by employersto prevent employees
from joining unions and to disrupt union
activities in the
workplace. (For more detailed information on
collective bargaining visit:
http://www.dol.gov/dol/topic/labor-relations/collbargaining.htm
(http://www.dol.gov/dol/topic/labor-
relations/collbargaining.htm) ). This act also established
penalties for
violating theserights and powers. The Taft-Hartley
Act of 1947 amended the National Labor
Relations Act
by extending the prohibition of unfair labor
practices to laborunions, not just employersas
under the
1935 law.
The gain of power by laborunions has had a
big impact on compensation issues, such as
wages paid and
bene�its offered. The impact of laborunions has
lessened in many industries in current times,
although

http://www.dol.gov/whd/contracts/dbra.htm
http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=
3121&context=fss_papers
http://www.nlrb.gov/resources/national-labor-relations-act
http://www.dol.gov/dol/topic/labor-relations/collbargaining.htm
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someindustries, such as automobile manufacturing
and law enforcement, continue to have a
signi�icant
laborunion in�luence.
The Social Security Act of 1935
On August 14, 1935, President Franklin D.
Roosevelt became the �irst president to advocate
federal
assistance for the elderly. As part of his Second
New Deal, the Social Security Act of 1935
(http://www.ssa.gov/history/35act.html) was signed into
law to establish old-age bene�its at the federal
level.
The bene�its were to be paid in proportion to
the previous earning of individuals, and a
reserve fund to
pay for the bene�its would be created by a
tax paid equally by employees and employers.
Originally, only
employees in industrial and commercial occupations

were eligible for bene�its, but numerous important
amendments sincethen have expanded those covered
under the act.
Additionally, the act provided money and bene�its to
the unemployed, funded by a tax on
employers. It
also enabled states to make provisions for
those needing the most help. See Franklin
D. Roosevelt’s
statement on signing the Social Security Act here:
http://www.presidency .ucsb.edu/mediaplay.php?
id=14916&admin=32
(http://www.presidency.ucsb.edu/mediaplay.php?id=14916&ad
min=32) . Prior to the
passage of the act, therewas no federal
unemployment compensation and states did not
universally or
evenly support olderAmericans or those who
were blind, dependent and disabled children, welfare
for
mothers and children, and public health.
Walsh-Healey Public Contracts Act (PCA) of 1936
The Walsh-Healey Public Contracts Act (PCA)
(http://www.dol.gov/whd/govcontracts/pca.htm) was the
�irstfederal act to provide employees the right to
be paid at least the minimum wagefor all hours
worked
and to be paid for overtime work at a rate not
less than one and one-half times the regular
rate of pay
(“time and a half”) for any hours worked
beyond 40 hours per week. The act applies
only to companies

that provide materials, supplies, articles, or equipment
to the U.S. government or the District of
Columbia
and covers employees who produce, assemble,
handle, or ship goods under such contracts.
Executive,
administrative, and professional employees and outside
salespersons are exempt from the minimum wage
and overtime provisions of the act. While the
act was limited in its focus—covering only
federal contracts
—it was the beginning of providing wageprotection in
the form of minimum wages and overtime pay to
employees.
Fair Labor Standards Act (FLSA) of 1938
The Fair Labor Standards Act (FLSA)
(http://www.dol.gov/whd/�lsa/) expanded on the
Walsh-Healey Act
and established minimum wage, overtime pay, record
keeping, and child-labor standards affecting full-
time and part-time workers in both the private and
government sectors. The law also set the current
standard of a 40-hour workweek for private
industry.
Not all jobs, however, are covered by overtime and
minimum wagerequirements. Executive, professional,
and administrative professionals are generally considered
to be exempt from FLSA provisions. Most
other
jobs are considered to be nonexempt and
covered by FLSA regulations. Keep in mind
that receiving a
salary does not automatically mean that you

are exempt from FLSA requirements. While a
salary
employee is typically exempt from overtime and
minimum wagerequirements, it is not always
the case, as
salary is not the determining factor as to
whether an employee is exempt or nonexempt
under FLSA. See
http://www.ssa.gov/history/35act.html
http://www.presidency.ucsb.edu/mediaplay.php?id=14916&admi
n=32
http://www.dol.gov/whd/govcontracts/pca.htm
http://www.dol.gov/whd/flsa/
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Critical Thinking
Which federal law established during
the Great Depression era do you believe
has the most in�luencetoday? Why?
http://www.�lsa.com/coverage.html
(http://www.�lsa.com/coverage.html) for additional
information on
exempt versus nonexempt status of jobs.
The Wage and Hour Division (WHD) of the
U.S.
Department of Labor administers and enforces

the
FLSA with respect to private employment, state
and
local government employment, and federal employees.
Its enforcement umbrella includes wages, family
and
medical leave, break time for nursing mothers,
child
labor, government contracts, immigrant
workers,
agricultural employment, special employment (such
as
workers with special needs), and even lie detector
tests
used in employment practices (through the Employee
Polygraph ProtectionAct of 1988).
Today, more than 130 million American workers are
covered by the provisions of the FLSA.
Together, the
Social Security Act of 1935 and the FLSA of
1938 were sweeping bills that introduced a change
in attitudes
toward the role of government and generated an
arrayof programs to aid numerous groups of
Americans.
http://www.flsa.com/coverage.html
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Critical Thinking
Review the regulations set forth in the
Fair Labor Standards Act. Do you think
the modern workplacewould be the
same had such legislation not been
passed? If so, how? If not, why?
2.3 Basic Wage Standards
Numerous dif�iculties occurred earlyin the
implementation and administration of the FLSA.
It quickly
became apparent that there were both logistical
and tactical dif�iculties with the enforcement of
legislation across various regions and industries.
For example, the statutory minimum wagewas likely
to
produce undesirable effects upon the economies of
Puerto Rico and the Virgin Islands if applied
to all of
their covered industries because they didn’t have the
developed economies that the rest of the United
States had. Consequently, on June 26, 1940, a
special committee was set up that ultimately
allowed
minimum wagelevels in Puerto Rico and the Virgin
Islands to be less than the rates applicable
elsewhere
in the United States.
On May 14, 1947, the FLSA was amended by
the Portal-to-Portal Act. This legislation was
signi�icant
because it resolved someissues as to what
constitutes compensable hours worked (i.e.,

had to be paid)
under FLSA, establishing that activities that
bene�itedemployerswere compensable, but activities
such as
commuting to work were a normal part of the
work process and not normally compensable. In
1949, the
FLSA was amended to extend childlaborcoverage,
raise the minimum wage40 centsan hour to 75
cents
an hour for all workers, and expand minimum wage
coverage to include workers in the air
transport
industry. The minimum wagewas increased again in
1955 to one dollar per hour.
The 1961 amendments greatly expanded the scope of
the FLSA within the retail and service
sectors and
also increased the minimum wagefor previously covered
workers to $1.15 an hour in September
1961
and an additional ten cents an hour two
years later. In 1974, Congress included under
the FLSA all
nonsupervisory employees of federal, state, and
local governments and many domestic workers.
Between 1978 and 2006, the federal minimum wage
was raised in stages from $2.90 to $5.15.
The Fair
Minimum Wage Act of 2007 raised the
minimum wage, over time, such that as of
2015, covered,
nonexempt workers are entitled to a federal
minimum wageof not less than $7.25 per hour.

In each of the cases and stages of
increases, Congress, which has legislative
authority over federal
spending, has from time to time provided challenges to
increasingthe minimum wage. The Supreme Court
also has made its share of contributions to
questioning and interpreting the FLSA.
Some states and municipalities have legislated a
minimum wagehigher than that speci�ied by the
federal
government, while others don’t designate a
minimum wageat all, in which case the federal
wage rate
applies (see Table 2.1). President Obama signed an
executive order that applies to public
contractors—
those who hold federal contracts—requiringthem to
pay a minimum wageof $10.10 per hour
beginning
on January 1, 2015.
Debate about the minimum wage has been
ongoing
sinceit was introduced, with ardent supporters on
both
sides. Currently,the debate revolves around the
issueof
raising the minimum wagein response to the rising
cost
of living. Numerous companies have chosen
to act on
their own and pay their workers above the mandated
minimum wagelevels. For example, Aetna announced
at

the beginning of 2015 that it set $16 an
hour as its
lowest level of pay, with the stated goals of
the change
being to recruit top talent and reduce
turnover. Gap Inc.
and Starbucks Corp.TM are also companies that
have
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recently raised the minimum amount they pay their
workers (Mathews & Francis, 2015).
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The Pay Gap
2.4 Antidiscrimination Laws
Throughout history, numerous groups have faced
discrimination, bias, and unfair treatment in all
facets of
life. This has occurred in employment practices as
well. As such, numerous laws have been

passed to
protect the rights of applicants and employees
from discrimination, including in their compensation.
The
U.S. Equal Employment Opportunity Commission
(EEOC) enforces theseantidiscrimination laws.
Below
are someof the key laws related to preventing
discrimination in compensation and bene�its
practices.
Table 2.1: Consolidated state minimum wages as of
09/01/2014
Greater than federal
minimum wage*
Equal to federal minimum
wageof $7.25*
Less than federal
minimum wage*
No minimum
wagerequired*
AK - $7.75 MN - $8.00 HI NH AR - $6.25 AL
AZ - $7.90 MO - $7.50 IA OK GA - $5.15 LA
CA - $9.00 MT - $7.90 ID PA WY - $5.15 MS
CO - $8.00 NJ - $8.25 IN SD SC
CT - $8.70 NM - $7.50 KS TX TN

DC - $9.50 NV - $8.25 KY UT
DE - $7.75 NY - $8.00 MD VA
FL - $7.93 OH - $7.95 NC WV
IL - $8.25 OR - $9.10 ND WI
MA - $8.00 RI - $8.00 NE
ME - $7.50 VT - $8.73
MI - $8.15 WA - $9.32
23 states + DC 19 states 3 states 5 states
* Where federal and state law have different
minimum wagerates, the higher standard applies.
Note: Like the federal wageand hour law, state law
oftenexempts particular occupations, industries, or
sizes of employersfrom the minimum
laborstandard generally applied to covered employment.
Particular exemptions are not identi�ied in
this table. Users are encouraged to
consult the laws of particular states in determining
whether the state’s minimum wageapplies to a
particular employment. This information
oftenmay be found at the websites maintained by
state labordepartments. Links to thesewebsites
are available at
www.dol.gov/whd/contacts/state_of.htm.
Souce: United States Department of Labor.
http://www.dol.gov/whd/minwage/america.htm
(http://www.dol.gov/whd/minwage/america.htm)

Equal Pay Act (EPA) of 1963
During World War II, with most men of
working age �ighting overseas, women
had to �ill important jobs, particularly
in the manufacturing sectors, that had
formerly been held by men. In
December 1940, the number of active
military personnel in the United States
http://www.dol.gov/whd/minwage/america.htm
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The Pay Gap: Sexism or Something Else?
© Infobase. All Rights Reserved. Length: 08:39
Critical Thinking
The Equal Pay Amendment was passed
in 1963, yet by someestimates, women
still make on average 77 centsto every
dollar men earn. Does such a disparity in
totaled approximately 800,000, but by
June 1945, this number had grown to
12.3 million. Over this time period, the
number of women in the workforce

increased from 10 million to 19 million.
The increasingly female workforce,
however, highlighted a discrepancy in
monetary compensation practices in
that women were being paid less
simply for the fact that they were not
men. The War Labor Board, established
in 1942 to resolve disputes between
workers and employersto ensure that
disputes didn’t disrupt the war effort,
addressed the issueby specifying that
equal pay should be provided to both
men and women performing similar
jobs. Employers, however, routinely
circumvented this requirement by
either assigning women to lower-skill-
level jobs or by reclassifying jobs so
they would not have to provide equitable pay.
It would take two decades before any federal
legislation was passed to formally address
this issue. In
1963, the Equal Pay Act
(http://www.eeoc.gov/laws/statutes/epa.cfm) was passed
and signed into law,
asserting that gender-based discrimination was prohibited
and, within the same workplace, men and
women were to be given equal pay for equal
work. The concept of what constituted
comparable pay was
interpreted to mean that jobs need not be
identical; instead, equality is established by
the requirement of
substantially equal knowledge, skills, and
abilities as well as the production of similar

results. Hiring for
“women’s jobs” and “men’s jobs” with unequal
compensation policies became unlawful.
Speci�ically, the Equal Pay Act contains the
following language:
Employers may not pay unequal wages to men
and women who perform jobs that require
substantially equal skill,effort, and responsibility,
and that are performedunder similar working
conditions within the same establishment.
The content and performance of a job, not the
title of the position, determines whether jobs are
substantially equal.
Lilly Ledbetter Fair Pay Act of 2009
The Lilly Ledbetter Fair Pay Act
(http://www.gpo.gov/fdsys/pkg/PLAW-
111publ2/html/PLAW-111publ2.htm) was enacted to
clarify that a discriminatory compensation decision is
considered to have occurred each time compensation is
paid, and not just at the time an employer makes
an
initial discriminatory decision. This act basically
http://www.eeoc.gov/laws/statutes/epa.cfm
http://www.gpo.gov/fdsys/pkg/PLAW-111publ2/html/PLAW-
111publ2.htm
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pay mean that that EPA has failed in its
mission? Explain your rationale.
Jakob Helbig/Cultura/Getty Images
Race, sex, and religion are equally protected
against discrimination.
extends the statute of limitations for �iling a
lawsuit that
asserts violation of equal-pay legislation.
Title VII of the CivilRights Act of 1964
Broad-sweeping legislation against discrimination
was created with the Civil Rights Act of 1964
(http://www.eeoc.gov/laws/statutes/titlevii.cfm) .
Speci�ically related to employment, Title VII of
this act
protects individuals against employment practices
that discriminate based on race, color,
national origin,
sex, or religion. Title VII applies to employerswith 15
or more employees, employment agencies, labor
organizations, and local, state, and federal
governments.
This law states that equal employment opportunity
cannot be denied any person because of
his or her
racial group or perceived racial group, race-
linked characteristics (e.g., hair texture, color,
facial features),
or because of marriage to or association with

someone of a particular race or color. Title
VII also prohibits
employment decisions, including compensation practices,
based on stereotypes and assumptions about
abilities, traits, or the performance of individuals
of certain racial groups. Sex and religion
are also equally
protected against discrimination, and bias against a
person’s sex or religion is prohibitedfrom
impacting
employment decisions. The prohibitions apply
regardless of whether the discrimination is directed at
Caucasians, African-Americans, Asians, Latinos, Arabs,
Native Americans, Native Hawaiians and
Paci�ic
Islanders, multiracial individuals, or persons of
any otherrace, color, sex, religion, or perceived
national
origin.
Disparate Treatment and Adverse Impact
It is important to note that Title VII of the Civil
Rights
Act of 1964 covers not only intentional
discrimination
against protected groups but also accidental
discrimination if such discrimination could have
been
reasonably prevented.
Disparate treatment represents intentional
employment discrimination. Evidence of disparate
treatment may be direct, such as a policy that
women or
members of a racial group may not be hired
for a given

set of jobs. Evidence may also involve a mixed
motive,
which occurs when a protected characteristic,
such as
sex, and a legitimate reason, such as a lack of
skill sets,
are commingled and thus contribute to a denial
of
hiring or promotion. To make an adequate
determination if disparate treatment occurred, four factors
are involved:
1. The person is in a protected class,
2. The applicant for a job was quali�ied,
3. Rejectionoccurred in spite of quali�ications,and
4. The position remained open and recruiting continued in
spite of having a quali�ied applicant
available.
Adverse impact occurs when an individual in a
protected group is unintentionally discriminated
against
due to the way employment practices are carried
out. An example of this is a company that
requires an
http://www.eeoc.gov/laws/statutes/titlevii.cfm
1/31/2018 Print
sec2.5,ch02sec2.6… 14/26

Critical Thinking
Describe the differences between
disparate treatment and adverse impact
in compensation and bene�its decisions.
Critical Thinking
Do you thinkthe CivilRights Act of 1964
has been successfulin making the
workplacefree from discrimination? In
what ways do you feel it has succeeded?
In what ways do you thinkit has failed?
employee to not have an arrest record. Since an
arrest is
different than a conviction (innocent until proven
guilty!), this practice could be discriminatory if a
particular group, such as men or minorities, are
more
likely to have been arrested. While the
company is
probably just intending to not hire criminals, because of
the way the company is going about this—
looking at
arrests rather than convictions—unintentional
discrimination can occur. Adverse impact focuses on
the
effect of the actions taken, rather than
underlying motives or intentions.
Age Discrimination in Employment Act (ADEA) of
1967 (as Amended in 1978, 1986, and
1990)

The Age Discrimination in Employment Act of
1967 (http://www.eeoc.gov/laws/statutes/adea.cfm)
protects individuals who are 40 years of age or
olderfrom employment discrimination based on
age. The
ADEA’s protections apply to both employees
and job applicants. Under the ADEA, it is
unlawful to
discriminate against a person because of his or
her age with respect to any term, condition, or
privilege of
employment, including hiring, �iring, promotion,
layoff, compensation, bene�its, job assignments, and
training. It also prohibits mandatory retirementin
most sectors.
It is also unlawful to retaliate against an
individual for opposing employment practices that
discriminate
based on age, for �iling an age discrimination
charge, and for testifying or participating in
any way in an
investigation, proceeding, or litigation under the
ADEA.
It is important to note that the ADEA does not
cover individuals who are younger than 40
years of age.
Older Workers Bene�it ProtectionAct (OWBPA)of
1990
As a result of the aging of the BabyBoom
Generation, the 1990 Older Workers Bene�it
ProtectionAct
(http://www.eeoc.gov/eeoc/history/35th/thelaw/owbpa.html)
was created as an amendment to the ADEA

to
provide additional support for olderworkers. The
OWBPA prohibits employersfrom denying employee
bene�its to olderworkers based on age. The
amendment was created to protect older
workers who were
laid off from receiving unfavorable severance packages in
relation to younger workers. It also covers
other
employee bene�its, such as health insurance,by
dictating that employersmay not charge older
workers
more for health care even though illness is more
likely with olderworkers.
CivilRights Act of 1991
The Civil Rights Act of 1991
(http://www.eeoc.gov/eeoc/history/35th/1990s/civilrights.
html) was passed to update and clarify the
CivilRights
Act of 1964. Legislators noted that additional
federal
remedies were required to prevent unlawful
harassment and that additional protections against
unlawful discrimination were necessary.
Additionally,
several Supreme Court decisions had weakened
the
original law, particularly in Wards Cove
Packing Co. v.
http://www.eeoc.gov/laws/statutes/adea.cfm
http://www.eeoc.gov/eeoc/history/35th/thelaw/owbpa.html
http://www.eeoc.gov/eeoc/history/35th/1990s/civilrights.html

1/31/2018 Print
sec2.5,ch02sec2.6… 15/26
Atonio, 490 U.S. 642 (1989), in which the Court
determined that the employee,not the employer,
held the
burden of proof to showwhich speci�ic
practice created adverse impact. The passage of
the CivilRights Act
of 1991 reversed this practice, shifting the burden of
proof to employerssuch that they must showthat
the company practice being challenged is a
business necessity. The act also expanded the
geographical
scope of protection against job discrimination to
include American employersand American-controlled
companies operating abroad.
Compensation and Bene�its in the Real World:
Walmart Stores Inc.
For legal, �inancial, and ethical reasons, it is
critical that employersconsider both laws and
employee perceptions when designing compensation
systems. It can be quitecostly in terms of
money and resources when issues occur.
Walmart can attest to this. In 2010, Walmart
paid $11.7 million to settle a sex
discrimination case
(http://www.eeoc.gov/eeoc/newsroom/release/3-1-10.cfm
(http://www.eeoc.gov/eeoc/newsroom/release/3-1-10.cfm) ).

The settlementof this case, however, did
not end Walmart’s legal issues. For several years,
Walmart has been involved in a lawsuit brought
by a group of current and former female
employees, led by Betty Dukes, that alleges
the
corporation engaged in company-wide gender
discrimination by paying women less than men,
promotingfewer women to management positions,
and promotingmale employees more quickly.
In 2011, the Supreme Court of the United
States ruledthat the employees did not have
standing to
sue Walmart as a class action
(http://www.supremecourt.gov/opinions/10pdf/10-277.pdf
(http://www.supremecourt.gov/opinions/10pdf/10-277.pdf) ).
The ruling, however, did not rule on
individual discrimination claims, so plaintiffs have
narrowed the scope of the class and �iled
new
suits (http://www.tennessean.com/story/news/2015/07/09/ruling-
reopens -
discrimination-claims-women-walmart/29935131/
(http://www.tennessean.com/story/news/2015/07/09/ruling-
reopens-discrimination-claims-women-
walmart/29935131/) ).
Walmart continues to �ight legal issues that have
had a negative impact on its reputation in
the
marketplace. Walmart illustrates the critical need to
follow both the spirit and the letter of
the law
when setting compensation and bene�its practices.
http://www.eeoc.gov/eeoc/newsroom/release/3-1-10.cfm

http://www.supremecourt.gov/opinions/10pdf/10-277.pdf
http://www.tennessean.com/story/news/2015/07/09/ruling-
reopens-discrimination-claims-women-walmart/29935131/
1/31/2018 Print
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JGI/Jamie Grill/Getty Images
The Pregnancy Discrimination Act of 1978
protects the rights of pregnant women in
regard to hiring, leaves of absence, and
fringe bene�its.
2.5 Accommodating Disabilities
To clarify and make earlier laws related to
equity in the workplace more explicit,
the Pregnancy
Discrimination Act of 1978, the Americans with
Disabilities Act of 1990, and the Family
and Medical Leave
Act of 1993 were passed. These laws
provide speci�ic legal requirements and guidelines
related to
individuals and families to meet the needs of a
changing society.
Pregnancy Discrimination Act (PDA) of 1978
The Pregnancy Discrimination Act of 1978
(http://www.eeoc.gov/laws/statutes/pregnancy.cfm)
amended Title VII of the Civil Rights Act of

1964 to
preclude any form of discrimination toward
pregnant
women. The act affects employers with 15 or
more
employees and impacts hiring, leaves of absence
due to
pregnancy and maternity, and fringe bene�its. With
respect to hiring, employersmay not refuse to
hire any
pregnant woman due to her pregnancy, pregnancy-
related condition, or the prejudices of others
in the
workplace.
Special procedures may not be used to
determine
ability to perform job duties unless the same
procedures are used for all employees.
Inability to
perform a job by a pregnant woman must be
treated in
the same manner as afforded any othertemporarily
disabled employee.A pregnant employee must
be
permitted to work as long as she is capable of
doing so, and an equivalent job must be
available when she
returns to work, the same as for any employee
otherwise on sick or disability leave.
Employer-provided health insurance plans must
cover all pregnancy-related expenses and
reimbursements on the same basisas any othercovered
medical expense. Limitations, exclusions, and

amounts payable for health-related costsmust be equally
applied to pregnancy-related conditions (i.e.,
the
company cannot charge more for pregnancy-related
medical expenses). Additionally, the same level
of
health bene�its for spouses of either male or
female employees must be provided.
If an employer provides any bene�its to workers on
leave, the same bene�its must be provided to
those on
leave for pregnancy-related conditions. Any
bene�its such as vacation accrual, temporary
disability
bene�its, seniority calculations, and pay increases
provided to any employees on leave are
required to be
provided to pregnant employees.
Americans with Disabilities Act (ADA) of 1990
The Americans with Disabilities Act of 1990
(http://www.ada.gov/) prohibits discrimination against
quali�ied individuals with disabilities in job
application procedures, hiring, �iring,
advancement,
compensation, promotions, seniority accrual, job
training, and otherterms, conditions, and
privileges of
employment. The ADA covers employers with
15 or more employees and also includes
employment
agencies, labororganizations, and local and state
governments. The ADA’s nondiscrimination
standards

also apply to federal employees under Section
501 of the Rehabilitation Act.
http://www.eeoc.gov/laws/statutes/pregnancy.cfm
http://www.ada.gov/
1/31/2018 Print
sec2.5,ch02sec2.6… 17/26
Critical Thinking
Do you thinkemployersgenerally do
enough to accommodate disabilities?
Under this act, an individual with a disability is a
person who
has a physical or mental impairment that
substantially limits one or more major life
activities,
has a record of such impairment, or
is regarded as having such impairment.
It is important to note that if a person is
perceived to have a disability but does not
actually have one, he or
she is still covered under the act.
Family and Medical Leave Act (FMLA) of 1993
The Family and Medical Leave Act
(http://www.dol.gov/whd/fmla/) became effective in

August 1993 and
entitles eligible employees to take up to 12
weeks of unpaid, job-protected leave in a
12-month period for
speci�ied family and medical reasons, such as
long-term illnesses of the employee or the employee’s
immediate family members. FMLA applies to
all public agencies, including state, local, and
federal
employers; local education agencies (schools);
and private-sector employers who employ 50 or
more
employees in 20 or more workweeks in the
current or preceding calendar year, including joint
employers
and successors of covered employers.
When the law was initially signed, many
employersdid not have well-thought-out policies
and practices to
deal with its implications, so someemployees
�igured out how to manipulate the system.
For example, the
12-month period was assumed to be a calendar or
�iscal year. Therefore, employees would
apply for the
12-week leave period at the end of the
calendar (or �iscal) year and then reapply for
another 12-week
leave period at the start of the next calendar
(or �iscal) year. Such actions allowed the
employee to
combine the two periods into a six-month leave of
absence. In somecases, of course, this time
off was
necessary; however, others would take advantage of

the company’s lack of effective policy
management
and receive an extended period of time off.
Companies also found it cost-prohibitive to
remove an employee from their group plans
(e.g., health
insurance) and then reinstate the employee upon his or
her return to work. Consequently, companies
kept
the employee actively enrolled in their plans, paying
the expenses for noncontributory employees
since
therewas no otherprocedure in place.
Once �irms integrated their HR practices with
the new law, most developed policies that
required
employees intending to use FMLA to �irstuse
any accrued sick or vacation leave before
going on FMLA
leave. Most, if not all, companies also now
have policies in place stating that the leave
of absence provided
through the FMLA is based on a “rolling
year.” That is, once an employee utilizes his or
her leave option,
the 12-month clock begins again upon the
employee’s return to work.
Amendments to the FMLA by the National
Defense
Authorization Act for FY 2008 (NDAA), Public Law
110-
181, expanded the FMLA to allow eligible
employees to

take up to 12 weeks of job-protected leave in
the
applicable 12-month period for any “qualifying
exigency” arising out of the fact that a covered
military
member is on active duty or has been
noti�ied of an
impending call or order to active duty in
support of a
contingency operation. The NDAA also amended
the
http://www.dol.gov/whd/fmla/
1/31/2018 Print
sec2.5,ch02sec2.6… 18/26
FMLA to allow eligible employees to take up
to 26 weeks of job-protected leave in a
“single 12-month
period” to care for a covered service member
with a serious injury or illness.
It is important to note that leave under
FMLA is not required to be paid for by the
company. Many
employersdo continue to pay an employee for at
least a portion of the leave, but that is
the company’s
choice, not mandated by the law. The law just
speci�ies that the employee will still have a job
when he or

she returns after the leave.
1/31/2018 Print
sec2.5,ch02sec2.6… 19/26
Everett Collection/Superstock
President Franklin Roosevelt signsthe
Social Security Bill in 1935.
2.6 Nonwage Bene�its
The change in the workforce during World War II
(that is, the increase in working women due to
the men
�ighting), along with wageand pricecontrols, spurred
a growth in nonmonetary bene�its. Companies
had
to �ind otherways to attract, motivate, and retain
employees sincethey couldn’t just give raises or
pay
more due to the wage and price controls in
place at the time. Also, the need to
maintain a steady
production �low in order to meet the
demands of war caused companies to offer
perks to workers to
reduce absenteeism and turnover. For example, the
federal government provided on-the-job training
and
on-site cafeterias, while some private
companies, such as Kaiser Steel and

Boeing, offered child-care
facilities adjacent to their factories. These were key
incentives to entice and enable women to
successfully
enterthe workforce at a time when they were greatly
needed.
These nonwage bene�its have sincebecome an
important part of an employee’s compensation
package
and account for an increasing percentage of
total payroll costs. In the early 1900s,
nonwage bene�its
accounted for only about 3% of payroll costs—
hence, the name “fringe” bene�its, sincethey were on
the
edge of basicand common compensation practices—while
today, nonwage bene�its can account for over
50% of a company’s payroll costs, with payroll
costscomposing the largest operating expense
for most
companies.
Some bene�its—Social Security, unemployment,
and
worker’s compensation—are required by law. Health
insurance is now required by law per the Patient
Protection and Affordable Care Act (PPACA) of
2010,
but on the level of the individual. Other
bene�its are
discretionary or not mandated by law. Examples of
discretionary bene�its include dental insurance,401(k)
retirementplans, and paid time off for vacation or
sick
days. (Note: Timeis given for qualifying

illness under
FMLA, as discussed above, but the time off is
not
required to be paid. The term paid sick days covers
the
voluntary bene�it of paying an employee when he
or she
is not working due to a short-term illness
such as the
�lu.) An important aspect of discretionary
bene�its that
must be kept in mind is that if a company offers
that
bene�it, then it falls under any laws that
regulate that
type of bene�it. For example, if a company offers
a 401(k) retirementplan, then the company must
adhere
to the provisions of the Employee Retirement
Income Security Act (ERISA) even though the
offering of a
401(k) retirementplan itselfis not required.
We’ll begin by discussing the laws related to
required bene�its, followed by a discussion of
legislation
impacting commonly given discretionary bene�its.
Federal Insurance Contributions Act (FICA)
The Federal Insurance Contributions Act
(http://www.gpo.gov/fdsys/granule/USCODE-2011-
title26/USCODE-2011-title26-subtitleC-chap21/content-
detail.html) funds the federal system of old-
age,
survivors, disability, and hospital insurance (OASDI) as

established under the Social Security Act of
1935.
Social Security bene�its comprise payments made to
workers after they have retired from work as well
as payments made in cases of disability where
a worker can no longer work and payments
made to a
http://www.gpo.gov/fdsys/granule/USCODE-2011-
title26/USCODE-2011-title26-subtitleC-chap21/content-
detail.html
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sec2.5,ch02sec2.6… 20/26
Critical Thinking
The cost and implementation of Social
Security is oftena source of political
debate. After reading this section, what’s
your assessment of how Social Security
is implemented in the workplace?
spouse and dependent children in the case of a
worker’s death. This is the “old-age, survivors,
disability”
portion of the act. The hospital insurance portion is
�inanced by the Medicare tax.
The system works by requiring payment of a
percentage of the employee’s wages, with
equal amounts

paid by both the employee and the employer. Employee
wages are subject to Social Security and
Medicare
taxesirrespective of the employee’s age or
whether he or she is receiving Social
Security bene�its under
the system. The current tax rate for Social
Security is 6.2%for the employee and 6.2%for
the employer, or
12.4% total. The current tax rate for Medicare is
1.45% for the employee and 1.45% for the
employer, or
2.9%total.
For Social Security, the amount of wages that is
taxable
is capped at a certain amount ($118,500 as
of 2015),
but this amount is subject to change. After
the limit is
reached, the employee and the employer both no longer
pay the Social Security tax for that calendar year.
In
1993, the Consolidated Omnibus Budget
Reconciliation
Act (COBRA) (covered below) removed the taxable
wagelimit for Medicare tax so that all covered wages
are subject to a Medicare tax.
The amount of Social Security bene�its a worker
receives at retirement varies based on the
worker’s
earnings, length of time working, and the age at
which the worker begins to collect
bene�its. Table 2.2

shows the change in an employee’s full
retirementbene�it that will be received if an
employee retires and
starts to draw Social Security either earlier or
later than normal retirementage.
Table 2.2 Social Security bene�it
Year of
birth
Reduction in bene�it if
retire at age 62
Normal retirementage—full
bene�it received
Increase in bene�it if
retire at age 70
1924 20.00% 65 15.00%
1925-26 20.00% 65 17.50%
1927-28 20.00% 65 20.00%
1929-30 20.00% 65 22.50%
1931-32 20.00% 65 25.00%
1933-34 20.00% 65 27.50%
1935-36 20.00% 65 30.00%
1937 20.00% 65 32.50%

1938 20.83% 65, 2 mo. 31.42%
1939 21.67% 65, 4 mo. 32.67%
1940 22.50% 65, 6 mo. 31.50%
1941 23.33% 65, 8 mo. 32.50%
1942 24.17% 65, 10 mo. 31.25%
1/31/2018 Print
sec2.5,ch02sec2.6… 21/26
Year of
birth
Reduction in bene�it if
retire at age 62
Normal retirementage—full
bene�it received
Increase in bene�it if
retire at age 70
1943-54 25.00% 66 32.00%
1955 25.83% 66, 2 mo. 30.67%
1956 26.67% 66, 4 mo. 29.33%

1957 27.50% 66, 6 mo. 28.00%
1958 28.33% 66, 8 mo. 26.67%
1959 29.17% 66, 10 mo. 25.33%
1960
and later
30.00% 67 24.00%
Note: Persons born on January 1 of any year
should refer to the previous year of birth.
Source: Social Security Administration
http://www.ssa.gov/OACT/ProgData/ar_drc.html
(http://www.ssa.gov/OACT/ProgData/ar_drc.html)
The amount a dependent or spouse receives at an
employee’s death or the amount an
employee receives if
disabled varies by the level of the employee’s
earnings, the length of time the employee has
been paying
into the system, and other such factors. More
information can be obtained from the Social
Security
Administration (http://www.ssa.gov) , the agency
responsible for administering Social Security.
Unemployment Compensation
Unemployment compensation provides workers who have
lost their jobs through no fault of their own
with monetary payments for a given period of
time or until they �inda new job. The intent of

the bene�it is
to help workers by partially contributing to
necessities, such as food, clothing, and shelter,
as a bridge until
the workers are able to �ind a new job.
Unemployment compensation is paid and
administered by the
individual states within the parameters set by
the federal government. Therefore, the amount of
unemployment compensation and the amount of time
out of work for which individuals may receive
compensation varies by state. In addition, there
are someadjustments to the amounts the
unemployed
may receive. For example, in Louisiana and Illinois,
the amount of unemployment compensation
received
will be adjusted downwardif the worker also
receives Social Security bene�its.
Unemployment compensation for U.S. workers is funded
by the Federal Unemployment Tax Act (FUTA),
which is paid by the company, not the employee.
The FUTA rate varies by company and is
determined by
factors such as the size of the company and how
many unemployment claims a company’s
workers have
made. Oncethe speci�ied dollar limit is reached, no
further taxesfor FUTA are collected for that
calendar
year.
Workers’ Compensation Law
Workers’ compensation law was devised to resolve

disputes over workplaceinjuries. It was created to
handle workplaceinjuries outside the traditional
tort law system that dealswith personal injuries as
a
compromise between both employer and employee rights
and defenses traditionally available under tort
law. Workers' compensation is largely a matter of
state law, although a similar system exists
for railroad
employees under the Federal Employer Liability
Act (FELA), 45 U.S.C. §51.
http://www.ssa.gov/OACT/ProgData/ar_drc.html
http://www.ssa.gov/
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sec2.5,ch02sec2.6… 22/26
All employees are covered by workers’
compensation insurance,which compensates an
employee for
lost time,medical expenses, and loss of life or
dismemberment arising from a work-related
injury, disease,
or death. Employees must immediately report
any accident or injury to their supervisor
and the human
resources department so that the necessary paperwork
is completed.
Patient Protectionand Affordable Care Act (PPACA) of
2010

The Patient Protectionand Affordable Care Act
(http://www.hhs.gov/healthcare/rights/) , often
referred
to as the Affordable Care Act (ACA) or more
colloquially as Obamacare, enacted major
changes to health
care insurance practices in the United States. Until
this act was signed into law, health insurance
was
considered a discretionary bene�it driven by
the employer’s need to be competitive in
the marketplace in
attracting and retaining employees as well as in an
effort to maintain a healthy and productive
workforce.
Now, under the act, health insurance is
required, but the impetus is on the individual to
obtain the
insurance.Employers of a suf�icient size and
scope to be covered under the law have
the choice of offering
health insurance or of paying a tax penalty in
lieu of offering insurance.
The act also reforms the health care system by
expandingthe availability of health insurance,
regulating
health insurance coverage, and restructuring health
care delivery, including the manner in which it is
funded. Some of the otherfeatures of the
legislation include the following:
Health care exchanges. The law requires states to
create and maintain health care “exchanges” in
which health insurance providers compete for

customers on equal terms. The exchangeswill be
open to anyone without employer-provided coverage
who wants to purchase a health insurance
plan. If a state does not create an exchange, the
federal government will create one for it.
Low-value plans.
No penalty for waiting periods.
Employer-provided free-choice vouchers.
Automatic enrollment procedure.
Incentivesfor wellness.
Tax on high-value plans. Beginningin 2018,
therewill be a 40% excise tax on insurance
companies and plan administrators for group health
coverage that exceeds a threshold of $10,200
for single coverage and $27,500 for families, not
counting stand-alone dental and vision plans.
For
retirees above age 55 and for plans that cover
employees in high-risk professions, the
thresholds
are $11,850 for single coverage and $30,950 for
families.
Work breaks for nursing mothers without
�inancial penalties.
It is important to note that legal challenges, delays
in enforcement, and lack of clarity have delayed
the
implementation of many aspects of PPACA.
This is very much a law that is in �lux,
and its complete impact
on health care and employment in general remain
to be seen as theseissues work themselves
out through
the courts and through future legislation.

Employee Retirement Income Security Act (ERISA) of
1974
The Employee Retirement Income Security Act of
1974 (http://www.dol.gov/general/topic/health-
plans/erisa) regulates retirementplans and other
employee bene�it plans that are offered by
private-sector
organizations. In common usage, ERISA also often
refers to Internal Revenue Coderegulations of
bene�it
plans as well as the actual act. The plans
covered under ERISA are voluntarily offered
by the organization;
they are not required by ERISA. If offered, ERISA
does dictate the minimum levels of bene�its
that are
http://www.hhs.gov/healthcare/rights/
http://www.dol.gov/general/topic/health-plans/erisa
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required under a plan as well as the reporting
and disclosure requirements. Examples of plans
covered
under ERISA include pension plans, 401(k)
plans, and health care savings accounts as well as
the
establishment of disability bene�its, death bene�its,
prepaid legal services, vacation bene�its, company-

sponsored day care centers, scholarship funds, and
apprenticeship and training bene�its.
ERISA has been expanded to include new health
laws—the Consolidated Omnibus Budget
Reconciliation
Act of 1985 and the Health Insurance Portability
and Accountability Act (HIPAA) of 1996—which
are
discussed below.
Consolidated Omnibus Budget Reconciliation Act of
1985
Throughout their careers, workers will likely face
multiple life events that may cause job
changes or even
job losses. The Consolidated Omnibus Budget
Reconciliation Act (http://www.dol.gov/dol/topic/health-
plans/cobra.htm) helps workers and their families
keep their group health coverage during times
such as
these. COBRA applies to plans in the private
sector and those sponsored by state and local
governments.
COBRA provides workers who lose their health
bene�its the option to continue group health
bene�its
provided by their current plan under certain
circumstances. If the employer continues to offer a
group
health plan, the employee and his or her family
can retain their group health coverage for up
to 18 months
by paying group rates. The COBRA premium

may be higher (the full cost of the bene�it plus a
2%
administration charge) than what the individual was paying
while employed. Historically, however, the
cost has typically been lower than for private,
individual health insurance coverage. It is
unclear, however,
how more recent legislation, such as the PPACA,
will impact pricing and, therefore, the need for
COBRA
coverage.
The American Recovery and Reinvestment Act (ARRA) of
2009 provided for premium reductions and
additional election opportunities for health bene�its
under COBRA for a limited time for those
workers
who lost their jobs between September 1, 2008,
and May 31, 2010. The employee received a
premium
reduction while the company received a tax credit
for the remaining portion of the premium.
On June 26, 2013, the U.S. Supreme Court, in
United States v. Windsor, found
unconstitutional Section 3 of
the federal Defense of Marriage Act (DOMA), which
had prohibited the federal government from
acknowledging marriages between same-sex couples. As a
result, federal laws governing employee bene�it
plans require companies to treat employees’
same-sex and opposite-sex spouses equally for
purposes of
bene�its that are extended to spouses, meaning �irms
are required to offer COBRA continuation
coverage

to same-sex spouses.
Health Insurance Portability and Accountability Act of
1996
The Health Insurance Portability and
Accountability Act
(http://www.dol.gov/ebsa/newsroom/fshipaa.html) helps
workers as they move to different jobs by
protecting workers’ ability to get and keep health
insurance coverage. Key aspects of HIPAA are
that it
protects workers and their families by limiting
exclusions for preexisting medical conditions
(known as preexisting conditions);
provides credit against maximum preexisting
condition exclusion periods for prior health
coverage and a process for providing certi�icates
showing periods of prior coverage to a new
group health plan or health insurance issuer;
http://www.dol.gov/dol/topic/health-plans/cobra.htm
http://www.dol.gov/ebsa/newsroom/fshipaa.html
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sec2.5,ch02sec2.6… 24/26
provides new rights that allow individuals to
enroll for health coverage when they lose
other
health coverage, get married, or add a new

dependent (versus having to wait for a
company’s
annual enrollment period);
prohibits discrimination in enrollment and in
premiums charged to employees and their
dependents based on health status–related factors;
guarantees availability of health insurance
coverage for small employersand renewability of
health insurance coverage for both small and large
employers; and
preserves the states’ role in regulating health
insurance,including the states’ authority to provide
greater protections than those available under
federal law.
Again, it is unclear how PPACA will impact
the need for HIPAA, as it provides more
extensive coverage
than that offered under HIPAA.
Case Study
A Moatfor Your Castle Inc.: Growing Pains
Alex Lloyd and Rebecca Lee are lifelong friends
who graduated from college and moved back home
to El Paso, Texas, 10 years ago to start a
business—A Moatfor Your Castle Inc.—building
wood,
vinyl, and metal fences for residences. The
business started small, with just the two of
them
handling all aspects of the business except for
the actual installation of the fences, which
was done
with the assistance of day laborers. As business grew,

they added support staff as well as
permanent installers to the company’s payroll.
Three years ago, they expanded into the pool
business and began offering the installation of
pools in addition to fences for residences.
They have
been successfulwith this new venture and have now hired
their 20th employee.
What laws covered in this chapter now apply to
A Moatfor YourCastle Inc. that did not
apply before it hiredits 20th employee? What
laws already applied? How many employees
must be hiredbefore FMLA is applicable?
At this stage, should the company handle
compliance in-house or outsource it? Why?
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sec2.5,ch02sec2.6… 25/26
Summary & Resources
Summary
In this chapter, we discussed federal laws that impact
reward systems offered by organizations. Mostof
the laws that in�luencecompensation and bene�its systems
today have their origins in the 1930s, when
the
country suffered economic devastation due to the
Great Depression. These are a few of
the most impactful

laws generated from that period:
The National Labor Relations (Wagner) Act continued
the mission of reforming and regulating
laborrelations. Unions acquired fundamental rights
and powers, including the right of collective
bargaining, de�initions of unfair laborpractices,
and established penalties for violating them.
The Social Security Act was created to establish
bene�its for the elderly and the unemployed. It
also enabled states to provide for those who
were blind, dependent and disabled children,
mothers and children, and public health.
The Fair Labor Standards Act established the
concepts of a minimum wage, overtime pay,
record
keeping, and child-labor standards.
It was not until 1963, when the Equal
Pay Act was passed and signed into law, that
gender-based
discrimination was prohibitedand, within the same
establishment, men and women were to be given
equal pay for equal work. Title VII of the
CivilRights Act of 1964 protects individuals
against employment
discrimination on the basis of race, color,
national origin, sex, or religion. The Age
Discrimination in
Employment Act protects individuals who are 40
years of age or olderfrom employment
discrimination
based on age.
The CivilRights Act of 1991 was enacted to
strengthen and improve federal civil rights

laws and to clarify
provisions regarding adverse impact actions. The
Pregnancy Discrimination Act amended Title VII of
the
CivilRights Act of 1964 to preclude any form of
discrimination toward pregnant women. The
Americans
with Disabilities Act prohibits private employers,
state and local governments, employment agencies,
and
laborunions from discriminating against quali�ied
individuals with disabilities.
Worker’s compensation law was devised to resolve
disputes over workplaceinjuries outside the
traditional
tort law system and represents a compromise
between both employer and employee rights and
defenses
traditionally available under tort law. Unemployment
compensation represents insurance bene�its paid by
the state or federal government to individuals
who are involuntarily out of work in order to
provide them
with assistance while obtaining otheremployment by
partially contributing to necessities, such as
food,
clothing, and shelter.
More recently, the Patient Protection and
Affordable Care Act reformed the health care
system by
expandingthe availability of health insurance,
regulating health insurance coverage, and restructuring
health care delivery, including the manner in which
it is funded. The future impact of the

PPACA is still not
clear due to ongoing legal and legislative issues.
Key Terms
adverse impact
Occurs when an individual in a protected group
is unintentionally discriminated against due to
the way
employment practices are carried out.
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sec2.5,ch02sec2.6… 26/26
collective bargaining
Good-faith negotiations between an employer and a
group of employees aimed at reaching
agreements
related to employment issues, such as wages,
hours, and working conditions.
disparate treatment
Occurs when an employer knowingly and
willingly discriminates against people on the
basisof religious
beliefs, race, or gender.
Great Depression
A severe worldwide economic depression in
the decade preceding World War II.

mixed motive
Occurs when a protected characteristic, such as
gender, and a legitimate reason, such as a
lack of skill
sets, are commingled and thus contribute to a denial
of hiring or promotion.
Social Security bene�its
Comprises payments made to workers after they
have retired from work as well as payments made
in
cases of disability where a worker can no
longer work and payments made to a spouse
and dependent
children in the case of a worker’s death.
unemployment compensation
Provides workers who have lost their jobs through no
fault of their own with monetary payments for a
given period of time or until they �inda new
job.
unfair laborpractices
Tactics used by employersto prevent employees
from joining unions and to disrupt union
activities in
the workplace. (The Taft-Hartley Act of 1947
amended the de�inition to also include tactics
used by
laborunions, such as coercing employees to join a
union and refusing to bargain with employers,
to
disrupt company activities.)
workers’ compensation insurance
Compensates an employee for lost time,medical

expenses, and loss of life or dismemberment
arising
from a work-related injury, disease, or death.
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sec1.5,ch01summar… 1/29
Learning Objectives
After reading this chapter, you will be able to:
1. Describe the historical development of
compensation.
2. Explain the broad context within which a
total rewards program operates.
3. Discuss the primary goals of a
compensation system.
4. Describe the key components of a total rewards
system.
5. De�ine core compensation and list its components.
1 An Overview of Compensation andBene�its
iStock/Thinkstock

1/31/2018 Print
Introduction
Consider the following situations:
A �inancial services �irm has grown to the
point where it needs to add account managers to
handle the client accounts. What is the best
way for the company to pay the account
managers so
that they are rewarded for getting new client
accounts as well as servicing existing client
accounts? Should the account managers be paid a
salary, a commission, a bonus, or some
combination of all of theseoptions?
••••
Two retail companies are in direct competition.
One company pays an average of $15.00 an
hour
but provides no company-paid holidays or vacation.
Another company pays an average of $10.00
an hour but also provides company-paid holidays and
vacation. Is one method better than the
other? For the company? For the employees?
Could either approach lead to a competitive
advantage over the competition?
••••

An automobile company has run into dif�icult times
and must cut expenses. Recognizing that
payroll is oftenthe single largest expense in
organizations, what is the impact on the
company if
it cuts wages? What impact will that have on
the morale, motivation, and retention of current
employees? Will this impact the ability to attract
new employees?
Managers,executives, business owners, and human
resources (HR) professionals ask questions such as
theseevery day. Why? Because it helps them
stay in business!
It must be remembered that employees are
individuals with their own desires, motivations,
and needs.
Properly designed, a compensation and bene�its
strategy that addresses the needs of not only
the business
but also its employees will support the company’s
overall business strategy, helping the company
be
successful in an ever-changing, competitive
environment. The key is to align the goals
and efforts of
employees with those of the organization for
which they work. Questions such as those
above must be
answered in a way that enhances, rather than detracts
from, the operation of the company. Since
employee
talent is a critical resource for a company,
the compensation, which includes bene�its, of
that talent is a

vital component of how a company operates.
In this book, we will explore the need for
aligning compensation and bene�it strategy with
business
strategy. Speci�ically, we will address the
contributions an effective compensation and bene�its
system
makes to ensure successfulachievement of the
�irm’s strategy. We will examine all aspects of
what it takes
for an employer to attract, motivate, recognize,
reward, and retain the most talented and
skilled work
forcepossible. While not every company will have a
dedicated compensation professional, much less a
compensation department, thesedecisions must still be
made in all types and sizes of businesses,
and it is
our goal in this book to provide you with the
knowledge and background to make these
kinds of informed
strategic decisions.
We begin this chapter by providing a brief
overview of the history of compensation and
how
compensation systems evolved into what they are today.
We then shift our attention to the primary factors
that go into creating a compensation system,
namely, an organization’s culture, business strategy,
and
administration, and how the threeinteract. We then end
with the primary goals that any compensation

1/31/2018 Print
system hopes to accomplish and the types of
compensation that can be utilized to design a
cohesive
compensation and bene�its plan.
1/31/2018 Print
Christie’s Images Ltd./Superstock
Bartering arose as the �irstmonetary
system.
1.1 A BriefHistory of Compensation
It is important to understand where we came
from in order to understand where we
are and where we are
going. Understanding how modern compensation
practices evolved can assist in identifying best
approaches to aligning corporate strategy with both
short- and long-term goals.
Bartering: The First Compensation System

One way to examine human culture is by
considering the threewaves (or ages) of
revolutionary change
that have, arguably, had the greatest impact on
society (see Tof�ler, 1970). The �irst of these
was the
agricultural revolution(beginning about 9000 BCE),
when humans began transitioning from
primarily
living as hunter-gatherers to growing crops
and beginning to live a more settled existence.
The next is the
Industrial Revolution (from the late 18th century
through the beginning of the 20th century), which
was
characterized by a dramatic growth in technology
and the movement from an agricultural-
based to a
manufacturing-based economy. The last, which began
in the mid-20th century and is still going
on, is the
information revolution, exempli�ied by the
creation and growth of computer-related
technology.
Our standards with regard to what is considered
both
valuable and useful in our lives have shifted
accordingly.
For example, how people live has changed, from
the
extended families necessary to sustain an
agrarian
society to nuclear families during the industrial
period
to the working-parent families of today.

Similarly,
business during the agrarian age was conducted by
the
family, by bureaucracies during the Industrial
Revolution, and by teams in the current
information
age. Underlying all of these economic shifts
and the
subsequent ways in which we organize society
has been
the method by which we compensate each
other for
labor.
Without a developed monetary system,
compensation
for one’s laborentailed using what one had grown
or
made by hand, such as making clothes
from cotton
grown in the �ields. People quickly �igured
out that this system was limiting and would
not work well. As
such, bartering, or the direct exchange of goods
or services for othergoods or services, arose
as a system
of exchange for one’s labors. In bartering, a
fur trapper, for example, might tradepelts to a
dairyfarmer in
exchange for milk, eggs, or cheese. The
quantities exchanged between the two would be
determined by
their mutually agreed-upon valuation. They might agree,
for example, that two dozen eggs was worth
one
small pelt, or that the trapper would provide

trapping services for the farmer over the time
frame of a
winter in exchange for the farmer’s supplying milk
for the same duration. Much of the impetus
for the
creation of written language camedirectly from the
need for keeping trackof bartered goods over
time
(Robinson, 1995).
The direct-exchange compensation system was helpful
in addressing immediate needs, but this
method
was limiting in its utility in that the resources
available were restricted to those in the
immediate
exchange. A dairyfarmer’s milk was worthless to a
locksmith, for example, if that locksmith also
owned a
cow, as therewould be nothing the farmer could
give to acquire the locksmith’s services.
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This is why a medium of exchange, such as the
various currencieswe use today, is so vital to
an exchange
system—it allows for people to acquire goods,
services, and resources beyond a direct one-to-
one trade.

Instead of a dairy farmer having to trade
milk for another direct good or
service, such as pelts or a
locksmith’s services, the farmer could receive a
tangible item (the medium of exchange) with an
agreed-
upon value that could be saved and used for an
altogether different need or purpose at a future
time.The
medium of exchange, in effect, then becomes a
means of storing value. This exchange allows
goods and
services to obtain a certain universally
accepted value, often resulting in the medium
used for the
exchange becoming valuable in itself. Perception of
value is the key component of this system.
All parties
involved must accept the value for an item in
order for it to maintain its value.
The actual items used in exchange and as a
store of value have also evolved with time. Lumps
of base
metal, such as copper or tin, were used as a
medium of exchange since at least the
beginnings of the
Bronze Age, or about 1000 BCE, while modern
coinage is much more recent and began as
simply a method
for identifying the weight and quality of the
metal being exchanged. People could
exchange their particular
goods or services for one of thesemetals and
then tradeelsewhere the metal they acquired for
whatever

they wanted or needed.
Today, our mediums of exchange are even more diverse.
We still use coinage for smaller exchanges,
but we
also use paper, plastic, and even electronic means of
compensating individuals and groups. All of
these
different means of exchange have liberated individuals
and organizations alike to form ever more complex,
mutually acceptable relationships that address wants
and needs. While the mechanism of
exchange has
changed over time,this core concept of storing value
for later use and exchanging what we have today
for
what we want or need in the future has not
changed. HR professionals use this concept of
exchanging one
item (an employee’s labor) for another
(compensation and bene�its) every day. Designed
properly, this
exchange relationship serves to alignthe employee’s
labors with the company’s goals and
strategies.
The Industrial Revolution: The Basis for Modern
Compensation Practices
Our complex system of compensation used today
has its rootsin the late 18th century with the
beginning
of the Industrial Revolution. The advent of tools
such as the cotton gin, patented by American
inventor Eli
Whitney in 1794, signaled the decline of

individual hand laborand the beginning of the
proliferation of
mechanical devices capable of much greater
productivity. The increasingcomplexity of heavy
industrial
machinery, however, necessitated the systematic
training of workers, and training, in turn,
represented an
increased cost in terms of both time and money.
Therefore, companies needed to �ind a
way to both utilize
that increased training and retain those trained
workers. The method of rewarding workers for
labor
needed to evolve.
Such technological changes in the economy also
required workers to move from the family
farm to more
population-dense urban areaswhere manufacturing
was booming. Individuals and families required—at
a
minimum—food, safety, and shelter in this new
urban environment. Compensating workers for
their time,
skills, and efforts became a requirement. This
dramatic shift in how and where people worked
and lived
added yet another dimension to compensation—
hence the need for a comprehensive
compensation
system that would attract, retain, and motivate
employees while enabling the company to
make a pro�it.
Taylor’s Scienti�ic Management Theory

In addition to proper training, guidelinesand rules
related to how the new industrial worker was to
be
managed were required. Compensation methods that
mirrored the realities of the Industrial Revolution
1/31/2018 Print
were also needed.
This void was �illed by Frederick Winslow Taylor,
who has been called the father of “scienti�ic
management” due to his work aimed at
improving industrial ef�iciency. Taylor, a trained
mechanical
engineer in the United States, believed that through
a detailed analysis of a given task, using
techniques
such as the detailed study of both the time taken
to accomplish actions and the actual
physical motions
performed(“time and motion” studies), it would be
possible to discover one best way to perform a
task
(Kanigel, 2005).
Based on his research and observations, Taylor
developed four rules for scienti�icmanagement:

1. Create work methods based on a scienti�ic
study of speci�ic tasks.
2. Scienti�ically select, train, and develop each
employee.
3. Provide detailed instructions for speci�ic tasks.
4. Divide work nearly equally between managers
and workers.
While conducting research using time and motion
studies, Taylor found that workers and
managers
typically did not interact with one another. At the
time,therewas little to no standardization in factory
work, and little motivation on the part of
managers or their subordinates to work except to
maintain an
employed status. In the late 1800s, standardizing
tasksand focusing on employee motivation were
radical
ideas, which is precisely what Taylor proposed.
One of the most in�luential ideasTaylor introduced
at the time was the notion of providing a
fair wagefor
a fair day’s work. Additionally, he highlighted
the need for selecting, training, and developing
each
employee.Although Taylor was focused on the
scienti�icside of work—and as a result
would oftenforget
that the workers were people and not machines
themselves—many of the ideashe put forth related
to the
need to fairly compensate workers for their
labor. Taylor’s ideas laid the groundwork for
the modern

workplaceand the need for a comprehensive
compensation system.
Fayol’s Principles of Management
Building on Taylor’s scienti�icmanagement theory,
Henri Fayol, a mining engineer in France,
developed 14
principles of management (Fayol, 1949), threeof
which have direct implications for the
compensation and
bene�its programs of today. They are remuneration,
initiative, and equity.
Remuneration—Employee satisfaction depends, in
part, on a fair day’s pay for a fair day’s
work, a
re�lection of Taylor’s in�luenceon Fayol’s
thinking.
Initiative—Productive employees take responsibility
for their work and put forth effort and ideas
to better the organization.
Equity—Employees should be compensated
commensurate to their output. The compensation
employees receive must be aligned with not only
what they believe they and the job they perform
are worth but also with what others who perform
similar work receive.
Taken together, Taylor’s and Fayol’s ideashave
in�luenced business practices since their
inception and
continuing into the modern day.
Today, organizations have evolved beyond just
providing pay for work to providing otherforms of

care and
support for employees. Changes in society have
necessitated the creation and growth of laws
and
government regulation. Additionally, the �ield of
psychology has taught us that people are
not easy to
understand and are driven by individual goals
and motivation. Both of these factors will
be addressed
1/31/2018 Print
extensively in future chapters. Remember,
however, as we will repeat numerous times
throughout this
book, the hallmark of an effective compensation
and bene�its program is consistency. In order
to attain
consistency, we need to understand what
compensation actually is.
1/31/2018 Print

Critical Thinking
Select an organization with which you
are familiar and describe the type of
compensation strategy it uses.
1.2 Components of a Compensation System
A compensation system is a systematic
approach to providing rewards to employees in
exchange for
work provided, with the goal of helping organizations
attract, motivate, and retain the best talent. Of
course, many different components factor into
not only a proposed compensation plan but also the
execution of that plan. An organization needs to
take into account how much it can afford as
well as what
the market demands, what potential talent might
expect, and also how current employees might
react.
Let’sconsider the following scenario:
A German software company became aware of an
extremely talented senior marketing executive
from a U.S. company who had become dissatis�ied in
her current position. The woman, Anne
Prevost, had risen through the ranks at her current
company and had been promoted as far as
possible. The German �irm saw that Prevost had
engineered an advertising campaign that helped
her company make signi�icant inroads into the
German �irm’s marketplace. The current head of
marketing for the German �irm, Jürgen Mehr,
recognized that Anne might be open to
changing
employersand would be a valuable addition to

the company. However, Jürgen was dismayed that
Anne’s salary was already almost identical to
his, and wooing her away from her current
employer might require offering a potential
subordinate a higher salary than he made
himself. In
discussing the situation with the head of human
resources, Mehr discovered Prevost had a
�irm
offer with another of their competitors, a highly
leveraged start-up that offered a lower base
salary but substantial stock options. Prevost
spoke excellent German and was quiteinterested in
moving to Germany and rearing her sons there,
even though the cost of living in Germany
was
substantially more than what she was used to.
Additionally, the CEO of the German company
was
sold on the idea of having Prevost join the team,
especially sincetheir current strategy was to
increase international revenues by 10%,and he �irmly
believed Prevost could help achieve that
goal. (Fryer, 2003; used by permission)
As is evident in the above scenario, thereare
several elements Anne Prevost �inds
important in a rewards
program: compensation, bene�its, work-life, recognition,
and developmental and career opportunities. If
this German �irm wants to recruit Prevost, it
needs to take her needs into consideration.
However, an
effective compensation strategy also will take into account
issues related to what is best for the
company

in terms of the productivity gains it accrues
by making the hire, how much it is able to
afford, how it will
affect the standing of current talent in the
�irm, and so on.
A compensation strategy, therefore, must alignwith the
company’s overall strategic vision and goals.
The
company’s management must answer thesequestions:
What will it cost not to have this employee
on
board (due to not bene�iting from her talents as
well as the potential of a competitor
bene�iting instead)?
What problems do we expect her to solve?
How can she help us achieve our long-term market
objectives?
Part of this equation is taking into consideration
the
personal costsand changes for the potential hire. In
the
particular case of Anne Prevost, the �irm must
consider
cost-of-living differentials between the United States
and Germany, effective cultural integration support,
and
otherelements key to her success. After all, little
will be
gained by a company in hiring an employee
for perhaps
less up-front money, only to have that employee
be
unable to ef�iciently and effectively make
the personal

and occupational transition.Fundamentally,the goal of
1/31/2018 Print
an effective compensation strategy must address what it
will take to keep the new potential hire focused
on performance and not distracted by personal matters
that may in part arise due to being hiredby
the
organization in the �irstplace. In the case of
Anne Prevost, the German hiring �irm
would not want to hire
her to have her distracted with issues such
as differences in exchange rates or tuition
for her sons’
schooling or excessive cultural or language barriers.
Such issues would decrease her performance at
work,
which would diminish the company’s investment
in her talent. Worse, persistent problems
on the
personal front might also result in her leaving
the �irm, which would mean that the
hunt for talent would
need to begin all over again, costing the �irm
yet more time and more money. We will further
examine
issues like this in future chapters.
For now, however, let’s look brie�ly at threefactors

that are integral to the creation of any
compensation
system.
WorldatWork (www.worldatwork.org
(http://www.worldatwork.org) ), formerly known as
the American
Compensation Association, has provided compensation
professionals with resources and education since
1955. The organization created a compensation
model called the total rewards model that
highlights the
impact of organizational culture, business strategy,
and HR strategy on attracting, motivating, and
retaining employees. The model is presented in
Figure 1.1.
Figure 1.1: WorldatWork’stotal rewards model
A company’s reward strategy is not just for
the employee’s bene�it. It impacts
the overall business performance while also
boosting employee engagement.
http://www.worldatwork.org/
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sec1.5,ch01summ… 10/29
Critical Thinking
Discuss the WorldatWork model and

how it can be used to understand the
relationship between rewards and
performance.
Copyright © 2015 WorldatWork. All rights reserved.
The WorldatWork Total Rewards Model provides a
way
to conceptualize the way employee rewards impact
business performance. In the center of the model
is the
employee.An employee’s performance is dependent,
in
part, upon satisfaction with (and other attitudes such
commitment to) an organization and engagement
with
the organization’s purpose and mission. These interact
to in�luence overall business performance.
Centered
around the employee in the model are the key
goals of a
reward system, namely, to attract, motivate, engage,
and
retain quality employees. These goals are of
course
in�luenced by the total rewards strategy,
including compensation, bene�its, work-life effectiveness,
recognition, performance management and talent
development. However, this strategy is directly
impacted by the macro level strategic facets of
the organization: organizational culture, business
strategy,
and human resource strategy. We will now discuss
thesestrategic elements in depth.

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Organizational Culture
Organizational culture represents the shared norms
and values of an organization, such as a
company or
charity, that dictate not only how goals are
accomplished but also the ways in which those
goals are
achieved. The culture of any organization can be
operationalizedin numerous ways, but generally,
and
more informally, it can be viewed as “the way
we get things done around here.” As
opposed to formal
academic de�initions, this description is, perhaps,
more straightforward and may be more easily
understood by all employees and managers and
communicated more effectively.
A healthy organizational culture helps get all
employees on the same page as management in
terms of
goals and behavior, which leadsto a positive
environment that motivates employees to be
successfuland
promotes loyalty to the organization as well as
unitywithin the organization. An unhealthy
organizational
culture has the opposite effect and leads to a

negative environment that runs counter to what
management wants to accomplish. To achieve a
healthy organizational culture, the management
team is
critical in setting the culture and maintaining it
through policies, procedures, reward systems,
and
everyday ways of conducting business.
To understand organizational culture, we must also
understand the nature of the society in
which the
company is embedded. Hofstede (http://geert-
hofstede.com/) (1983b) developed a model for
international
management and cross-cultural communication
utilizing six dimensions that capture the essential
elements of a country’s culture. The dimensions
are power distance, individualism, masculinity,
uncertainty avoidance, pragmatism, and indulgence.
In keeping with our scenario at the beginning of
this
section, we’lllook at the comparison of Germany in
relation to the United States with regard to
thesesix
dimensions in Figure 1.2.
1. Power distance considers the degree to which
a society recognizes and accepts authority. In
our
German example, Anne would need to know
that in Germany the power distance is less
than in
the United States, so participative meetings and
communication in general will be more common.
Additionally, leader actions and decisions are more

likely to be challenged.
2. Individualism accounts for how strongly a culture
emphasizes individual achievement over group
and community achievement. Since Anne comes
from the United States, a country that
emphasizes individualism more strongly than Germany
does, she must be aware of this difference
and make adjustments to how she interacts and
works with others in her department and
the
company as a whole. While the German culture
values individualism at a relatively high level,
it is
not nearly as high as in the United States.
3. Any society with a high score in masculinity
will be driven by competition, success, and
achievement—all characteristics of U.S. and German
culture. In terms of this dimension, Anne
will
be able to transition easily to the German culture.
4. In the United States, taking reasonable
risks in business is encouraged. In Germany, on
the other
hand, not taking as many risks is more the
normdue to the tendency toward uncertainty
avoidance.
5. Pragmatism refers to societies that do not
have a need to explain everything but to
lead a virtuous
life and accept that positive results will occur.
Pragmatism is using a practical approach to
problems, focusing on the situation, and not being

pulled into ideasand theories. Germany and
the United States are at extreme ends of the
spectrum on this characteristic. As such, Anne
would
need to be prepared to operate in a generally
more pragmatic manner than would be required in
her current company.
6. Indulgence de�ines the degree to which
people in a society control their desires
and impulses and
behave in a more cynical and pessimistic way.
We see in Figure 1.2 that German people
are more
http://geert-hofstede.com/
1/31/2018 Print
restrained, control self-grati�ication, and tend not to
emphasize leisure activities. These are
cultural qualities Anne will need to be mindful of.
Figure 1.2: Cross-cultural comparison: Germany and
the
United States
Using Hofstede’s six dimensions, it becomes
clear which cultural
qualities Anne will need to be mindful of when
she begins working in

Germany.
Source: The hofstede centre. www.geert-hofstede.com
(http://geert-hofstede.com/)
In addition to broader national issues related to
culture, organizations also take on characteristics
that
de�ine the way they conduct business and what it is
like to work for or interact with the
organization. The
norms and values of an organization in�luence
factors from employee selection and retention to
compensation as well as corporate strategy (Giorgi,
Lockwood, & Glynn, 2015). When designing
a
compensation and bene�its system, the company needs
to put a plan in place that reinforces and
helps
buildits culture. Consider the example of Southwest
Airlines that is presented in the following feature.
Compensation and Bene�its in the Real World:
Business Strategy at
SouthwestAirlines
SouthwestAirlines was an idea created by Herb
Kelleher and Rollin King in the late 1960s,
though,
due to courtchallenges from otherairlines, the
company did not get off the ground (literally)
until
June 1971. The airline began by �lying among
just threecities in Texas (Houston, Dallas,
and San
Antonio) as a way to minimize barriers to entry

such as the then-restrictive federal transportation
laws. Beginningwith a �leet of only threeused
Boeing 737s, SouthwestAirlines parlayed its
approach of a low-cost differentiation strategy into
one of the most pro�itable and fastest-growing
airlines in the world. By its second year of
operations, the company charged only $20.00
for one-
way fares between its threedestination cities,
whereas otherairlines charged $28.00. It truly
had a
competitive position.
http://geert-hofstede.com/
1/31/2018 Print
Critical Thinking
Why is an understanding of
organizational culture important to
developing and implementing a
successfultotal rewards system? Select
an organization with which you are
familiar and describe its culture. In
otherwords, how do things get done in
the organization?
Since its beginnings, Southwesthas maintained its
low-cost differentiation strategy using only the
Boeing 737, thus requiring its mechanics, �light,

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