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50 words for each question with references pleaseMartocchio, J. J. (2013).

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Strategic compensation: A human resource management approach. (7th ed.). Upper Saddle River, NJ: Pearson. (ISBN 978-0-13-262075-8)


Chapter 16 Challenges Facing Compensation Professionals C
U Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 16 Challenges Facing Compensation
Professionals C
Fallout from the “Great Recession”
What Is an Economic Recession?
Underemployment: Implications for Compensation
The Compensation–Productivity Gap
Rising Wages in China
Challenges in Health care Reform
Key Considerations for Employers
Challenges to the Legality of PPACA Workforce Demographic Shifts
Labor Force Diversity
Relevance for Employee Benefits
Considerations for Employee Motivation
Key Terms
Discussion Questions
Endnotes A
In this chapter, you will learn about
1. Four challenges before compensation professionals
2. The impact of economic recession on compensation practice 3. The reasons for rising wages in China
4. Uncertainty and challenges associated with health care reform
5. The influence of changing workforce demographics on employee benefits practice
8 4
hus far in Strategic Compensation, we have 5
studied the fundamentals of employee compensation
and benefits programs. This approach to studying compensation arms compensation professionals
with the knowledge to more effectively make compensation decisions that fit with companies’
competitive advantages. There is much more to consider besides the fundamentals. In this chapter, we will T examine four key issues among many that will shape the work of compensation and benefits professionals in
the future:

• Fallout from the “Great Recession”
Rising wages in China
Challenges in health care reform
Workforce demographic shifts 356 Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 16 • Challenges Facing Compensation Professionals 357 FALLOUT FROM THE “GREAT RECESSION”
The U.S. economy experienced an economic recession from December 2007 through June 2009.
The term “Great Recession” is widely used to describe the significance of this recession. It was the
longest recession since World War II, lasting 19 months. In this section, we will review the
definition of an economic recession and its relevance to employee compensation through two
important issues: underemployment and the compensation–productivity gap.
What Is an Economic Recession?
The term economic recession refers to a general slowdown in economic activity. As we will see
shortly, evidence of economic recessions includes reduced gross domestic product (GDP) and
increased unemployment rates. Complex multiple factors lead to recessions. Reduced consumer
spending is among the primary causes of economic recessions. Consumers’ demand for products
and services such as automobiles declines. For example, automobile manufacturers, among them,
General Motors and Chrysler, respond to lower consumer demand for their products by cutting
production levels in order to avoid excess inventory. Oftentimes, companies respond to lower
demand through significant layoffs of employees. Among the economic reasons for extended
mass layoffs, events related to seasonal factors accounted for 42 percent of events and 43 percent
of related separations during the fourth quarter of the year 2010.1 Over the year, the largest
decrease in separations occurred in layoffs due to business demand reasons such as in this example.
Table 16-1 shows layoff activity between 2005 and 2010. The number of layoff events along with
separations and initial claimants rose dramatically during the recession and began decreasing
following the recession, although the numbers following the recession remain substantially
higher than prior to the recession. The preliminary 2011 data show a continuation of this trend.2
Reduced production adversely affects other companies’ operations. Automobile manufacN
turing companies do not produce every component of vehicles. In fact, these companies rely on
specialty companies to produce vehicle components such as windshields and bumpers. Reduced
consumer demand for automobiles leads to reduced automobile manufacturers’ need for
components from suppliers. Hundreds of companies alone supply components to automobile
makers. Layoffs occur in these companies as well as in the automobile manufacturing companies.
Companies in other industries similarly experience adverse effects. Reduced demand for
products and services across industries contributes to economic recessions. The Federal Reserve
Bank revealed that approximately 86 percent of industries have cut back production since the
beginning of the Great Recession; this reduction is the most widespread since 1969 when
the Federal Reserve Bank began tracking this information.31 8
965,935 U TABLE 16-1 Selected Measures of Layoff Activity, 2005–2010
Period Layoff Events 2005
2010 4,881
7,158 1,516,978
1,213,638 Initial Claimants
1,288,750 Note: Layoff events refer to the number of company decisions to layoff employees.
Separations refer to the number of employees who lost their jobs as a result of the
number of layoff events. Initial claimants refer to the number of unemployed
persons from the layoff events who applied for unemployment insurance benefits.
Source: U.S. Bureau of Labor Statistics (2011). Extended Mass Layoffs—Fourth
Quarter 2010 and Annual Totals—2010 (USDL 11-0156). Available:,
accessed April 9, 2011. Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. 358 Epilogue
4 Percent 2
FIGURE 16-1 Quarter-to-Quarter Growth in Real GDP, United States,
2007–2010 Source: U.S. Department of Commerce, Bureau of Economic
Analysis. Available:, accessed April 1, 2011.
The impact of widespread cutbacks on various industries’ output becomes evident in a
declining GDP. As discussed in Chapter 15, GDP describes the size of a country’s economy. GDP
size is expressed as the market value of all final goods and services produced within the country
2007 over a specified period. Figure 16-1 shows the change in GDP growth rates for each quarterly
period between 2007 and 2010. Clearly, GDP fell virtually each quarter during the Great
Recession. Although GDP began rising following the end of the recession, it will take quite some
time before its size surpasses prerecession levels. N
Underemployment refers to employees who wish to work full-time, but are forced to work
part-time for economic reasons, such as poor business conditions or inability to find a job.4
During October–November 2007, theT
2-month period preceding the onset of this recession, the
number of underemployed workers in the United States was estimated to be slightly more than
4.2 million. Following the onset of the recession, the number of underemployed individuals rose
dramatically. Table 16-2 displays the number of underemployed individuals just prior to the
beginning of the recession through the end of 2010. The number of underemployed rose steadily
throughout and following the recession.
Underemployment poses implications for employees’ earnings. According to the U.S.
Bureau of Labor Statistics, the mean hourly earnings of the underemployed were low compared
to those who were not underemployed.6 The mean hourly wages for all underemployed workers
TABLE 16-2 5
Underemployment in the United States, 2007–2010
U Period
October–November 2007
October–December 2008
October–December 2009
October–December 2010 (approximate)
Absolute change, 2007–2010 (approximate)
Percent change, 2007–2010 (approximate) Number Underemployed
114 Source: Sum, A., & Khatiwada, I. (2010). The Nation’s Underemployed in the “Great Recession” of
2007-09. Monthly Labor Review, 133(11), pp. 3–15. Available:, accessed April 1, 2011. Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 16 • Challenges Facing Compensation Professionals 359 was $12.80. Mean hourly wages were as follows based on educational attainment, clearly showing
an increase for higher educational attainment:

• High school dropouts: $11.23
High school graduates: $11.78
Bachelor’s degree holders: $14.35
Master’s or higher degree: $21.46 In addition, the mean hourly earnings of the underemployed were considerably below
those of full-time workers, both overall and in each educational group, as shown in Table 16-3.
The mean hourly earnings for full-time wage and salary workers were $20.96, exceeding those of
the underemployed by $8.16, or 64 percent. In each of the five education groups whose members
were not enrolled in school, mean hourly earnings of the underemployed were anywhere from 88
cents to $11.82 below those of their full-time employed C
peers. Many of the underemployed,
particularly those with higher educational attainment, were considered to be malemployed.
Malemployment occurs when job holders possess greater education, skills, or knowledge than is
required to perform their jobs. In sum, underemployment leads to earning losses because the
underemployed work fewer hours and take jobs within lower-paying occupations. For example, a
person holding a bachelor’s degree in psychology whose job is a part-time grocery store clerk is
considered to be underemployed and malemployed.
Finally, there are longer-term implications of underemployment besides current lower pay.
Underemployed workers are likely to have lower future earnings partly because employers
provide less or no training to part-time workers. Figure 16-2 shows the rate of increase in pay
levels during and following the Great Recession, which is lower than these rates prior to this
recession. Also, this figure indicates that the rate of increase during the Great Recession was much
lower than the rate during the recession which occurred in 2001. As a result, underemployment
may slow down the economic recovery from recession. Lower current pay and anticipated lower
future earnings will likely reduce the consumption of goods and services, thus holding back
increases in spending, business production, and employment levels.
The previous figures chronicle pay information for the underemployed. The pay situation
for those becoming employed full-time following periods of unemployment is less encouraging.
According to the U.S. Bureau of Labor Statistics, approximately 55 percent are earning less, of
which nearly 36 percent are earning at least 20 percent less than they were prior to becoming
unemployed. In comparison, approximately 45 percent are earning more, of which only 25 percent
are earning at least 20 percent more than they were prior to becoming employed. 1
TABLE 16-3 Mean Hourly Wages of Underemployed Persons and Full-Time Wage
and Salary Workers, 16 Years and Older, by Educational Attainment,
October–December 2009
Education group
Full-time Workers
All workers
U 8.20
High school students
College students
High school dropouts
High school graduatesa
1–3 years of collegeb
Bachelor’s degree
Master’s or higher degree
b 13.04
21.46 12.67
32.07 0.37
10.61 Including those who received a General Education Development (GED) certificate.
Including those who received an associate’s degree. Source: U.S. Bureau of Labor Statistics. Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. 360 Epilogue
Slow Growing
Change from a year earlier in wages and salaries
of workers in the same jobs
4% Recession 3 2 1 C
FIGURE 16-2 Annual Changes in Wages and Salaries of Workers
in the Same Jobs Source: U.S. Bureau of Labor Statistics.
The Compensation–Productivity Gap
The gap between real hourly compensation and labor productivity indicates whether workers’ pay is
0 2001 ‘02 ‘03 keeping up with productivity. Real hourly compensation measures the purchasing power of a dollar
while nominal hourly compensation is the face value of a dollar. Increases in the costs of goods and
services cause nominal pay to be less than real pay. For example, let’s assume that an employee
accepted a job at $10 per hour. This figure—$10 per hour—represents nominal pay. At the same
time, $10 also represents real pay. However, over 1 year, let’s assume that the price of goods and
services increased, on average, 5 percent. At the end of the year, nominal hourly pay remains at $10.
Hourly real pay, on the other hand, declined by 5 percent, or $0.50. In other words, $10 purchases
only $9.50 worth of goods and services.T this example, $9.50 represents hourly real pay.
Productivity growth promotes rising living standards in the following manner. Increases in
productivity growth indicate companies’ investments in capital equipment and information
technology. Examples of capital equipment include new manufacturing facilities, research and
development labs, and sales distribution centers. Examples of information technology include
structured databases containing expert information to help end users make informed decisions in
complex situations. For instance, physicians may access databases to help them diagnose health
conditions based on patients’ symptoms and health histories. Another example occurs in the
marketing field where information systems enable companies to identify customers for new products
and services based on a variety of factors including household income and purchasing history.
Since the 1970s, real hourly compensation has lagged behind labor productivity growth as
shown in Figure 16-3.8 The growth of productivity and real hourly compensation in the
nonfarm business sector (which accounts for three-fourths of output and employment in the
total U.S. economy) was comparable until 1973. While the annual change in productivity
averaged 2.8 percent and real hourly compensation growth averaged 2.6 percent during the
1947–1973 period, In 1973–1979, the annual averages were at 1.1 and 0.9 percent, respectively.
Real hourly compensation growth failed to keep pace with accelerating productivity growth
over the past three decades, and the gap between productivity growth and compensation growth
widened. Hence, during 2000–2009, average annual growth in productivity and real compensation equaled 2.5 percent and 1.1 percent, respectively.
Figure 16-4 shows the gains or losses in hourly wages relative to the increases in productivity
for the 18-month period following each recession after World War II. Companies experienced
increases in productivity each time, but the gain in real compensation has been substantially less.
Most noteworthy is the difference between increases in real compensation relative to increases in Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 16 • Challenges Facing Compensation Professionals 361
2.6 Productivity Real Hourly Compensation
2.5 Average annual percent change 2.5
2 1.5 1.5 1.4
1.1 1 1.1
0.9 C
R 1990–2000
FIGURE 16-3 Productivity Growth and Real Hourly Compensation Growth,
Selected Years, 1947–2009 Source: U.S. Bureau of Labor Statistics.
0.5 0.5 A
Gains or losses in the first 18 months of selected recoveries
Hourly wage*
Start of
recovery –2%
1949 4q
1954 2q
1961 1q
1970 4q
1975 1q
1982 4q
Sharing the Wealth 8 10 1991 1q
2001 4q
2009 2q
*Adjusted for inflation 1
FIGURE 16-4 Gains or Losses in Real Hourly Pay Compared to Productivity Increases,
18 Months Following Economic Recessions Source: U.S. Bureau of Labor Statistics.
productivity since the end of the Great Recession, which is much more substantial than in any of
the prior recessions.
There are two reasons that may explain the compensation–productivity gap. First, high
unemployment following recessions leave employees with relatively lower power to bargain for
higher pay because the supply of individuals seeking work is greater than the company’s demand
for new workers. Second, most companies experience profit losses during economic recessions,
and, then, profits generally increase following recessions. Companies promote profits, in part, by
holding down employees’ pay.
In sum, we considered the impact of the Great Recession on compensation. We described
an economic recession. Then, we examined the underemployment phenomenon. Finally, we
reviewed problems stemming from the compensation–productivity gap. Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. 362 Epilogue RISING WAGES IN CHINA
In recent decades, many U.S. companies relocated manufacturing facilities from the United States
to other countries such as the Peoples’ Republic of China because the cost of labor was substantially lower there than in the United States. These companies’ goal was to lower the cost of
production ultimately to maintain competitive prices and to preserve profits. As we will discuss
shortly, the costs of labor in China have been increasing rapidly. Rising costs are quickly reducing
the competitive advantage gained from moving manufacturing operations to China.
Among developing Asian economies, China’s average pay rate is highest (versus Indonesia,
Philippines, Vietnam, and Bangladesh). In recent years, the Chinese central government has been
substantially raising minimum wage rates, creating pressure throughout the wage structure.
Minimum wage rates increased an average of 24 percent across the country’s 31 provinces, and
the government is planning an annual increase in minimum wages through 2015. Average
monthly income for migrant workers C
increased 13 percent (approximately, $257).
Chinese policy makers are supportive of increased wages for the following reason. In
recent history, the growth in the Chinese economy was based in large part to its trade surplus.
A trade surplus occurs when the value of goods and services being shipped for sale outside the
country, in this case, China, exceed the value of goods and services shipped from other
countries to China. Encouraging higher wages promotes domestic consumption, that is, the
purchase and use of goods and services within its national borders. Increased domestic
consumption will decrease the country’s reliance on exports to sustain growth. Reduced
reliance on exports is particularly necessary as labor costs within China increase rapidly. As
China’s labor costs rise, so would the cost of its exports, making the country less competitive in
the global economy.
Labor shortages have also contributed to wage increases in China. These shortages are due,
in part, to the rapidly aging Chinese population after 30 years of its one-child policy. This policy,
still in effect, limits most couples toN
having one child only. The Chinese government implemented the policy to curb population E
growth in large cities.
Economic growth is creating the need for new jobs; however, the one-child policy has
slowed population growth as intended, vastly reducing the number of young workforce entrants.
As a result, this policy has inadvertently contributed to an aging population. The largest segment
of the Chinese population is currently in the 35–44 age range. E CHALLENGES IN HEALTH CARE REFORM 1 On March 23, 2010, President Barack Obama signed into law The Patient Protection and
Affordable Care Act (PPACA). Shortly thereafter, on March, 30, 2010, PPACA was amended by
the passage of the Health Care and Education Reconciliation Act of 2010. Together, these laws
provide the basis for health care reform in the United States.
The goal of health care reform is to reduce the number of uninsured U.S. residents by
32 million in 2016. The U.S. Congressional Budget Office estimates that the cost of health care
reform over the next 10 years will cost approximately $971 billion through the year 2019,10 which
will be paid by individual taxpayers and companies.
The Health Care and Education Reconciliation Act adds several requirements that may be
broken down into two categories. First, there are a multitude of revisions to PPACA such as
limiting the penalty, to be discussed shortly, to companies that choose not to offer health
insurance. Second, this act adds a variety of provisions that will enable more students and
families to qualify for financial aid. For example, this act terminates the process of the federal
government giving subsidies to private banks that offer federally insured loans. Instead, loans will
be administered directly by the U.S. Department of Education, which will lower the fees students
will pay to get such loans. Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 16 • Challenges Facing Compensation Professionals 363 Key Considerations for Employers
Health care reform will substantially influence the way employers provide health care benefits to
employees. Prior to the passage of PPACA, companies generally chose whether to offer health
care insurance to employees. The new legislation will require most employers to provide health
care insurance to employees; otherwise, they will incur significant financial penalties. Beginning
in 2014, if the employers with 50 or more full-time employees fail to offer health insurance
coverage they must pay a penalty to the government that equals $2,000 per employee. These
terms represent the general rule, but there are higher fines for employers that offer unaffordable
health insurance. It is possible that employers may lower wages to offset the costs of health insurance, decrease the size of their workforce, or, most unfavorably, go out of business.
It is expected that the cost of health care insurance will become more expensive to employers
because of certain new requirements. These changes will include the elimination of the lifetime
benefits cap. (We discussed maximum benefits caps in Chapter 10.) Until this health care reform,
employers could choose to control costs by imposing lifetime benefit caps, say, at $1 million. Also
previously, employers chose longer waiting periods to limit the rising costs of offering health care
coverage. But now, PPACA will also limit waiting periods before new employees may receive
health care coverage to a maximum of 90 days.
Several states, interest groups, and citizens are opposed to the PPACA law, and have filed
Challenges to the Legality of PPACA lawsuits challenging its legality. The lawsuits have focused on two issues. First, the employer
penalty provisions of PPACA will be detrimental to businesses’ success as noted earlier. Second,
PPACA represents an infringement on people’s constitutional rights. In particular, requiring
Americans to purchase health insurance or pay a penalty (the provision that is scheduled to
go into effect in 2014) reaches beyond the federal government’s power under the U.S.
Constitution’s commerce clause.
Although several lawsuits are pending, only six rulings had been rendered when the revision
of this textbook was completed. Eleven federal district judges had ruled on that issue, with five
upholding the law. The division on the legality of PPACA can be defined largely by the political
orientation of the court judges. The judges who found theT unconstitutional were appointed
by Republican presidents, and those upholding it were appointed by Democratic presidents.
In January 2011, U.S. District Court judge Roger Vinson in Florida ruled against the legislation in its entirety. He reasoned that the insurance mandate to individuals and to employers is
central to the law. Thus, he ruled that the entire law must be voided. Since then, in March 2011,
Judge Vinson granted a stay to his January ruling. He reasoned that blocking the implementation
of PPACA would create substantial disruption to employers a...
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Chapter 11 Legally Required Benefits CHAPTER OUTLINE C
, An Overview of Legally Required Benefits
Components of Legally Required Benefits
Social Security Act of 1935
State Compulsory Disability Laws (Workers’
Family and Medical Leave Act of 1993
The Benefits and Costs of Legally Required
Designing and Planning the Benefits Program N
Determining Who Receives Coverage
Financing LEARNING OBJECTIVES Employee Choice
Cost Containment
Compensation in Action
Key Terms
Discussion Questions
Case: Benefits for Part-Time Workers
Endnotes T
E In this chapter, you will learn about
1. Which employee benefits are legally required
2. The Social Security Act of 1935 and its mandated protection programs: unemployment insurance; old-age,
survivor, and disability insurance (OASDI); and Medicare
3. Compulsory state disability laws (workers’ compensation)
4. The Family and Medical Leave Act of 1993
5. Some of the implications for strategic compensation and possible employer approaches to managing legally
required benefits
6. The considerations that go along with designing and the planning benefits program ultiple laws require employer participation in some employee benefits programs. The Social Security
programs (e.g., retirement and disability) most notably influence many people, and these are perhaps
the most widely publicized legally required benefits in the United States. For years, there have been valid
concerns that there will be insufficient funding to meet promised benefits. As time passes, these concerns are
growing stronger. There are also ongoing political debates about how to ensure the viability of Social Security
programs. President George W. Bush signed an executive order on May 2, 2001 (see Chapter 2 for a definition of M 243 Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. 244 Part IV • Employee Benefits executive orders), to create the new Presidential Commission to Strengthen Social Security.
Politicians have debated the merits and drawbacks of various solutions to shore up the Social
Security system. Under President George W. Bush’s administration, the focus was to encourage
tax credits for individuals who save for retirement and to encourage more savings through
employer-sponsored retirement plans. The Democrats have called for increasing the tax under
the Federal Income Contributions Act to bolster the trust fund; however, it has been met with
strong opposition by business leaders, particularly small businesses, which usually possess
smaller profit margins. The Pension Protection Act of 2006 (discussed in Chapter 2) is expected
to increase the number of people who participate in their employer-sponsored defined contribution plans by giving employers the authority to enroll new employees in the plan automatically. AN OVERVIEW OF LEGALLY REQUIRED BENEFITS C The U.S. government established programs to protect individuals from catastrophic events such
as disability and unemployment. Legally required benefits are protection programs that attempt
to promote worker safety and health, maintain family income streams, and assist families in
crisis. The cost of legally required benefits to employers is quite high. As of March 2011, U.S.
companies spent an average $4,800 per employee annually to provide legally required benefits.1
Human resource (HR) staffs and compensation professionals in particular must follow a variety
of laws as they develop and implement programs.
Legally required benefits historically provided a form of social insurance. Prompted largely
by the rapid growth of industrialization in the United States in the early nineteenth century and
the Great Depression of the 1930s, initial social insurance programs were designed to minimize
the possibility that individuals who became unemployed or severely injured while working would
become destitute. In addition, socialN
insurance programs aimed to stabilize the well-being of
dependent family members of injured or unemployed individuals. Furthermore, early social
insurance programs were designed to enable retirees to maintain subsistence income levels. These
intents of legally required benefits remain intact today.
Legally required benefits currently apply to virtually all U.S. companies, and they “level
the playing field,” so to speak. These programs are unlikely to directly lead to a competitive advanT
tage for one company over another; however, legally required benefits may indirectly promote
competitive advantage for all companies by enabling unemployed individuals, disabled employees,
and their dependent family members to participate in the economy as consumers of products and
services. The government has a vested interest in promoting a vigorous economy that exhibits
regular buying and selling, such that 1 demand for goods and services does not substantially
outpace or fall below the supply of those goods and services. The key to maintaining a vigorous
economy is clearly the participation of individuals as consumers of the products and services sold
in the marketplace. In this chapter, it will become evident how many elements of employee
benefits serve this end. 5
U The key legally required benefits are mandated by the following laws: the Social Security Act of
1935, various state workers’ compensation laws, and the Family and Medical Leave Act of 1993.
All provide protection programs to employees and their dependents.
Social Security Act of 1935
Income discontinuity caused by the Great Depression led to the
Social Security Act as a means to protect families from financial devastation in the event of
unemployment. The Great Depression of the 1930s was a time when many businesses failed and
masses of people became chronically unemployed. During this period, employers shifted their HISTORICAL BACKGROUND Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 11 • Legally Required Benefits focus from maximizing profits simply to staying in business. Overall, ensuring the financial
solvency of employees during periods of temporary unemployment and following work-related
injuries promoted the well-being of the economy and contributed to some companies’ ability to
remain in business. These subsistence payments specifically contributed to the viability of the
economy by providing temporarily unemployed or injured individuals with the means to
contribute to economic activity by making purchases that result in demand for products and
The Social Security Act of 1935 also addresses retirement income and the health and
welfare of employees and their families. Many employees could not meet their financial obligations (e.g., housing expenses and food) on a daily basis, and most employees could not retire
because they were unable to save enough money to support themselves in retirement.
Furthermore, employees’ poor financial situations left them unable to afford medical treatment
for themselves and their families.
As a result of these social maladies, three programs within the act aim to relieve some of the
consequences of these social problems: A
• Unemployment insurance
• Old Age, Survivor, and Disability Insurance (OASDI)R
• Medicare
Each of those programs will be reviewed in turn. K
, The Social Security Act founded a national federal–state
unemployment insurance program for individuals who become unemployed through no fault of
their own. Each state administers its own program and develops guidelines within parameters set
by the federal government. States pay into a central unemployment tax fund administered by the
federal government. The federal government invests theseN
payments, and it disburses funds to
states as needed. The unemployment insurance program applies to virtually all employees in the
United States, with the exception of most agricultural and domestic workers (e.g., housekeepers).
Individuals must meet several criteria to qualify for unemployment benefits.
Unemployment itself does not necessarily qualify a person, although these criteria vary someT
what by state. Those applying for unemployment insurance benefits must have been employed
for a minimum period of time. This base period tendsE be the first four of the last five
completed calendar quarters immediately prior to becoming unemployed. In addition, all states
require sufficient previous earnings, typically $1,000 during the last four quarters combined.
Other criteria are listed in Table 11-1.
Individuals who meet the eligibility criteria receive weekly benefits. Because the federal
government places no limits on a maximum allowable amount, the benefits amount varies widely
from state to state. Most states calculate the weekly benefits as a specified fraction of an
employee’s average wages during the highest calendar quarter of the base period. UNEMPLOYMENT INSURANCE TABLE 11-1 5
Eligibility Criteria for Unemployment Insurance Benefits To be eligible for unemployment insurance benefits, an individual must:
6. Not have left a job voluntarily
Be able and available for work
Be actively seeking work
Not have refused an offer of suitable employment
Not be unemployed because of a labor dispute (exception in few states)
Not have had employment terminated because of gross violations
of conduct within the workplace Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. 245 246 Part IV • Employee Benefits Unemployed individuals usually collect unemployment insurance benefits for several
weeks. Since 1972, the average duration of benefits has ranged between 12 and 18 weeks. The
average duration refers to the mean number of weeks for which unemployment insurance
claimants collect benefits under regular state programs. The deep economic recession, which
began in late 2007, and the subsequent loss of millions of jobs left most of the millions of newly
unemployed unable to secure work within the scope of state unemployment insurance programs.
As a result, Congress approved the Emergency Unemployment Insurance (EUC) Program
in June, 2008, by the Supplemental Appropriations Act of 2008.2 The EUC program provided
13 additional weeks of federally funded unemployment insurance benefits to the unemployed
who had exhausted all state unemployment insurance benefits for which they were eligible. As the
economic recession deepened, particularly in several states such as Michigan, it became apparent
to the federal government that the EUC program extensions were not sufficient to bridge the
lengthening gap between periods C employment. In response, Congress enacted the
Unemployment Compensation Act of 20083 on November 21, 2008. This law expanded the EUC
benefits to 20 weeks nationwide (from 13 weeks) and it provided for 13 more weeks of EUC (for
a total of 33 weeks) to individuals who reside in states with high unemployment rates. This
temporary program was extended twice, most recently in December 2010 under the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Under the extension,
unemployment insurance benefits are available to individuals for weeks of unemployment
ending on or before January 3, 2012. The number of weeks an individual is eligible to receive
unemployment insurance benefits depends upon the unemployment rate of the state in which
unemployed individuals reside.
Unemployment insurance benefits are financed by federal and state taxes levied on
employers under the Federal Unemployment Tax Act (FUTA). State and local governments, as
well as not-for-profit companies (e.g.,N United Way), are generally exempt from FUTA. Alaska
is currently the only state that requires employee contributions. Employer contributions amount
to 6.2 percent of the first $7,000 earned by each employee (i.e., the taxable wage base). FUTA
specifies $7,000 as the minimum allowable taxable wage base. Relatively few states’ taxable wage
base is as low as the FUTA-specified minimum (e.g., Florida, Indiana, and South Carolina). States
typically set the taxable wage base according to the average wage level. In 2010, states’ taxable
wage base ranged from $7,000 to $34,100.
The federal government deposits 5.4 percent to the Federal Unemployment Trust Fund,
which is administered by the Treasury Department. The Treasury Department invests this money
in government securities, crediting the principal amount contributed by each state and investment income to an account. The federal government retains 0.8 percent to cover administrative
costs and to maintain a reserve to bail out states with very low balances in their accounts.
States also impose taxes on employers to fund their unemployment insurance programs.
An employer’s actual tax burden varies according to an experience rating system. Every state
applies different tax rates to companies, subject to statutory minimum and maximum rates. Each
company’s tax rate depends on its prior experience with unemployment. Accordingly, a company
that lays off a large percentage of employees will have a higher tax rate than a company that lays
off relatively few or none of its employees. This experience rating system implies that a company
can manage its unemployment tax burden.
OASDI contains a number of benefits
that were amended to the act following its enactment in 1935. Besides providing retirement
income, the amendments include survivors’ insurance (1939) and disability insurance (1965).
The phrase old age in the title refers to retirement benefits.
Virtually all U.S. workers are eligible for protections under the OASDI and Medicare
programs, except for three exempt classes. First, civilian employees of the federal government and
railroad employees with at least 10 years of service are exempt from the retirement program;
however, these individuals are not exempt from the Medicare program. Second, employees of
OLD AGE, SURVIVOR, AND DISABILITY INSURANCE Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 11 • Legally Required Benefits state and local governments who are already covered under other retirement plans are exempt
from Social Security retirement contributions unless these government organizations choose to
participate in this program. Third, children under age 21 who work for a parent are exempt,
except children age 18 or older who work in the parent’s business.
OLD AGE BENEFITS Individuals may receive various benefit levels upon retirement, or under
survivors’ and disability programs, based on how much credit they have earned through eligible
payroll contributions. They earn credit based on quarters of coverage, which equals three
consecutive months during the calendar year. In 2011, a worker earns credit for one quarter of
coverage for each quarter in which she makes $1,120 of Social Security taxable income. This
figure is based on the average total wages of all workers as determined by the Social Security
Administration (SSA). Of course, workers may earn up to four quarters of coverage credit each
year. Individuals become fully insured when they earn credit for 40 quarters of coverage, or
10 years of employment, and remain fully insured during their lifetime.
An individual who has become fully insured must meet additional requirements before
receiving benefits under the particular programs. Under the retirement program, fully insured
individuals may choose to receive benefits as early as age 62, although their benefit amounts will
be permanently reduced if elected prior to age 65. Congress recently instituted changes in the
minimum age for receiving full benefits. They increased theK retirement age for people born in
1938 or later because of higher life expectancies of 65-year-old individuals. For example, the U.S.
Bureau of the Census estimated that individuals age 65 in 1997 would live an additional 17.7
years. In 2007, this estimate increased significantly to 22.5 years.4 The age for collecting full Social
Security retirement benefits is gradually increasing from 60 to 67 over a 22-year period ending in
2022. The average monthly benefit for all retired workers was $1,170 in June 2010.5 N The SSA calculates survivors’ benefits based on the insureds’ employN
ment status and the survivors’ relationship to the deceased. Dependent, unmarried children of
the deceased, and a spouse of the deceased who is caring for a child or children may receive
survivors’ benefits if the deceased worker was fully insured. A widow or widower at least age 60,
or a parent at least age 62 who was dependent on the deceased employee, is entitled to survivors’
benefits if the deceased worker was fully insured. In June 2010, the average monthly benefit was
The retirement program contains incentives to encourage individuals to delay their retirement after reaching full retirement age. The Social Security Administration increases retirement
benefits by a designated percent for each month worked 1
beyond full retirement until age 70,
subject to a maximum percentage increase. The percentage increase depends on the year of birth.
For example, let’s assume that an individual’s full retirement age is 66 years and his monthly
benefit at that age is $1,000. If he were to take retirement as early as age 62, his monthly benefit
would be $750. If he were to delay his retirement until age 70, his monthly benefit would be
substantially larger at $1,320.
The SSA pays benefits to seriously disabled workers and family
members. In particular, Social Security pays only for total disability. Disability under Social
Security is based on a person’s inability to perform work done before becoming disabled and is
unable to adjust to other work because of medical condition. The disability must also last or be
expected to last for at least 1 year or to result in death. DISABILITY BENEFITS Disability benefits are available to disabled workers who are unable to work as a
result of a serious medical or mental impairment that lasts at least 12 months. Seriously disabled
workers are eligible to receive disability benefits as long as they meet two criteria. First, the worker
must have accumulated at least 40 credits. Second, the worker must have earned at least 20 credits
of the last 40 calendar quarters in the last 10 years ending with the year of disablement. ELIGIBILITY Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. 247 248 Part IV • Employee Benefits Younger workers need fewer quarters of coverage because they have fewer years to accumulate quarters of coverage. For example, workers ages 24–31 may qualify with half as many credits
between age 21 and becoming disabled. For instance, becoming disabled at age 29 requires credit
for 4 years of employment (equivalent to 16 credits based on earning 4 credits per year) since the
8-year period beginning at age 21. The average monthly disability benefit in June 2010 was $1,065.
The Medicare program serves nearly all U.S. citizens age 65 or older by providing
insurance coverage for hospitalization, convalescent care, and major doctor bills. The Medicare
program includes five separate features: MEDICARE • Medicare Part A—Hospital Insurance.
• Medicare Part B—Medical Insurance.
• Medigap—Voluntary supplemental insurance to pay for services not covered in Parts
A and B.
• Medicare Part C: Medicare Advantage—Choices in health care providers, such as through
HMOs and PPOs.
• Medicare Part D: Medicare Prescription Drug Benefit—Prescription Drug Coverage. R
Most individuals who are eligible to receive protection under Medicare may choose to
receive coverage in one of two ways. A person may receive coverage under the original Medicare
Plan or Medicare Advantage Plans as illustrated in Figure 11-1.
, Original Medicare Plan
Part A
(Hospital) Part B
(Medical) Medicare provides this coverage. Part B is optional. You
have your choice of doctors. Your costs may be higher
than in Medicare Advantage plans. ؉
Part D
(Prescription Drug Coverage)
You can choose this coverage. Private companies
approved by Medicare run these plans. Plans cover
different drugs. Medically necessary drugs must be
covered. ؉ A
Medicare Advantage Plans
like HMOs and PPOs
Called “Part C,” this option combines your
Part A (Hospital) and Part B (Medical)
TPrivate insurance companies approved by Medicare
provide this coverage. Generally, you must see
Tdoctors in the plan. Your cost may be lower than in
Ethe Original Medicare Plan, and you may get extra
benefits. ؉
Part D
(Prescription Drug Coverage)
4 Most Part C plans cover prescription drugs. If they don’t
5 you may be able to choose this coverage. Plans cover
different drugs. Medically necessary drugs must be
U Medigap (Medicare Supplement
Insurance) Policy
You can choose to buy this private coverage (or an
employer/union may offer similar coverage) to fill in gaps
in Part A and Part B coverage. Costs vary by policy and
company. FIGURE 11-1 Options for Receiving Medicare Benefits Source: U.S. Department of Health and Human Services (2011).
Medicare & You. Available:, accessed February 14, 2011. Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 11 • Legally Required Benefits In a nutshell, the original Medicare Plan is a fee-for-service plan that is managed by the
federal government. As we discussed in Chapter 10, fee-for-service plans include many health
care services, medical supplies, and certain prescription drugs. Participants in fee-for-service
plans possess the choice to receive care from virtually any licensed health care provider or facility.
On the other hand, Medicare Advantage Plans include a variety of insurance options, including
health maintenance organizations, preferred provider organizations, Medicare special needs
plans, and Medicare medical savings account plans (MSA). Medicare Advantage Plans are run by
private companies subject to strict regulations specified in the Medicare program. Restrictions
pertain to pricing of the different plans.
MEDICARE PART A COVERAGE This compulsory hospitalization insurance covers both
inpatient and outpatient hospital care and services. Social Security beneficiaries, retirees, voluntary enrollees, and disabled individuals are all entitled. Both employers and employees finance
Medicare Part A benefits through payroll taxes of 1.45 percent on all earnings.
Examples of Part A coverage include: A
• Inpatient hospital care in a semiprivate room, meals, general nursing, and other hospital
supplies and services.
• Home health services limited to reasonable and essential part-time or intermittent skilled
nursing care and home health aide services, and physical therapy, occupational therapy,
and speech-language pathology ordered by a doctor. ,
• Skilled nursing facility care, including semiprivate room, meals, skilled nursing and rehabilitative services, and supplies for up to 100 days per year. Examples of skilled nursing care
include physical therapy after a stroke or serious accident.
MEDICARE PART B COVERAGE This voluntary supplementary medical insurance covers
80 percent of medical services and supplies after the enrolled individual pays an annual
deductible for services furnished under this plan. Part B helps pay for physicians’ services and for
some medical services and supplies not covered under Part A. Medicare Part B pays for medical
care such as doctors’ services, outpatient care, clinical laboratory services (e.g., blood tests and
urinalysis) and some preventive health services (e.g., cardiovascular screenings and bone mass
In 2011, the monthly Part A premium was $450. measurement). Part B also provides ambulance services to a hospital or skilled nursing facility
when transportation in any other vehicle would endanger a person’s health.
Part A coverage automatically qualifies an individual to enroll in Part B coverage for a
monthly premium. The monthly premium amount is based on annual income and the premium
amounts will be revised annually. In 2011, monthly Part B premiums ranged from $115.40 to
4 5
Medigap insurance supplements Part A and Part B coverage, and is
available to Medica...
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Chapter 13 Compensating the Flexible Workforce
Contingent Employees and Flexible Work
The Contingent Workforce
Groups of Contingent Workers
Reasons for U.S. Employers’ Increased Reliance on
Contingent Workers
Pay and Employee Benefits for Contingent
Part-Time Employees
Temporary Employees
Leased Workers
Independent Contractors, Freelancers, and
Flexible Work Schedules: Flextime, Compressed
Workweeks, and Telecommuting
Flextime Schedules
Compressed Workweek Schedules
Telecommuting Flexible Work Schedules: Balancing the Demands of
Work Life and Home Life
Pay and Employee Benefits for Flexible Employees
Employee Benefits
Unions’ Reactions to Contingent Workers and
Flexible Work Schedules
Strategic Issues and Choices in Using Contingent
and Flexible Workers
Compensation in Action
Key Terms
Discussion Questions
Case: Telecommuting at MedEx
Endnotes 1
In this chapter, you will learn about
1. Various groups of contingent workers and the reasons for U.S. employers’ increased reliance on them
2. Pay and employee benefits issues for contingent workers
3. Key features of flexible work schedules, compressed workweeks, and telecommuting
4. Pay and employee benefits issues for flexible work schedules, compressed workweeks, and telecommuting
5. Unions’ reactions to contingent workers and flexible work schedules
6. Strategic issues and choices in using contingent workers 295 Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. 296 Part V • Contemporary Strategic Compensation Challenges hanging business conditions and personal preferences for flexibility to accommodate
nonwork demands have led to an increase in contingent workers and the use of flexible work
schedules in the United States. Companies employed as many as 5.7 million contingent
workers in February 2005, representing about 4 percent of total employment.1 Likewise, the
complexities of employees’ personal lives (e.g., dependent children and elderly relatives, dual career
couples, and disabilities) make working standard 8-hour days for 5 consecutive days every week
difficult. About 27 million employees worked flexible work schedules during May 2004.2 Altogether,
contingent and flexible-schedule employees represent about 27.5 percent of the U.S. civilian labor
force. (These statistics represent the most recently available comprehensive data at the time of publication; data on contingent workers and workers on flexible schedules are collected infrequently.)
This chapter looks at compensation issues for contingent workers and demonstrates that
compensating contingent workers is a complex proposition. Human resource (HR) and compensation professionals encounter tremendous challenges in managing both the core and contingent
workforces. Many companies employ both types of workers, often in the same jobs. To the casual
onlooker, including coworkers, there L no visible differences between these workers; however,
HR and compensation professionals must take many factors into consideration.
The previous chapters addressed compensation issues for core employees. Core employees
have full-time jobs (i.e., they work at least 35 hours per week), and they generally plan long-term
or indefinite relationships with their employers. In addition, all core employees were assumed to
work standard schedules (i.e., fixed 8-hour work shifts, 5 days per week). Compensation practices
differ somewhat for the flexible workforce. C THE CONTINGENT WORKFORCE
According to the U.S. Bureau of LaborN
Statistics, contingent workers3 are those who do not have
an implicit or explicit contract for ongoing employment. Persons who do not expect to continue
in their jobs for such personal reasons as retirement or returning to school are not considered
contingent workers, provided that they would have the option of continuing in the job were it not
for these reasons. Figure 13-1 details questions that determine whether workers expect their
employment to continue, that is, whether their work arrangement is considered to be contingent.
The duration of their employment varies according to their convenience and employers’
business needs. A slightly larger proportion of contingent workers than noncontingent workers
were women (49 versus 47 percent). Contingent workers most commonly hold professional
(e.g., accountant), clerical (e.g., secretary), or laborer (e.g., construction worker) positions;
they perform jobs in the service and retail trade industries. More and more companies favor
contingent employment to control staffing levels and costs. 8 Groups of Contingent Workers
There are four distinct groups of contingent workers:

• Part-time employees
Temporary and on-call employees
Leased employee arrangements U
Independent contractors, freelancers, and consultants
Table 13-1 shows the number of contingent workers in categories. PART-TIME EMPLOYEES The Bureau of Labor Statistics distinguishes between two kinds of
part-time employees: voluntary and involuntary. A voluntary part-time employee chooses to
work fewer than 35 hours per regularly scheduled workweek. In some cases, individuals supplement full-time employment with part-time employment to meet financial obligations.
Some workers, including a small but growing number of professionals, elect to work part-time
as a lifestyle choice. These part-timers sacrifice pay, and possibly career advancement, in exchange for Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 13 • Compensating the Flexible Workforce 297 1.Some people are in temporary
jobs that last only for a limited
time or until the completion of a
project. Is your job temporary? 2. Provided the economy does not
change and your job performance
is adequate, can you continue to
work for your current employer
as long as you wish? No Yes
Yes Yes 3. Are you working
only until a specific
project is completed?
No Yes C
, 4. Were you hired to
temporarily replace
another worker?
No Yes 5. Were you hired for
a fixed period of time?
6. Is your job a year-round
job or is it only
certain times of the year? A
8. What is the
main reason you
expect to stay at
your current job for
less than a year?
E More than a year Year-round
or certain times 7. How much longer do you
expect to work in your
current job? Employment
expected to continue A year or less, and
responded "no" to
Q 3, 4, 5, and
"year round" to Q6 A year or less, and
responded "yes" to
Q 3, 4, or 5 or
"certain times" to Q6 Economic
reason Yes Personal
reason 9. If it were not for
this reason, Could
you have kept
working at the job
you had last week?
No 1
Employment NOT
expected to continue
FIGURE 13-1 Questions that Determine Whether Workers Expect Their Employment to Continue
Source: Polivka, A. E. (1996). Contingent and alternative work U
arrangements, defined. Monthly
Labor Review, 119(10), p. 5. more free time to devote to family, hobbies, and personal interests. They often have working spouses
whose benefits, generally including medical and dental insurance, extend coverage to family members.
Involuntary part-time employees work fewer than 35 hours per week because they are
unable to find full-time employment. Involuntary part-time work represents the lion’s share of
all part-time employment. There is a commonly held but inaccurate stereotype of involuntary
part-time workers as being low skilled and uninterested in career advancement. To the contrary,
many involuntary part-time workers hold entry-level career-track jobs.4 Although we have Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. 298 Part V • Contemporary Strategic Compensation Challenges
TABLE 13-1 Number of Contingent Employees, February 2005
Type of Contingent Workers Number Part-time employees
On-call employees
Temporary help agency workers
Leased employees 2,294,000
813,000 Source: U.S. Bureau of Labor Statistics (2005). Contingent and Alternative Employment
Arrangements, February 2005. USDL: 05-1433. Available:, accessed
June 14, 2007. discussed voluntary and involuntary C
part-time work as part of the contingent workforce, it is
important to emphasize that many core workers negotiate part-time schedules with employers.
Table 13-2 lists the specific reasons for part-time work and the number of individuals who
work part-time, defined as fewer than 35 hours weekly, for each reason. As previously noted, some TABLE 13-2 R
Reason for Working Less Than 35 Hours Per Week,
November 2010 (Numbers in Thousands) Total Usually
Full-Time Usually
Part-Time 39,555 13,462 8,670 1,868 26,092
6,803 5,897 1,685 4,212 2,487 — 2,487 191 87 104 95 95 — 30,885 11,595 19,290 830 48 782 4,547 511 4,036 804 — 804 6,013 80 5,934 2,373 — 2,373 3,368 3,368 — 5,342 5,342 — 163 163 — 7,443 2,083 5,361 Economic reasons 22.5 23.8 22.1 Other reasons 22.4 27.2 19.5 Reason for Working Less than
35 Hours
Total, 16 years and over
Economic reasons
Slack work or business conditions
Could only find part-time work
Seasonal work
Job started or ended during week A
E Noneconomic reasons
Child-care problems 1
Other family or personal obligations
Health or medical limitations
In school or training
Retired or Social Security limit on
Vacation or personal day
Holiday, legal, or religious
Weather-related curtailment
All other reasons
Average hours: Note: Dash indicates no data or data that do not meet publication criteria.
Source: U.S. Bureau of Labor Statistics (January 2011, monthly). Employment & Earnings. See Internet site Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 13 • Compensating the Flexible Workforce 299
TABLE 13-3 Employers’ Hourly Costs for Full- and Part-Time
Employee Benefits, March 2011
Benefit Full-Time ($) Part-Time ($) Paid leave 2.42 0.48 Supplemental pay 0.95 0.22 Insurance 2.77 0.76 Retirement and savings 1.25 0.25 Legally required benefits 2.55 1.63 Total hourly benefits costs 9.95 3.35 Source: U.S. Bureau of Labor Statistics (2011). Employer Costs for Employee
Compensation, March 2011. USDL: 11-0849. Washington, DC: U.S. Government
Printing Office. C
individuals who usually work full-time also hold part-time jobs. Others typically work part-time jobs
only. Companies may experience advantages and disadvantages from employing part-time workers.
Flexibility is the key advantage. Most companies realize a substantial cost savings because they offer
few or no discretionary benefits. In addition, companies realize cost savings for benefits that are linked
, to hours worked (e.g., retirement plan contributions). Table 13-3 shows employers’ costs for providing various discretionary benefits and legally required benefits to full-time and part-time employees.
Employers save considerable money in the areas of paid leave, A
insurance, and legally required benefits.
Companies also save on overtime pay expenses. Hiring part-time workers during peak
business periods minimizes overtime pay costs. As we discussed in Chapter 2, the Fair Labor
Standards Act of 1938 (FLSA) requires that companies pay nonexempt employees at a rate equalN
ing one and one-half times their regular hourly pay rates. Retail businesses save by employing
part-time sales associates during the peak holiday shopping season.
Job sharing is a special kind of part-time employment agreement. Two or more part-time
employees perform a single full-time job. These employees may perform all job duties or share the
responsibility for particular tasks. Some job sharers meet regularly to coordinate their efforts. Job
sharing represents a compromise between employees’ needs or desires not to work full-time and
employers’ needs to staff jobs on a full-time basis. Both employers and employees benefit from the
use of job sharing. Table 13-4 lists some of the benefits of job sharing to employers and employees. 1
TABLE 13-4 Benefits of Job Sharing
Benefits to Employers
• Maintenance of productivity because of higher morale and maintenance of employee skills
• Retention of skilled workers
• Reduction or elimination of the training costs that result U retraining laid-off employees
• Greater flexibility in deploying workers to keep operations going
• Minimization of postrecession costs of hiring and training new workers to replace those
who found other jobs during layoff
• Strengthening employees’ loyalty to the company Benefits to Employees

• Continued employee benefits protection
Continued employment when the likelihood of unemployment is high
Maintenance of family income
Continued participation in qualified retirement programs Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. 300 Part V • Contemporary Strategic Compensation Challenges Companies traditionally hire temporary employees
for two reasons. First, temporary workers fill in for core employees who are on approved leaves of
absence, including sick leave, vacation, bereavement leave, jury duty, and military leave. Second,
temporary workers offer extra sets of hands when companies’ business activities peak, during such
times as the holiday season for retail businesses or summer for amusement parks. Temporary
employees perform jobs on a short-term basis usually measured in days, weeks, or months.
Companies have been hiring temporary workers for three additional reasons. First, temporary
employment arrangements provide employers the opportunity to evaluate whether legitimate needs
exist for creating new positions. Second, temporary employment arrangements give employers the
opportunity to decide whether to retain particular workers on an indefinite basis. “The temp job is
often what one university placement director calls the ‘3-month interview’—and a gateway to a fulltime job and perhaps a new career.”5 In effect, the temporary arrangement represents a probationary
period, when employers observe whether workers are meeting job performance standards. As a
corollary, such temporary arrangements provide workers the chance to decide whether to accept
employment on a full-time basis after L have had time to “check things out.” Third, employing
temporary workers is often less costly than employing core workers because temporary workers are
less likely to receive costly discretionary benefits (e.g., medical insurance coverage).
Companies hire temporary employees from a variety of sources. The most common source
is a temporary employment agency.K 2005, companies employed approximately 1.2 million
temporary workers (most current data available at time of publication).6 Most temporary employ,
ment agencies traditionally placed clerical and administrative workers. Now, some temporary
agencies also place workers with specialized skills (e.g., auditors, computer systems analysts, and
lawyers). These agencies are becoming more common.
Companies generally establish relationships with temporary employment agencies based
on several factors. First, companies consider agencies’ reputations as an important factor, judging
reputations by how well agencies’ placements work out. Some agencies place a wide range of
employees, yet others specialize in one type of placement (e.g., financial services professionals).
When companies plan to hire a variety of temporary workers, it is often more convenient to work
with agencies that do not specialize. Companies should ultimately judge these agencies’ placeT
ment records for each type of employee.
Second, companies also should T
consider agencies’ fees. Cost is a paramount consideration
for companies that are pursuing lowest-cost competitive strategies. Temporary agencies base fees
as a percentage of their placements’ pay rates. The percentage varies from agency to agency. The
competition among temporary agencies fortunately keeps these rates in check.
Although temporary employees work in a variety of companies, their legal employers are the
temporary employment agencies. Temporary employment agencies take full responsibility for
selecting temporary employee candidates and determine candidates’ qualifications through interviews
and testing. Many temporary agencies train candidates to use such office equipment as fax machines,
electronic mail, and spreadsheet and word processing software programs, particularly for clerical and
administrative jobs. Temporary employees receive compensation directly from the agency.
Companies may hire temporary employees through other means. For example, some
companies hire individuals directly as temporary workers. Under direct hire arrangements, tempoU
rary employees typically do not work for more than 1 year. In addition, the hiring companies are the
temporary workers’ legal employers. Thus, companies take full responsibility for all HR functions
that affect temporary employees, including performance evaluation, compensation, and training.
On-call arrangements are another method for employing temporary workers. On-call
employees work sporadically throughout the year when companies require their services. Companies
can schedule workers for several days or weeks in a row. Some unionized skilled trade workers are
available as on-call employees when they are unable to secure permanent, full-time employment.
These employees’ unions maintain rosters of unemployed members who are available for work.
When employed, on-call workers are employees of the hiring companies. Thus, the hiring companies
are responsible for managing and implementing HR policies, including compensation.
TEMPORARY AND ON-CALL EMPLOYEES Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. Chapter 13 • Compensating the Flexible Workforce 301
LEASED EMPLOYEE ARRANGEMENTS Lease companies employ qualified individuals and
place them in client companies on a long-term basis. Most leasing companies bill the client for the
direct costs of employing the workers (e.g., payroll, benefits, and payroll taxes) and then charge a
fixed fee. Lease companies base these fees on either a fixed percentage of the client’s payroll or
a fixed fee per employee.
Leasing arrangements are common in the food service industry. ARAMARK Food Services
is an example of a leasing company that provides cafeteria services to client companies.
ARAMARK staffs these companies’ in-house cafeterias with cooks, food preparers, and checkout
clerks. These cafeteria workers are employees of the leasing company, not the client company.
Leasing companies also operate in other industries, including security services, building maintenance, and administrative services. Lease companies and temporary employment agencies are
similar because both manage all HR activities. Thus, lease companies provide both wages and
benefits to their employees. Lease companies and temporary employment agencies differ in an
important respect, however. Lease company placements generally remain in effect for the duraL
tion of the lease company’s contract with the host company. A
Independent contracR
tors, freelancers, and consultants (the term independent contractor will be used in this discussion)
establish working relationships with companies on their K rather than through temporary
employment agencies or lease companies. Independent contractors typically possess specialized
skills that are in short supply in the labor market. Companies select independent contractors to
INDEPENDENT CONTRACTORS, FREELANCERS, AND CONSULTANTS complete particular projects of short-term duration (i.e., usually a year or less). Adjunct faculty
members represent a specific example of independent contractors. Colleges and universities hire
them to cover for permanent faculty members who are on sabbatical leave or until they hire
tenure-track replacements. In addition, some companies staff segments of their workforces with
independent contractors to contain discretionary benefits costs. N
Reasons for U.S. Employers’ Increased Reliance on Contingent Workers
Structural changes in the U.S. economy have contributed to the rise of contingent employment:
• Economic recessions
• International competition
• Shift from manufacturing to a service economy
• Rise in female labor force participation
• Runaway costs to provide employer-sponsored health insurance
1 8
Many companies layoff segments of their workforces during economic
recessions as a cost-control measure. Following economic recessions, some companies restore
staffing levels with permanent employees. Many companies are increasingly restoring staffing levels
with contingent workers. Since the early 1970s, the U.S. economy experienced several economic
recessions. These repeated recessions have shaken employers’ confidence about future economic
prosperity. Staffing segments of workforces with contingent workers represents a form of risk control
because employers save on most discretionary benefits costs. In addition, companies can terminate
contingent workers’ services more easily: These employment relationships are explicitly tentative.
Both the host employer and the workers understand that these engagements are of limited duration. ECONOMIC RECESSIONS International competition is another pertinent structural
change. American companies no longer compete just against each other. Many foreign businesses
have demonstrated the ability to manufacture goods at lower costs than their American competitors.
As a result, successful American companies have streamlined operations to control costs. These companies are saving costs by reducing the numbers of core employees and using contingent workers as
an alternative. INTERNATIONAL COMPETITION Strategic Compensation: A Human Resource Management Approach, Seventh Edition, by Joseph J. Martocchio. Published by Prentice Hall.
Copyright © 2013 by Pearson Education, Inc. 302 Part V • Contemporary Strategic Compensation Challenges
broad divisions of industries: transportation, communication, and public utilities; wholesale
trade; retail trade; finance, insurance, and real estate; services; and government. Manufacturing
companies’ (e.g., automobile makers and textiles) employment declined substantially during the
past several years,7 and economic forecasts predict a loss of jobs in the manufacturing and mining
sectors through 2018.8 During this period, a steady decrease in employment in manufacturing
industries is expected to be offset by a substantial rise in employment in the retail trade and service
sectors such as professional and business services as well as health care and social assistance.9
Service sector employment is expected to add nearly 15 million new jobs to the economy by
2018.10 In addition, contingent workers typically find employment in service businesses, which are
more labor intensive than capital intensive (e.g., heavy manufacturing equipment). A number of trends depict a society that is in some ways increasingly dedicated to future
investment by means of both capital and increased effort. Business-oriented services—
such as upgrading of software and intelligent machinery, services related to construction, and improvement of business processes with the aid of consultants—may all be
interpreted as present investments for a wealthier future. The extension of business
operating hours may be interpreted in the same way. Even two rapidly increasing social
services, daycare and residentialK enable some people to work outside the home
instead of caring for relatives, and to contribute to economic expansion.11
The increase in female participation in the
labor force has promoted growth in the use of contingent workers. One-income families were
commonplace until the early 1970s, N males headed these households. Since then, several
economic recessions in the United States left large numbers of individuals unemployed.
Many wives entered the labor force temporarily to supplement family income during their
husbands’ unemployment spells. The majority took low-paying jobs as clerical or service workE
ers because t...
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