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Solution Manual For Strategic Compensation A Human Resource Management Approach, 11th edition Joseph J. Martocchio Chapter 1-14

Table of Contents CHAPTER 1 Strategic Compensation: A Component of Human Resource Systems .........................1 I. Overview II. Defining Strategic Compensation III. Compensation as a Strategic Business Partner IV. Strategic Compensation Decisions V. Building Blocks and Structure of Strategic Compensation Systems VI. Fitting the Compensation Function in an Organization‘s Structure VII. Stakeholders of the Compensation System VIII. Developing Skills for your Career IX. Key Terms X. Discussion Questions and Suggested Answers XI. Preparing for My Career: Compensation in Action XII. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XIII. XIV.

Crunch the Numbers!: Questions and Suggested Student Responses

Working Together: Team Exercise with Suggested Student Responses

CHAPTER 2 Contextual Influences on Compensation Practice ........................................................17 I. Overview II. Interindustry Wage Differentials III. Pay Differentials Based on Occupational Characteristics IV. Geographic Pay Differentials V. Labor Unions VI. Employment Laws That Influence Compensation Practices VII. Key Terms VIII. Discussion Questions and Suggested Answers IX. Preparing for My Career: Compensation in Action X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XI. Crunch the Numbers! Questions and Suggested Student Responses XII. Working Together: Team Exercise with Suggested Student Responses

CHAPTER 3 Traditional Bases for Pay: Seniority and Merit ............................................................32 I. Seniority and Longevity Pay II. Merit Pay III. Performance Appraisal IV. Strengthening the Pay-for-Performance Link V. Possible Limitations of Merit Pay Programs VI. Key Terms VII. Discussion Questions and Suggested Answers VIII. Preparing for My Career: Compensation in Action IX. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses X. Crunch the Numbers!: Questions and Suggested Student Responses XI. Working Together: Team Exercise with Suggested Student Responses CHAPTER 4 Incentive Pay ....................................................................................................................48 I. Exploring Incentive Pay II. Contrasting Incentive Pay with Traditional Pay III. Individual Incentives IV. Group Incentives V. Company-Wide Incentives VI. Designing Incentive Pay Programs VII. Key Terms VIII. Discussion Questions and Suggested Answers IX. Preparing for My Career: Compensation in Action X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XI. Crunch the Numbers! Questions and Suggested Student Responses XII. Working Together: Team Exercise with Suggested Student Responses CHAPTER 5 Person-Focused Pay .........................................................................................................62 I. Defining Person-Focused Pay: Pay-for-Knowledge, Skill-Based Pay, and Competency-Based Pay II. Usage of Person-Focused Pay Programs III. Reasons to Adopt Person-Focused Pay Programs IV. Varieties of Person-Focused Pay Programs V. Contrasting Person-Focused Pay with Job-Based Pay VI. Advantages and Disadvantages of Person-Focused Pay Programs VII. Key Terms VIII. Discussion Questions and Suggested Answers IX. Preparing for My Career: Compensation in Action X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XI. Crunch the Numbers! Questions and Suggested Student Responses iv Copyright © 2025 Pearson Education, Inc.

XII.

Working Together: Team Exercise with Suggest Student Responses

CHAPTER 6 Building Internally Consistent Compensation Systems ...............................................74 I. Internal Consistency II. Job Analysis III. Job Evaluation IV. Pay Equity V. Internally Consistent Compensation Systems and Competitive Strategy VI. Key Terms VII. Discussion Questions and Suggested Answers VIII. Preparing for My Career: Compensation in Action IX. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses X. Crunch the Numbers! Questions and Suggested Student Responses XI. Working Together: Team Exercise with Suggested Student Responses CHAPTER 7 Building Market-Competitive Compensation Systems ................................................91 I. Market-Competitive Pay Systems: The Basic Building Blocks II. Compensation Surveys III Integrating Internal Job Structures with External Market Pay Rates IV. Compensation Policies and Strategic Mandates V. Key Terms VI. Discussion Questions and Suggested Answers VII. Preparing for My Career: Compensation in Action VIII. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses IX. Crunch the Numbers! Questions and Suggested Student Responses X. Working Together: Team Exercise with Suggested Student Responses CHAPTER 8 Building Pay Structures That Recognize Employee Contributions ..........................105 I. Constructing a Pay Structure II. Pay Transparency III. Designing Merit Pay Systems IV. Designing Sales Incentive Compensation Plans V. Pay Structure Variations VI. Key Terms VII. Discussion Questions and Suggested Answers VIII. Preparing for My Career: Compensation in Action IX. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses X. Crunch the Numbers! Questions and Suggested Student Responses XI. Working Together: Team Exercise with Suggested Student Responses

CHAPTER 9 Discretionary Benefits ...................................................................................................121 I. Origins of Discretionary Benefits II. Categories of Discretionary Benefits III. Legislation Pertinent to Discretionary Benefits IV. Designing and Planning the Benefits Program V. The Benefits and Costs of Discretionary Benefits VI. Key Terms VII. Discussion Questions and Suggested Answers VIII. Preparing for My Career: Compensation in Action IX. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses X. Crunch the Numbers! Questions and Suggested Student Responses XI. Working Together: Team Exercise with Suggested Student Responses CHAPTER 10 Legally Required Benefits .............................................................................................139 I. Origins of Legally Required Benefits II. Categories of Legally Required Benefits III. Health Insurance Program Design Alternatives IV. Additional Health Care Legislation V. The Benefits and Costs of Legally Required Benefits VI. Key Terms VII. Preparing for My Career: Compensation in Action VIII. Discussion Questions and Suggested Answers IX. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses X. Crunch the Numbers! Questions and Suggested Student Responses XI. Working Together: Team Exercise with Suggested Student Responses CHAPTER 11 Compensating Executives ..............................................................................................159 I. Contrasting Executive Pay with Pay for Nonexecutive Employees II. Defining Executive Status III. Executive Compensation Packages IV. Principles and Processes for Setting Executive Compensation V. Executive Compensation Disclosure Rules VI. Executive Compensation: Are U.S. Executives Paid Too Much? VII. Key Terms VIII. Discussion Questions and Suggested Answers IX. Preparing for My Career: Compensation in Action X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XI. Crunch the Numbers! Questions and Suggested Student Responses XII. Working Together: Team Exercise with Suggested Student Responses

CHAPTER 12 Compensating the Flexible Work Force: Contingent Employees and Flexible Work Schedules ................................................177 I. The Contingent Workforce II. Pay and Employee Benefits for Contingent Workers III. Remote Work IV. Flexible Work Schedules V. Pay and Employee Benefits for Flexible Employees VI. Strategic Issues and Choices in Using Contingent and Flexible Workers VII. Key Terms VIII. Discussion Questions and Suggested Answers IX. Preparing for My Career: Compensation in Action X. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses XI. Crunch the Numbers! Questions and Suggested Student Responses XII. Working Together: Team Exercise with Suggested Student Responses

CHAPTER 13 Compensating Expatriates ............................................................................................194 I. Competitive Advantage and How International Activities Fit In II. Preliminary Considerations III. Components of International Compensation Programs IV. Balance Sheet Approach for U.S. Expatriates‘ Compensation Packages V. Repatriation Pay Issues VI. Key Terms VII. Discussion Questions and Suggested Answers VIII. Preparing for My Career: Compensation in Action IX. End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses X. Crunch the Numbers! Questions and Suggested Student Responses XI. Working Together: Team Exercise with Suggested Student Responses

CHAPTER 14 Pay and Benefits Outside the United States ................................................................210 I. Introduction II. Pertinent Concepts for Quantifying Economic Elements in the Discussion of Pay and Benefits Outside the United States III. North America IV. South America V. Europe VI. Asia VII. Key Terms VIII. Discussion Questions and Suggested Answers vii Copyright © 2025 Pearson Education, Inc.

IX. X. XI. XII.

Preparing for My Career: Compensation in Action End of Chapter Cases: Instructor Notes, and Questions and Suggested Student Crunch the Numbers! Questions and Suggested Student Responses Working Together: Team Exercise with Suggested Student Responses

Sample Syllabus .............................................................................................................226 Building Strategic Compensation Systems .................................................................228

CHAPTER 1 Strategic Compensation: A Component of Human Resource Systems

Learning Objectives 1-1. 1-2. 1-3. 1-4. 1-5. 1-6.

Define strategic compensation. Summarize the role of compensation as a strategic business partner. Explain strategic compensation decisions. Identify and discuss the building blocks and structural elements of strategic compensation systems. Describe the fit of the compensation function in organizations. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation professionals perform. viii Copyright © 2025 Pearson Education, Inc.

1-7.

Explore essential skills for developing your career in compensation or any other career path. Outline

I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII.

Overview Defining Strategic Compensation Compensation as a Strategic Business Partner Strategic Compensation Decisions Building Blocks and Structure of Strategic Compensation Systems Fitting the Compensation Function in an Organization‘s Structure Stakeholders of the Compensation System Developing Skills for your Career Key Terms Discussion Questions and Suggested Answers Preparing for My Career: Compensation in Action End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses

XIII.

Crunch the Numbers! Questions and Suggested Student Responses

XIV.

Working Together: Team Exercise with Suggested Student Responses

Lecture Outline I.

Overview A. Manpower planning 1. Predecessor to contemporary human resource management, focus was on effective deployment of employees 2. Goal was to achieve maximum productivity per employee B. Personnel management 1. Evolved due to government regulations concerning: a. Payroll taxes ix Copyright © 2025 Pearson Education, Inc.

b. Minimum wage laws c. Antidiscrimination laws 2. Competitive advantage a. Since 1980‘s recognition that employees can contribute to competitive advantage b. Competitive advantage describes a company‘s success when the company acquires or develops capabilities that facilitate outperforming the competition c. HR becomes a strategic function II.

Defining Strategic Compensation A. What Is Compensation? 1. Intrinsic and extrinsic compensation rewards employees receive for performing their jobs a. Intrinsic compensation: Reflects employees‘ psychological mindsets that result from performing their jobs b. Extrinsic compensation: Includes both monetary and nonmonetary rewards for: i. Obtaining certain job performance levels ii. Acquiring new skills and knowledge 2. Monetary compensation represents core compensation 3. Nonmonetary rewards (also known as employee benefits) include: a. Protection programs (e.g., health insurance) b. Paid time off (e.g., vacations) c. Services (e.g., day care assistance) 4. Both monetary and nonmonetary compensation represent costs to companies

B. What is Strategic Compensation? 1. Competitive business strategy refers to the planned use of company resources 2. Human resource strategies specify the use of multiple HR practices to reinforce competitive business strategy 3. Strategic compensation refers to the design and implementation of compensation systems to reinforce the objectives of both HR strategies and competitive business strategies III. Compensation as a Strategic Business Partner A. HR and compensation professionals today need to think like the chief executive officer (CEO) to become a strategic partner in achieving organizational plans and results B. Compensation professionals can give the CEO and chief financial officer (CFO) an understanding of the roles employees play in organizations to expand or shrink shareholder value C. How HR functions serve as strategic business partner 1. Capital refers to factors that enable companies to generate income, raise stock prices, bring economic value, strong brand identity, and reputation 2. Human capital refers to sets of collective skills, knowledge, and abilities that employees can apply to create value for their employers D. Compensation professionals can leverage the value of human capital in a variety of ways such as a well-designed merit pay program to reinforce performance IV. Strategic Compensation Decisions A. Environmental scanning 1. Used for strategy formulation 2. Main focus is discerning threats and opportunities B. Competitive Business Strategy Choices 1. Lowest-cost strategy or cost leadership strategy focuses on gaining completive advantage by being the lowest-cost producer of a product or service within the marketplace 2. Differentiation strategies develop products or services that are unique from those of their competitors C. Compensation Decisions That Support the Firm‘s Strategy 1. Compensation professionals use two broad elements to support strategic initiatives a. Basic building blocks b. Structural design elements

2. Employee roles associated with competitive strategies a. Compensation professionals must design and implement compensation practices that elicit strategy-consistent employee roles V. Building Blocks and Structure of Strategic Compensation Systems A. Building Blocks: Core Compensation and Employee Benefits 1. Core compensation a. Base pay includes hourly pay or wage or salary b. Is governed by Fair Labor Standards Act c. Is set according to compensable factors such as level of skill, effort, and responsibility required to perform the job and the severity of the working conditions i. Compensable factors are used to determine if jobs are equal under the Equal Pay Act of 1963 d. Is adjusted periodically for cost-of-living increases, differences in an employee‘s job performance, and increases in an employee‘s skill level or job knowledge i. Cost-of-living adjustments (COLA‘s) represent periodic base pay increases that are founded on changes in prices as recorded by the Consumer Price Index (CPI) e. Seniority pay systems reward employees with periodic additions to base pay according to employees‘ length of service in performing their jobs i. Designed according to the human capital theory: Employees will become more productive as they refine existing skills and acquire new skills and knowledge through length of service f. Merit pay is permanent base pay increases granted because of job performance g. Incentive pay or variable pay rewards employees for partially or completely attaining a predetermined work objective h. Person-focused pay or competency-based pay rewards employee for specifically learning new curricula i. Pay-for-knowledge plans reward managerial, service, or professional workers for successfully learning specific curricula ii. Skill-based pay is used mostly for employees who perform physical work and increases as workers master new skills 2. Employee benefits a. Represent nonmonetary rewards b. Discretionary benefits include three broad categories i. Protection programs that provide family benefits, promote health, and guard against income loss caused by factors such as unemployment, disability, or serious illness xii Copyright © 2025 Pearson Education, Inc.

ii. Paid time off such as vacation iii. Services provide such enhancements as tuition reimbursement and day care assistance c. Legally-required benefits are protection programs that attempt to promote worker safety and health and maintain family income streams i. Social Security Act of 1935 ii. Family and Medical Leave Act of 1993 iii. Patient Protection and Affordable Care Act of 2010 B. Fundamental Compensation System Design Elements 1. Internal consistency a. Internally consistent compensation systems clearly define the relative value of each job among all the jobs within a company b. Is based on the principle that employees working at jobs that require greater qualifications, more responsibilities, and/or more complex job duties should be paid more c. Is achieved using job analysis and job evaluation i. Job analysis is a systematic process for gathering, documenting, and analyzing information in order to describe jobs ii. Job evaluation is used to systematically recognize differences in the relative worth among a set of jobs 2. Market competitiveness a. Market-competitive pay systems are based on results of compensation surveys b. Compensation surveys collect and then analyze competitors‘ compensation data 3. Recognizing employee contributions a. Pay structures recognize differences in employee contributions, such as credentials, job knowledge, and job performance b. Pay grades group jobs for pay policy application c. Pay ranges include minimum, maximum, and midpoint pay rates C. Alternative Pay Structure Configurations 1. Merit pay plans 2. Sales compensation plans 3. Broadband structures 4. Two-tier wage structures 5. Executive compensation 6. Contingent worker compensation 7. Expatriate compensation 8. Compensation structures in countries other than the United States

VI. Fitting the Compensation Function in an Organization’s Structure A. How HR Professionals Fit into the Corporate Hierarchy 1. Line employees are workers who are directly involved in producing a company‘s goods or services 2. Staff employees are workers whose job it is to support the line functions human resource professionals are staff employees 3. HR practices include: a. Recruitment b. Selection c. Performance appraisal d. Training e. Career development f. Labor-management relations g. Employment termination h. Managing HR within the context of legislation B. The Compensation Profession 1. An executive is a top-level manager who reports directly to the corporation‘s CEO or to the head of a major division 2. A generalist, who may be an executive, performs tasks in a variety of HRrelated areas 3. A specialist may be an HR executive, manager, or non-manager who is typically concerned with only one of the areas of compensation practice 4. Opportunities for employment for compensation and benefits managers are projected to grow C. How the Compensation Function Fits into HR Departments 1. Compensation, recruitment, and selection a. Companies can spark interest by communicating the positive features of the core compensation and employee benefits programs b. Companies may offer inducements such as signing bonuses 2. Compensation and performance appraisal a. Performance appraisals are key to effective merit pay programs b. Employees must perceive a strong relationship between attaining performance standards and receiving pay increases 3. Compensation and training a. Successful pay-for-knowledge plans depend upon a company‘s ability to develop and implement systematic training programs b. Companies implementing pay-for-knowledge plans typically increase the amount of classroom and on-the-job training 4. Compensation and career development

a. Employees make lateral moves across a company‘s hierarchy or vertical moves up the hierarchy b. Employee‘s compensation changes reflect career development 5. Compensation and labor-management relations a. Collective bargaining agreements describe terms of employment b. Companies may provide COLAs b. Companies establish base pay on seniority pay 6. Compensation and employment termination a. Employment terminations are either involuntary or voluntary b. Some companies offer severance pay for involuntary terminations c. Companies sponsor pension programs in the case of retirement d. Companies sometimes use early retirement programs to reduce workforce size 7. Compensation and legislation a. Laws were enacted to establish acceptable employment practices and protect employees‘ rights b. Are grouped on four main themes i. Income continuity, safety, and work hours ii. Pay discrimination iii. Medical care and accommodation of disabilities and family needs iv. Prevailing wage laws c. Relevant laws include: i. Fair Labor Standards Act of 1938 ii. Equal Pay Act of 1963 iii. Civil Rights Act of 1964 iv. Patient Protection and Affordable Care Act of 2010 v. Pregnancy Discrimination Act of 1978 vi. Americans with Disabilities Act of 1990 vii. Family and Medical Leave Act of 1993 viii. Davis–Bacon Act of 1931

VII. Stakeholders of the Compensation System A. The success of HR departments depends on how they will serve various stakeholders including: 1. Employees 2. Line managers 3. Executives 4. Unions 5. U.S. Government B. Employees 1. Must educate employees on training options and connections between training and their pay 2. Must determine which objectives of discretionary benefits are most important to their particular workforce C. Line managers 1. Use their knowledge of relevant laws to help them make sound compensation judgments 2. Advise them on establishing pay rates E. Executives 1. Develop and manage sound compensation systems F. Unions 1. Abide by their collective bargaining agreements G. U.S. Government 1. Keep updated and comply with all employment legislation 2. Demonstrate that alleged discriminatory pay practices are not discriminatory VIII. Developing Skills for Your Career A. This course and this text will give you the opportunity to develop and practice seven important skills: 1. Communication a. The effective use of oral, written, and nonverbal skills for multiple purposes 2. Critical Thinking a. Purposeful and goal-directed thinking used to define sand solve problems 3. Collaboration a. Individuals actively work together on a task, constructing meaning and knowledge as a group

4. Knowledge Application and Analysis a. The ability to learn a concept and then appropriately apply that knowledge in another setting 5. Business Ethics and Social Responsibility a. Business ethics are sets of guiding principles that influence the way individuals and organizations behave b. Social responsibility is the implied, enforced, or felt obligation of managers to protect the interests of others c. Corporate sustainability focuses on the possible future impact of an organization on society 6. Information Technology Application and Computing Skills a. The ability to select and use appropriate technology to accomplish a given task 7. Data Literacy a. Ability to access, assess, interpret, manipulate, summarize, and communicate data End of the Chapter IX. Key Terms Competitive advantage: Describes a company‘s success when the company acquires or develops capabilities that facilitate outperforming the competition Compensation: Represents both the intrinsic and extrinsic rewards employees receive for performing their jobs and for their membership as employees Intrinsic compensation: Reflects employees‘ psychological mind-sets that result from performing their jobs Extrinsic compensation: Includes both monetary and nonmonetary rewards Core compensation: Monetary compensation Employee benefits: Non-monetary compensation Competitive business strategy: The planned use of company resources—financial capital, equipment capital, and human capital— to promote and sustain competitive advantage Human resources strategies: Specify the use of multiple HR practices to reinforce competitive business strategy Strategic compensation: Refers to the design and implementation of compensation systems to reinforce the objectives of both HR strategies and competitive business strategies Capital: Refers to the factors that enable companies to generate income, higher company stock prices, economic value, strong positive brand identity, and reputation

Human capital: Refers to sets of collective skills, knowledge, and abilities that employees can apply to create value for their employers Cost leadership or lowest-cost strategy: Focuses on gaining competitive advantage by being the lowest-cost producer of a product or service within the marketplace, while selling the product or service at a price advantage relative to the industry average Differentiation strategies: Companies adopt this strategy when they develop products or services that are unique from those of their competitors Base pay: Recurring money employees receive for doing their jobs Hourly pay or wage: Base pay received for each hour worked Annual salary: Base pay received for performing a job, regardless of the actual number of hours worked Compensable factors: Skill, effort, responsibility, and working condition factors Cost-of-living adjustments (COLAs): Represent periodic base pay increases that are founded on changes in prices as recorded by the Consumer Price Index (CPI) Seniority pay: A system to reward employees with periodic additions to base pay according to employees‘ length of service in performing their jobs Human capital theory: Employees‘ knowledge and skills (human capital) add value Merit pay: Program that assumes that employees‘ compensation over time should be determined, at least in part, by differences in job performance as judged by supervisors or managers Incentive pay: Compensation (other than base wages or salaries) that fluctuates according to employees‘ attainment of some standard based on a preestablished formula, individual or group goals, or company earnings Variable pay: Compensation (other than base wages or salaries) that fluctuates according to employees‘ attainment of some standard based on a preestablished formula, individual or group goals, or company earnings Person-focused pay plans: Programs that reward employees for specifically learning new curricula Competency-based pay: Programs that reward employees for specifically learning new curricula Pay-for-knowledge: Programs that reward managerial, service, or professional workers for successfully learning specific curricula Skill-based pay: Programs that increase workers‘ pay as they master new skills Discretionary benefits: Any variety of programs that provide paid time off, employee services, and protection programs that are offered on a discretionary basis Legally required benefits: Particular sets of benefits the U.S. government requires employers to offer to employees Protection programs: Legally required benefits that attempt to promote worker safety and health, maintain the influx of family income, and assist families in crisis Paid time off: Provides employees with pay for time when they are not working (e.g., vacation)

Services: Provide such enhancements as tuition reimbursement and day care assistance to employees and their families Internally consistent compensation systems: Clearly define the relative value of each job among all jobs within a company Job analysis: A systematic process for gathering, documenting, and analyzing information in order to describe jobs Job evaluation: A process to recognize differences in the relative worth among a set of jobs and to establish pay differentials accordingly Market-competitive pay systems: Compensation professionals build marketcompetitive compensation systems based on the results of compensation surveys Compensation surveys: Collect and then analyze competitors‘ compensation data Pay structures: Represent pay rate differences for jobs of unequal worth and the framework for recognizing differences in employee contributions Pay grades: Group jobs for pay policy application Pay ranges: Include minimum, maximum, and midpoint pay rates Line employees: Employees that are directly involved in producing companies‘ goods or delivering their services Staff employees: Employees that support the line functions Generalist: A human resource professional that may be an executive that performs tasks in a variety of HR-related areas Specialist: An HR executive, manager, or non-manager who is typically concerned with only one of the areas of compensation practice Severance pay: Companies may choose to award and amount, usually the equivalent of several months‘ pay following involuntary termination Pension programs: Provide income to individuals throughout their retirement Early retirement programs: Contain incentives designed to encourage highly paid employees with substantial seniority to retire earlier than they had planned X.

Discussion Questions and Suggested Answers

1-1.

What are the main building blocks of compensation systems? Briefly describe each one.

The main building blocks of a strategic compensation system are core compensation, which includes base pay and adjustments to base pay over time; and employee benefits which includes discretionary benefits and legally required benefits.

Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems.

AACSB: Application of knowledge

1-2.

How can compensation professionals serve as strategic business partners?

To serve as strategic business partners, compensation professionals need to think like the chief executive officer (CEO). They can give the CEO and chief financial officer (CFO) an understanding of the role that employees play in the organization and the way it combines with business processes to expand or shrink shareholder value.

Learning Objective: 1-2. Summarize the role of compensation as a strategic business partner. AACSB: Analytical thinking

1-3.

Are the three main elements of compensation systems—internal consistency, market competitiveness, and recognizing employee contributions—equally important, or do you believe that they differ in importance? Explain.

Student answers will vary. Importance of each element may vary based on the company, the industry, and other factors in the internal and external environments.

Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems. AACSB: Analytical thinking

1-4.

The compensation profession is expected grow at a healthy pace through the year 2026. Based on your understanding of how the chapter material blends together, what might be some reasons for this anticipated growth? Explain.

Student responses may vary. Some reasons may include future government regulations, more competitive environments, and changing employee demographics or societal motivators. All of these factors may influence the need for compensation professionals as they work to meet the needs of the multiple stakeholders in organizations.

Learning Objective: 1-6. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation functions perform. AACSB: Analytical thinking

1-5.

Stakeholder expectations pose challenges for compensation professionals. At times, there may be conflict among the expectations of different stakeholders. For two stakeholders, how do compensation professionals meet their expectations?

Employees: Educate about compensation programs and benefits. Line Managers: Provide advice about pay for different jobs. Executives: Developing and managing sounds compensation systems. Unions: Administering the pay and benefits policies specified in collective bargaining agreements. U.S. Government: Comply with employment legislation. Learning Objective: 1-6. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation functions perform. AACSB: Application of knowledge

1-6.

How are the seven employability skills relevant regardless of your career aspirations?

The skills you will develop and practice in this text are those that employers have identified as critical to success in the workplace. Therefore, you will benefit even if you do not pursue a career as a compensation professional.

Learning Objective: 1-7. Explore essential skills for developing your career in compensation or any other career path. AACSB: Analytical thinking

XI. Preparing for My Career: Compensation in Action Instructor Notes: This section outlines the role human resources professionals and line managers take in aligning compensation with strategy. This section can help students understand the importance of

understanding compensation practices whether they pursue a career as a human resources professional or a line manager.

XII.

End of Chapter Cases; Instructor Notes, and Questions and Suggested Student Responses

Case 1: Competitive Strategy at Sporting Shoes

Instructor Notes: The human resource planning process follows the company‘s strategic planning process. In this case, the company is shifting from a low-cost strategy to a differentiation strategy. Under the low-cost strategy, human resource practices focused on controlling costs and working to hire and retain workers focused on efficiency and productivity. The differentiation strategy will require some employees with a different skill set. Certain functions will need high levels of creativity and innovation. Human resource practices must shift to support these needs by attracting the right talent, and motivating the right behaviors to produce shoes for the new niche markets.

Questions and Suggested Student Responses:

1-7.

Following Sporting’s shift in competitive strategy, what are some considerations for the company’s human resource management practices?

Sporting‘s shift in competitive strategy will require the company to examine all of its‘ human resources practices including recruiting, selection, performance appraisal, compensation, and training.

Learning Objective: 1-3. Explain strategic compensation decisions.

AACSB: Analytical thinking 1-8.

What kind of challenges will Sporting face specifically in the area of compensation?

The new hires the company will need to make will create some compensation challenges. The company will need to make compensation competitive in the market place to make sure that they are able to attract the new talent needed. However, they must also keep compensation internally consistent at the same time. The company will need to examine its entire compensation strategy (including benefits and incentive pay) to make sure it is aligned with the company‘s new goals.

Learning Objective: 1-3. Explain strategic compensation decisions.

AACSB: Analytical thinking

Case 2: Ethics Dilemma: Profits at Any Cost

Instructor Notes: Wells Fargo‘s incentive pay plan that paid sales commissions based on opening new accounts led to more than 5,000 employees opening 2 million bank accounts for customers who did not request them. Many current and past employees claimed that the unethical behavior was the result of unrealistic sales goals made by the company.

Questions and Suggested Student Responses:

1-9.

As a compensation professional, what would you do?

Students may have a variety of responses based on when the compensational professional learned about the concern. When designing the program, the compensation professional should take steps to assure the sales goals were reasonable. After some of the fraudulent activities were identified, it is important for the compensation professional to investigate the problem to assure the design of the incentive system did not encourage unethical behavior.

Learning Objective: 1-6. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation professionals perform. AACSB: Ethical understanding and reasoning

1-10. What factor(s) in this ethical dilemma might influence a person to make a less-than-ethical decision? There are several factors that may have influenced the employees‘ unethical behaviors. The highpressure environment that was created and the threat of losing one‘s job or sales commission likely influenced the employees the most.

Learning Objective: 1-6. Identify the stakeholders of the compensation function and summarize their stakes in the work compensation professionals perform. AACSB: Ethical understanding and reasoning

XIII.

Crunch the Numbers! Questions and Suggested Student Responses

Calculating the Costs of Increasing the Total Compensation Budget at Butcher Enterprises

1-11. On an average hourly basis, how much does Butcher Enterprises spend on wages and benefits, respectively, in dollars? Butcher Enterprises spends an average of $19 per hour on wages and benefits. 70% of this amount or $13.30 is allocated for wages and 30% or $5.70 for benefits.

Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems.

AACSB: Analytical thinking 1-12. How much does the company spend on wages and benefits over the course of one year for 100 office workers? Assume that each worker provides 2,080 hours of service each year. The number of hours for 100 workers = 100 x 2080 = 208,000. The average hourly wage of $19 x 208,000 hours = $3,952,000 is how much the company spends on wages and benefits over the course of one year.

Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems.

AACSB: Analytical thinking

1-13. How much additional money does the company need to match the market rates for this group of 100 employees? You must first calculate the total for wages and benefits for market rate which is $23 x 208,000 hours = $4,784,000. The difference between $4,784,000 and $3,952,000 = $832,000. Therefore, Butcher Enterprises would need to spend an additional $832,000 per year to match the market rate for this group of employees.

Learning Objective: 1-4. Identify and discuss the building blocks and structural elements of strategic compensation systems.

AACSB: Analytical thinking

CHAPTER 2 Contextual Influences on Compensation Practice Learning Objectives 2-1.

Discuss the reasons for interindustry wage differentials.

2-2.

Explain the factors that contribute to pay differentials based on occupational characteristics.

2-3.

Summarize the reasons for the occurrence of geographic pay differentials.

2-4.

Discuss the role of labor unions in setting compensation.

2-5.

Identify and discuss key employment laws pertinent to compensation practice.

Outline

II.

Overview

II.

Interindustry Wage Differentials

III.

Pay Differentials Based on Occupational Characteristics

IV.

Geographic Pay Differentials

Labor Unions

VI.

Employment Laws Pertinent To Compensation Practice

VII.

Key Terms

VIII.

Discussion Questions and Suggested Answers

IX.

Preparing for My Career: Compensation in Action

End of Chapter Cases; Instructor Notes, and Questions and Suggested

Student Responses XI.

Crunch the Numbers! Questions and Suggested Student Responses

XII.

Working Together: Team Exercise with Suggested Student Responses

Lecture Outline

Overview A. Contextual influences on pay 1. Compensation professionals must understand patterns of pay differentials to make informed decisions about pay 2. Must also make decisions within scope of employment and labor laws 3. Global context also influences compensation

II.

Interindustry Wage Differentials

A. The differences in wages and benefits across industries 1. Attributed to: a. The industry‘s product market b. The degree of capital intensity c. The profitability of the industry d. Unionization

Companies in product markets with little competition

Generally pay higher wages

Exhibit substantial profits

Exhibit limited new competition because of:

a. Higher barriers to entry b. Insignificant influence of foreign competition 4. Government regulations and extremely expensive equipment represent entry barriers

Capital intensity

1. Defined as the extent to which companies’ operations are based on the use of large-scale equipment 2.

The amount of average pay varies with the degree of capital intensity a. Generally, manufacturing jobs are capital intensive, service jobs are not D. Profitability 1. Companies in more profitable industries tend to pay higher compensation

Unionization

Unionized industries tend to pay higher

2. Power of collectively negotiating leads to higher wages than individually negotiating

III.

Pay Differentials Based on Occupational Characteristics

A. Occupation 1. Group of jobs, found at one or more company, in which a common set of tasks are performed or are related in terms of similar objectives methodologies, materials, products, worker actions, or worker characteristics 2. Pay variations can occur within occupations, based on the complexity of the KSAs associated with job B. Knowledge, Skills, and Abilities 1. Role of job analysis 2. Jobs that require formal education or early experience are paid more C. Supply and Demand 1. Companies‘ demand for individuals relative to supply influences compensation IV.

Geographic Pay Differentials

A. Relative pay differentials 1. Occur between geographic areas B. Pay rate differentials 1. Expressed in dollars as hourly or annual pay 2. For occupations based on particular geographic regions 3. Cost of living differences 4. Remote work increases use of cost of labor differentials rather than geographic pay differentials

Labor Unions

National Labor Relations Act of 1935

1. Designed to remove barriers to free commerce and to restore equality of bargaining power between employees and employers 2. Collective bargaining agreement is a written document that describes the terms of employment approved by management and employees during negotiations and defines unfair labor practices

Compensation Issues in Collective Bargaining

1. Union and management negotiations usually center on pay raises and employee benefits 2.

Cost-of-living-adjustments (COLAs) a. Automatic pay increases based on changes in prices, as indexed by the consumer price index (CPI) b. Enables workers to maintain their standards of living by adjusting wages for inflation 3. Many nonunion companies offer higher compensation than they would if unions did not exist, this phenomenon is known as a spillover effect

Union influence has declined because: a. Legislation outlawed unions‘ use of intimidation b. Anti-discrimination laws provided protections for women and minorities c. Globalization increasing competition d. Right-to-work laws that prohibit management and unions from entering into agreements requiring union membership as a condition of employment

e. Higher rates of unionization in the public or government sector

VI.

Employment Laws Pertinent To Compensation Practice

Legislative Actions 1. Four Amendments to the U.S. Constitution a. Article 1, Section 8 (“The Congress shall have the power…to regulate Commerce with foreign nations, and among the several States, and with the Indian Tribes…”) b. First Amendment (“Congress shall make no laws respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”) c. Fifth Amendment (“No person shall...be deprived of life, liberty, or property without due process of law…”) d. Fourteenth Amendment, Section 1 (“No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States, nor shall any State deprive any person of life, liberty, or property without due process of law; nor deny any person within its jurisdiction the equal protection of the law.”)

2. Government has three levels in U.S. a. Federal government oversees the entire U.S. and territories b. State governments enact laws that pertain exclusively to respective regions c. Local governments enact laws that are pertinent to smaller geographic regions

Income Continuity, Safety, and Work Hours

Three main factors a. Great Depression i. Passage of the Social Security Act of 1935 (Title IX) ii. Passage of workers‘ compensation programs b. Move from family businesses to large factories

c. Division of labor characterized by skills and responsibilities

2. Fair Labor Standards Act of 1938 (FLSA) a. Addresses three main issues of minimum wage, overtime pay, and child labor provisions i. Enforced by the U.S. Department of Labor b. Minimum wage i.

Designed to ensure wages for a minimally acceptable standard of living

ii. Originally set at $0.25 per hour iii. Federal law supersedes state minimum wage law where the federal minimum wage is greater than the state

c. Overtime pay provisions i. Defined in FLSA ii. Most employers must pay time and one-half for over 40 hours work in a period of 7 consecutive days iii. Exempt jobs satisfy three tests (salary level, salary basis, and job duties) used to determine whether an employer must pay overtime, most other jobs are nonexempt iv. Fair Pay Rules in 2004 added additional complexity in determining which employees are exempt v. Portal-to-Portal Act of 1947 defines the term hours worked to include these compensable work activities:     

Waiting time On-Call time Rest and meal periods Sleeping time and certain other activities Lectures, meetings, and training programs

 

Travel time Equal Pay Act of 1963, which prohibits sex discrimination in pay for employees performing equal work

d. Child labor provisions

Intended to protect children from being overworked, working in potentially hazardous settings, and having their education jeopardized due to excessive work hours

ii. Children younger than age 14 usually cannot be employed iii. Children ages 14 and 15 may work in safe occupations outside school hours with some limitations iv. Children ages 16 and 17 do not have hourly restrictions but cannot work in hazardous jobs (e.g., running heavy industrial equipment, working around harmful substances)

C. Pay Discrimination Legislation 1.

Came out of the civil rights movement of the 1960s

Equal Pay Act of 1963 a. Enforced by the Equal Employment Opportunity Commission (EEOC) b. Applies to jobs of equal worth according to the Department of Labor’s definition of compensable factors, such as: i. Levels of skill ii. Effort iii. Responsibility iv. Working conditions c. Jobs must have ―similar,‖ not necessarily the ―same‖ working conditions d. Pay differentials for equal work are not always illegal; are legal where such payments are made pursuant to:

i. A seniority system ii. A merit system iii. A system which measures earnings by the quantity or quality of production iv. A differential based on any factor other than gender D. Civil Rights Act of 1964 1. Legislators designed Title VII of this Act to promote equal employment opportunities for underrepresented minorities 2. Disparate treatment discrimination a. Represents intentional discrimination, occurring whenever employers intentionally treat some workers less favorably than others because of: race, color, religion, sex, or national origin 3. Disparate impact discrimination a. Represents unintentional discrimination that occurs whenever an employer applies employment practices to all employees

b. The practice leads to unequal treatment of protected employee groups Title VII applies to: a. b. c. d.

Companies with 15 or more employees Employment agencies Labor unions Labor management committees controlling apprenticeship and training

5. Lilly Ledbetter Fair Pay Act overturned the Ledbetter v. Goodyear Tire & Rubber Co. case removing allowing women to file a pay discrimination charge within 180 days of a discriminatory paycheck 6. The Paycheck Fairness Act strengthens the remedies available to put sex-based pay discrimination on par with race-based pay discrimination

7. Bennett Amendment (to Title VII) a. Allows female employees to charge employers with Title VII violations regarding pay only when the employer has violated the Equal Pay Act of 1963

8. Age Discrimination in Employment Act of 1967 (ADEA) a. Designed to protect workers age 40 and older (“baby boomers”) from age discrimination

b. Older Workers Benefit Protection Act (OWBPA) places additional restrictions on employers’ benefits practices i. Employer may require older employees to pay more for health insurance or life insurance coverage if the cost is significantly greater than the cost for younger workers because these costs generally rise with age ii. Equal benefit or equal cost principle which specifies that employers do not have to provide equal benefits to older workers if it costs them more to do so 9. Civil Rights Act of 1991 a. Designed to overturn several Supreme Court rulings i. Atonio v. Ward Cove Packing Company shifted the burden of proof from the employee to the employer ii. Lorance v. AT&T Technologies allows employees to file a discrimination claim when the system is implemented or whenever the system negatively affects them iii. Boureslan v. Aramco allows expatriates to file discrimination lawsuits

E. Accommodating Disabilities and Family Needs 1. Pregnancy Discrimination Act of 1978 (PDA) a. An amendment to Title VII of the Civil Rights Act of 1964 that prohibits disparate impact discrimination against pregnant women for all employment practices b. Employers must not treat pregnancy less favorably than other medical conditions covered under employee benefits plans

2. Americans with Disabilities Act of 1990 (ADA) a. Prohibits discrimination against individuals with mental or physical disabilities within and outside employment settings b. Applies to employers with 15 or more employees c. Title I requires reasonable accommodations may include such efforts as making existing facilities readily accessible, restructuring jobs, and modifying work schedules

3. Family and Medical Leave Act of 1993 (FMLA) a. FMLA was designed to provide employees with job protection in cases of family or medical emergency b. Guarantees unpaid leave and the right to return to either the same position or a similar position with the same pay, conditions, and benefits

F. Prevailing Wage Laws 1. Davis–Bacon Act of 1931 a. Established employment standards for construction contractors holding federal government contracts valued at more than $2,000, including: highway building, dredging, demolition, and cleaning, as well as painting and decorating public buildings

2. Walsh–Healey Contracts Act of 1936 a. Applies to contractors and manufacturers who sell supplies, material, and equipment to the federal government with contracts worth at least $10,000 b. Requires contractors to meet guidelines relating to wages and hours, child labor, convict labor, and hazardous working conditions c. Prohibits contractors from exposing workers to conditions that violate the Occupational Safety and Health Act of 1970

End of the Chapter

VII. Key Terms

Interindustry wage differentials: Represent the pattern of pay and benefits associated with characteristics of industries Occupation: A group of jobs, found at more than one company, in which a common set of tasks are performed or are related in terms of similar objectives, methodologies, materials, products, worker actions, or worker characteristics National Labor Relations Act of 1935 (NLRA): The purpose of this act was to remove barriers to free commerce and to restore equality of bargaining power between employees and employers Collective bargaining agreement: A written document that describes the terms of employment approved by management and employees during negotiations Spillover effect: Occurs when management of nonunion firms generally offered somewhat higher wages and benefits to reduce the chance that employees would seek union representation Right-to-work-laws: Prohibit management and unions from entering into agreements requiring union membership as a condition of employment Federal constitution: Forms the basis for employment laws Federal government: Oversees the entire United States and its territories State governments: Enact and enforce laws that pertain exclusively to their respective regions Local governments: Enact and enforce laws that are most pertinent to smaller geographic regions Great Depression: Triggered legislation designed to stabilize the income of an individual who became unemployed because of poor business conditions or workplace injuries Social Security Act of 1935 (Title IX): Provided temporary income to workers who became unemployed through no fault of their own Workers’ compensation: Granted income to workers who were unable to work because of injuries sustained on the job

Fair Labor Standards Act of 1938 (FLSA): Establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments Exempt: Employees not covered by the FLSA including generally executive, administrative, learned professional, creative professional, computer workers, and outside sales employees Nonexempt: Jobs that are subject to the FLSA overtime pay provision FairPay Rules: Revised FLSA guidelines by the Department of Labor Portal-to-Portal Act of 1947: Defines the term hours worked that appears in the FLSA Equal Pay Act of 1963: Prohibits sex discrimination in pay for employees performing equal work Civil Rights Act of 1964: Key legislation designed to protect designated classes of employees and to uphold their rights individually against discriminatory employment decisions Compensable factors: Skill, effort, responsibility, and working conditions Title VII: Of the Civil Rights Act was designed to promote equal employment opportunities for underrepresented minorities. Disparate treatment: Represents intentional discrimination, occurring whenever employers intentionally treat some workers less favorably than others because of their race, color, sex, national origin, or religion Disparate impact: Represents unintentional discrimination Lilly Ledbetter Fair Pay Act: Restores prior law providing that a pay discrimination charge must simply be filed within 180 days of a discriminatory paycheck Paycheck Fairness Act: Strengthens the Equal Pay Act of 1963 by strengthening the remedies available to put sex-based pay discrimination on par with race-based pay discrimination Bennett Amendment: Allows female employees to charge employers with Title VII violations regarding pay only when the employer has violated the Equal Pay Act of 1963 Age Discrimination in Employment Act of 1967 (ADEA): Protects workers age 40 and older from illegal discrimination Baby boom generation: Generation born roughly between 1946 and 1964 and represented a swell in the American population Older Workers Benefit Protection Act (OWBPA): The 1990 amendment to the ADEA— placed additional restrictions on employer benefits practices Civil Rights Act of 1991: Overturned several Supreme Court rulings