73. INCIDENT: MERIT INCREASES
I. OVERVIEW:
This incident focuses on the uses and abuses of “merit” as a criterion for salary increases. While
most organization give “lip service” to “merit” as the principle criteria for wage and salary adjustments,
the term is subject to many meanings and interpreta’ons. In this incident, Dean Smith has a different
interpreta’on of “merit” than does Dr. Jones. The instructor may wish to discuss how “merit” is
interpreted at his or her own university for faculty and other categories of personnel.
The incident is loosely based upon an actual event which illustrates a rather common problem
among academic administrators. Despite the term “merit,” some higher-level academic administrators
(Deans, Vice Presidents) often prefer to give equal or near-equal percentage salary increases to
department chairs and program directors because it is easier, they don’t have to jus’fy the di-eren’als
to those receiving lower increases, and thus feel (mistakenly) that it minimizes conflict.
The long-term result of this policy is that the be8er faculty avoid academic administration,
leadership in the College is provided by the “lowest common denominator,” and the College becomes
mediocre or worse. In the actual case upon which this incident is based, the Chairperson resigned his
chair, went back to the faculty, and eventually took an administra’ve position at another university.
II. OBJECTIVES:
The purpose of this exercise is to serve as a catalyst for discussing a wide range of issues related
to “merit” salary increases. Students need to be made aware of the fact “merit” is not always based on
performance. The administration of merit increases is often de<cient because the administrator doesn’t
want to put in the effort to accurately assess performance or because he/she lacks the courage to
confront the poor performers and help them overcome their de<ciencies. The “bo8om line” is that it is
administra’vely easier to give equal across-the-board “merit” increases and many lazy administrators
choose this “path of least resistance.”
Students also need to become aware that employees compare their contribution and their
rewards with those of others in assessing whether their own rela’ve position is “equitable.” A policy of
equal rewards for unequal contribution does not minimize conflict since the more produc’ve
employees feel they have been treated inequitably.
III. ANSWERS TO INCIDENT QUESTIONS:
1. Describe the nature and causes of the compensation problem describe this incident.
2. Are “merit” salary increases always based on “merit?” Why or why not?
Obviously, whether or not a merit system of salary increases actually represents true merit
depends on who is administering the system. In many cases, equal across-the-board increases are given
with the implicit assumption that all employees in a given category are equally meritorious. Such an
assumption is rarely true. A true merit system requires a sophis’cated system for appraising employee
3. Why has Dean Smith had a policy of equal percentage salary increases for all
department chairs despite the stated university policy? Are all the chairs equally
meritorious?
As discussed above, it is easier to not make dis’nc’ons and to assume all chairs are equal. In
this way, Dean Smith doesn’t have to jus’fy below average increases to the less-produc’ve chairs. All
4. How do you think Dean Smith’s “merit” increases will affect Carl and his performance
as department chair and faculty member? Why? What can Dean Smith do to
motivate Carl if a large di-eren’al pay increase based on performance is out of the
ques’on?
5. What are the long-range bene<ts of a true “merit” program? What are the problems
associated with the lack of such a “merit” system for department chairs? Why? If
the Dean does not change his policy, what are the long-run implication for the
college?
Jones should ask Dean Smith to establish a true merit system in which the value of various
ac’vi’es, accomplishments, and criteria are clearly communicated. He might also want to make a case
that part of the evaluation be based on administra’ve performance and part on academic performance.
The discussion is not likely to change Dean Smith’s mind. His philosophy developed over a long
period of ‘me and has “worked” in the sense he is still Dean and has apparently avoided previous
confronta’on with department chairs concerning salary increases. Carl is unique among the chairs in
74. SKILL BUILDER: APPLYING THE FLSA — IS THIS JOB EXEMPT?
I. objective
II. Out-of-Class preparation Time: 60 minutes
III. In-Class Time Suggested: 45 minutes
IV. Procedures
A. Read the exercise and review the Fair Labor Standards Act excerpt pertaining to exempt status
(See Exhibit in textbook).
1. Analyze each case in respect to the tests that must be considered for determina’on of
exempt status of executive, professional or administra’ve jobs.
2. If you were the judge, how would you rule? Is the job exempt or non-exempt? Why or why
not?
SUGGESTED ANSWERS
General Note: It is important that the instructor go over the tests for the different exemp’ons. Students
must really understand that all of the different components of the test must be sa’s<ed for a job to fall
Case 1 Harry Phipps, Senior Professional Sales representative
This scenario is based on an actual court case (Pa8y Lee Smith versus Johnson & Johnson). The
issue is whether Phipps’ position is exempt from the FLSA. The students should <rst decide if the
position of senior professional sales representative falls within one of the FLSA’s exemp’ons. The court
decided the outside sales exemp’on did not apply to Smith but the administra’ve exemp’on did apply.
The administra’ve employee test has three requirements. While the company agreed that Phipps could
be de<ned as an administra’ve employee under the <rst requirement: Compensated on a salary or fee
basis at a rate of not less than $455 per week. But they disputed his quali<ca’on for that exemp’on
Case 2 Cheryl Wiley, Auto Damage Adjuster
This case is based on Jerome Robinson Smith versus Geico Insurance. The court found in favor of Geico
and concluded that the position of auto damage adjuster falls within the administra’ve employee
exemp’on. The decision is based on the following:
The primary duty of a GEICO auto damage adjuster consists of assessment, negotiation, and
se8lement of automobile damage claims all of which requires exercise of discre’on and
The auto damage adjuster has the power to make independent choices free from immediate
Case 3 John Krauss and national Bank
This case is based on Michael J. Davis vs. J P Morgan Chase heard in the United States Court of
Appeals in August 2009). The court had to assess whether Davis performed day-to-day sales ac’vi’es or
more substantial advisory duties as an underwriter. As an underwriter, Davis’s primary duty was to sell
loan products under the detailed directions of the Credit Guide. There is no indica’on that underwriters
were expected to advise customers as to what loan product best their needs and abili’es. Underwriters
did their job following procedures speci<ed in the Credit Guide in order to produce a yes or no decision.
Their work is related neither to seUng management policies nor to general business operation such as
human relation or advertising. The court found that all of the documenta’on submitted by Chase
75. SKILL BUILDER: DEVELOPING A WAGE STRUCTURE
I. OBJECTIVES:
1. To familiarize students with how data obtained when using the point system
approach to job evaluation can be used to develop a wage structure.
2. To give students practice in developing a wage structure.
II. TIME REQUIRED TO COMPLETE: 1 HOUR OR LESS
III. INSTRUCTIONS: See text
IV. SOLUTION:
This skill builder gives students practice in developing a wage structure and determining if
present employees are being paid in line with the structure.
The wage structure should have the following data points:
Grade 1
Grade 2
Grade 3
Grade 4
1. Which of the current salaries fall outside the appropriate pay steps?
Name Years Ste
p
Current Pay Step Range Within Step?
1. What action should the <rm take with regard to the pay of these individuals?
An important dis’nc’on to be made with regard to this skill builder is the difference between
pay grades and pay steps. None of the employees are outside of the pay grades. However, several are
“out of step.” Hamilton, Smith, and Johnston are over the step, and Richardson is below the step. So,
what should be done regarding these people? Richardson is below step and probably should be given a
Benefits
76. CASE: MANAGING NON-MONETARY COMPENSATION
I. OVERVIEW
A respiratory therapy department head, Drew Nelson, is employed by Breathing Care Associates
(BCA), a health care company with headquarters in Rochester, MN. Drew lives in Owatonna, MN, about
50 miles from BCA’s headquarters and works at the hospital there. His request to take a seven day
vaca’on has been denied. Company policy urges employees to take personal ‘me o- from work to
avoid becoming overly stressed. Despite this, Nelson’s boss refused to allow him to take seven days o-
because:
a. the department would be understa-ed,
b. and another employee in the department would have to be paid overtime.
Nelson has been under pressure to control labor costs due to restructuring at the rural hospital.
II. OBJECTIVES
This case can be used to:
1. Illustrate the consequences of restructuring.
2. Discuss requirements for exempt status under the Fair Labor Standards Act with
respect to overtime.
3. Explain “earned ‘me” as an alternative to paid ‘me o- for holidays, vaca’ons, sick
leave, and other personal reasons.
4. Illustrate problems that result from a reac’ve approach to human resource issues.
5. Discuss the ethics and effects on employee morale of having a written policy that
cannot be implemented.
III. DISCUSSION
First, issues that arise when students analyze this case will be addressed. Students usually
suggest that Nelson should join the union. His right to unionize probably would not be protected under
the national Labor relation Act, however, because he is considered a manager. Students also tend to
blame all problems in the case on poor communication, which may be a symptom of underlying
concerns.
Each objective listed under part II will now be discussed in turn.
a. Restructuring may have precipitated problems in the Doonesbury case. When respiratory
therapists found out the Waseca facility was going to close, it was in their best interests to
seek employment elsewhere. Three therapists resigned and were not replaced, which led to
inadequate staFng in the department.
Though the Waseca facility would close in June, 1985, it still had to be sta-ed until then. As often
happens during restructuring, remaining employees became overburdened. Because they worked so
many hours, they experienced stress bordering on burnout. This was particularly true for Nelson, who
put in extra hours without added compensation. Stressful condition may cause employee –
management relation to deteriorate, as they did here. Stressed out employees could make mistakes
that would jeopardize pa’ents’ well-being and reflect poorly on the hospital.
b. Was Nelson really an exempt employee?
To answer, one must become familiar with executive, administra’ve, and professional
exemp’ons from the Fair Labor Standards Act. To qualify for one of these “white collar” exemp’ons, a
person must be paid $250. or more per week and meet two added requirements, which vary depending
on the type of exemp’on sought.
The major duty of exempt executives must involve managing a recognized organiza’onal unit.
An executive should spend 50% or more working hours on managerial duties and also should use
discre’on frequently. An executive must customarily supervise at least two full-‘me workers or their
equivalent.
Working <rst line supervisors may not exercise enough discre’on to be considered exempt
executives. Though plant managers and registered nurses have been viewed as exempt, a factory
supervisor who did manual labor and a branch manager who was closely supervised were declared
non-exempt.
Administra’ve employees must do non-manual work related to general business operation or
management policies. They also must use discre’on and independent judgment regularly.
An exempt professional’s major work must require advanced knowledge or involve crea’ve
ability in an ar’s’c <eld. That person also must exercise judgment and discre’on. Cer'<ed medical
technologists in large clinics or laboratories have been viewed as exempt, but X-ray technologists in small
labs have not been. In this case, Nelson is a working supervisor who spends more than half his ‘me on
non-managerial duties. Therefore, he does not meet the tests for the executive or administra’ve
exemp’ons.
Determining whether Nelson meets the professional exemp’on is more diFcult. He has a
bachelor’s degree, but that is not needed to do his job. His position does, however, require advanced
study beyond high school. Since paramedics performing routine tasks in small clinics and medical
technicians with associate’s degrees have been considered non-exempt, Nelson’s position most likely
would be non-exempt too. If he wished, he could <le a complaint with the nearest oFce of the Wage
and Hour Division of the U.S. Department of Labor to try to obtain back overtime pay.
c. Earned ‘me has been proposed to eliminate sick leave abuse.
If employees have a <xed number of days per year for holidays, vaca’ons, illness, and for
personal reasons, they hurt only themselves by taking a sick day when well. Doing so will cut the
number of vaca’on or personal days they are allowed.
Though impossible to an’cipate every situation that might occur, Breathing Care Associates
could have expected employees to quit a3er they learned the Waseca facility would close. The <rm
could have developed con’ngency plans to deal with the resulting understaFng. Respiratory therapists
who usually worked at St. Luke’s in Rochester could have helped out at Owatonna. Perhaps therapists
from other area hospitals would have been willing to work an extra day at Owatonna for extra pay.
Breathing Care Associates should have used a proac’ve approach to meet staFng needs. Instead, the
company reacted to a crisis situation.
It is unethical to have a policy urging employees to use earned ‘me when
situation beyond their control prevent them from doing so. Perhaps BCA needs to develop two
different earned ‘me policies-one for St. Luke’s and one for the Owatonna hospital. On paper, BCA’s
earned ‘me policy seems generous. A gap between the stated policy and the ‘me o- employees
actually can take may create resentment and frustra’on. Employees’ morale may drop, contribu’ng to
excess absenteeism, turnover, or workplace tension.
IV. ANSWERS TO CASE QUESTIONS
1. What are Nelson’s alternatives?
He has at least <ve option. Nelson could try to persuade Barb to work 7 days in a row.
Simultaneously, he would have to convince Barnes to pay her overtime. He could explain that it would
The following alternatives are not recommended but are sometimes mentioned. Students may
suggest that Nelson quit his job, but this would not be a good career strategy unless he had been offered
Some think Drew should order Barb to work seven days in a row. This suggestion overes’mates
2. What do you think Nelson should do? Jus’fy your answer.
The answer depends on how much risk Drew wants to take. If he is risk-averse, he should take a
4-5 day vaca’on now and a longer vaca’on later. A more risky strategy would be to appeal the vaca’on
Epilogue: This case was based on actual events, but all names have been disguised. Nelson wrote a
letter to Barnes’ boss protes’ng his denial of the vaca’on request. Barnes’ boss would not overrule his
This teaching note was prepared by Margaret Foegen Karsten, The University of Wisconsin, Plaeville.