Chapter 10 – Compensation: Base Pay and Fringe Benefits
Prevailing Wage Laws – Davis-Bacon, Walsh-Healey, and Services Contract Acts require
employers to meet prevailing wage levels when doing business with the federal government
Relevant job market – matched to where an organization can locate the best pool of job
candidates, and/or the most cost-effective candidates
disability and health benefits (Medicare)
Vesting – the retention by an employee of all or part of his or her pension rights regardless of
whether or not he or she changes employers, retires early, etc.
Wage Gap – according to the Bureau of Labor Statistics from 2004, women earn 78.5 cents for
every dollar earned by a man
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CHAPTER 10 – LEGISLATION & COURT CASES
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)– provides current and
former employees the opportunity to pay for temporary extension of group health benefits
in the same establishment. The jobs need not be identical, but they must be substantially equal
based on job content, not job titles
Employee Retirement Income Security Act (ERISA) – 1974 federal act that regulates private
retirement plans intended to help employees get the benefits that had been promised over their
working lifetimes
Employment Act does not prohibit an employer from practicing “reverse age discrimination”
where older workers are favored over younger workers who are over 39
Health Insurance Portability and Accountability Act (HIPAA) – applies to all employers offering
group health plans, significantly reduces an employer’s ability to deny coverage, or charge
higher premiums based on an individual’s pre-existing conditions, it also requires the patient’s
the same way that standard medical and surgical events are covered
Chapter 10 – Compensation: Base Pay and Fringe Benefits
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© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Prevailing wage laws – includes Davis-Bacon Act of 1931, the Walsh –Healy Act of 1936, and
the Services Contract Act of 1965 cover federal contracts for construction, goods, and services
respectively, designed to ensure that workers employed on government contract receive fair
wages relative to other local workers
Pregnancy Discrimination Act of 1978 – Requires that pregnancy and pregnancy-related
disabilities be treated the same as other disabilities
Retirement Equity Act of 1984 – Mandates that all employees age 21 and older must be included
in the plan and that employees may have breaks in service of up to 5 years before they lose credit
for previous experience. Years for “vesting‘ must be counted starting at age 18.
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CHAPTER 10 -DISCUSSION QUESTIONS
1. Research CEO pay on the Internet (try www.aflcio.org/paywatch and Graef Crystal’s
column at www.bloomberg.com/columns). Identify persons you believe to be the most
overpaid and underpaid and explain why. Determine if any new legislation or regulation
could affect executive pay.
2007 SEC
2007 AFL-CIO calculation
method
General Motors
$14,415,914
$19,791,874
Ford Motor Co.
$21,670,674
$22,750,385
MicroSoft
$1,350,834
$1,350,834
Apple, Inc
$1
$1
General Electric Co.
$19,591,580
$14,287,557
Citigroup
$15,105,376
$25,502,621
Fannie Mae
$11,648,409
$14,231,650
Feddie Mac
$18,289,575
$14,497,981
H.R. 1257, the Shareholder Vote on Executive Compensation Act. The bill will require that
public companies ensure that shareholders have an annual nonbinding vote on their company’s
executive compensation plans. It also requires a nonbinding advisory vote if the company
awards a new golden parachute package while simultaneously negotiating the purchase or sale
of the company
Source: http://www.speaker.gov/legislation?id=0020
“Say–on–Pay” legislation: House passed legislation that gives shareholders a nonbinding
say on executive compensation in April 2007.
Source: http://money.cnn.com/2007/04/20/news/economy/house_executive_pay/index.htm
2. It has been proposed that HR managers should be more involved with
compensation committees charged with determining executive pay packages.
How should HR be involved?
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It is important for HR to provide empirical data to senior management in order to fully
capitalize on the human resources of an organization. Executives are part of that human
capital. HR managers, then, need a way to measure the executives in terms of the HR domains.
Dr. John Sullivan, Head and Professor of Human Resource Management College of Business, San
Francisco State University proposes the metrics CEOs should ask of HR professionals. Here are
some of his questions adapted for HR managers to ask CEOs.
• Are we over paying our executives for the output they produce?
o Can HR show the impact of pay increases? What is the % increase in
compensation to productivity and company performance than our
competitors. How much differently do we treat (pay) our top
contributors from our average contributors?
• Is there evidence that the CEO is a major contributor (among overhead
functions) to our corporate success/ profitability?
• In our employee pulse survey do employees rate the executives as a
contributors or barriers to productivity?
• Are our executives efficient and do they continually improve?
• Is there evidence that putting more executive resources in an area
dramatically impacts that areas productivity and profitability?
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• Is there evidence that the CEO has significantly added to our shareholders
3. Critique market-pricing pay with the traditional approach to compensation. Which
approach is more important for organizational effectiveness? Which approach would
you implement and why?
Internal pay equity is the determination of the pay structure for the various jobs within an
organization. At the individual level, internal pay equity concerns whether or not an employee
in a position feels his or her level of compensation is fair compared to that of other levels.
External pay equity is the determination of pay level based on the wage rates of other
4. Pay expert Ed Lawler says pay the person, not the job. Explain what you think he
means and how that would work.
Traditional pay structures reward employees for learning and developing skills that will help
them get promoted. Ed Lawler believes that pay structures need to reward employees for
developing skills that expand team capabilities and the organization’s core competencies.
In The Guru Guide, Lawler’s pay-for-knowledge plan is four-fold:
Chapter 10 – Compensation: Base Pay and Fringe Benefits
5. What is broadbanding and what does the latest research say about its effectiveness?
In a 2002 article, Edwin W. Arnold and Clyde J. Scott, review the most current writings on
broadbanding and its effectiveness. Their conclusion is that most organizations that use
broadbanding do not measure its effects.1
Governing.com grades the states in terms of performance. In its 2001 Report Card, three
states, South Carolina, Washington and Wisconsin, made their A-List for human resources.
South Carolina and Wisconsin already have broadbanding in place. Washington is adopting the
method to be fully implemented by 2004.3 There were five criteria for the Government
Performance Project, 1) Conduct strategic analysis of present and future needs (25% of the
Chapter 10 – Compensation: Base Pay and Fringe Benefits
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South Carolina found that broadbanding refocused its workforce on customer needs and
created more accountability for end results. However, it also found that more emphasis was
placed on support, which requires more generalists and new skill need to be developed to
administer the plan.6
6. The Paycheck Fairness Act has been proposed to promote pay equity. Research this
legislation and determine its status and/or effects.
The Paycheck Fairness Act (H.R. 1338 and S.766) was introduced March 6, 2007 by Sen. Hillary
Clinton and Rep. Rosa DeLauro to strengthen the Equal Pay Act of 1963. The bill expands
damages under the Equal Pay Act and amends its very broad fourth affirmative defense. In
addition, the Paycheck Fairness Act calls for a study of data collected by the EEOC and proposes
7. A constant political debate is whether the minimum wage should be increased.
Research this topic and justify your position on the topic.
6 See OPM. (2000). Broadbanding in State Government – The South Carolina Experience. United States
Office of Personnel Management. www.opm.gov/compconf/Postconf00/broadbnd/byrd.htm accessed August 3,
2002.
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Students’ responses will vary.
Arguments for increasing a minimum wage might include:
A minimum wage is necessary to protect employees who occupy lower level positions to provide
Arguments against a minimum wage might resemble the following:
A minimum wage is not necessary, and goes against the spirit of a market economy. Many
people might believe that without a minimum wage, large numbers of employees would not
8. Some argue that workers’ compensation programs and the FMLA have proven to be
problematic laws for employers. Research these issues to determine the recent
controversies and proposed solutions. Why are there so many lawsuits regarding
overtime?
Students’ responses will vary.
Arguments for a government mandate might include:
A family leave policy provides many benefits to the organization as well as the employees.
From the organization’s viewpoint, when an employee is on family leave, the organization can
Arguments against a government mandated family leave policy might include:
Chapter 10 – Compensation: Base Pay and Fringe Benefits
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© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Many organizations do not have the resources to train new employees to fill those positions
vacated by individuals who take family leave. A federal mandate may seriously threaten the
competitiveness of many organizations due to the added expenses involved.
9. The chapter covers the two problem areas of Dodd–Frank’s “clawback” provisions. If
you were the regulator, how would you resolve those questions in actual application
(and be specific…)? Research cases involving potential clawbacks under Sarbanes-Oxley
and /or Dodd Frank
10. Consider the case of Jacobs Engineering and its 2001 experience with “say on pay.”
Understanding that say on pay is an “advisory shareholder opinion,” how do you think
organizations (like Jacobs) will be affected (if at all), if they refuse to accept
shareholders’ say on pay?
11. Research current trends in defined contribution versus defined benefits programs.
From the employer’s perspective, what program is preferable and why? Now, consider
the employee’s perspective.
See chapter 10 for figures as of 2005. Many large companies cut their pensions in 2005
according to Watson Wyatt Worldwide, a compensation consulting firm. Eleven percent of
these firms either discontinued their pension plans altogether or froze benefits to workers. It is
estimated that defined-benefit plans fell about $350 billion into arrears in 2005. How did this
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12. What is the most typical pay policy for expatriate assignments? How would you
determine the entire pay package?
There are three approaches to expatriate pay. The going-rate approach, the balance sheet
approach, and standardized approach. The most typical is the balance sheet approach that
compensates employees for additional costs due to the international assignment. Four