This document contains Chapters 15 to 16 CHAPTER 15 Pay and Benefits Outside the United States Learning Objectives 1. Explain the differences between pay and benefits in the United States and in countries around the world (included in this chapter). 2. State the total costs of hourly compensation in manufacturing settings around the world. 3. List the countries that impose minimum wage rates. 4. Summarize the paid time off benefits in at least two countries. 5. Briefly summarize the protection benefits such as retirement, health care, and social security in at least two countries. Outline I. Introduction II. North America A. Overview B. Canada C. Mexico III. South America A. Overview B. Brazil IV. Europe A. Overview B. Germany V. Asia A. Overview B. India C. People’s Republic of China VI. Discussion Questions and Suggested Answers VII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses VIII. Additional Cases from the MyManagementLab Website; Instructor Notes, and Questions and Suggested Student Responses Lecture Outline I. Introduction 1. Globalization has resulted in a high level of interconnections between the economies of various parts of the world 2. U.S. employers will increasingly conduct business with entities in a variety of other countries as former underdeveloped parts of the world experience tremendous economic, trade, and standard of living growth 3. In addition, the move from traditional manufacturing to knowledge- and service-based employment also means that jobs as well as markets are more likely to be dispersed geographically 4. HR management professionals are going to have increased opportunities to develop compensation and benefits programs for U.S. employees in foreign assignments, as well as for indigenous employees in foreign offices of the parent company 5. Many other governments do not regularly assess pay levels in their economies, which stands in stark contrast to the wealth of data provided regularly on U.S. markets 6. The U.S. Bureau of Labor Statistics, however, regularly compares the hourly compensation costs in several countries 7. The gross domestic product (GDP) describes the size of a country’s economy, where size is expressed as the market value of all final goods and services produced within the country over a specified period 8. GDP per capita generally indicates the standard of living within a country, the larger the per capita GDP, presumably the better is the standard of living II. North America A. Overview 1. Mexico, Canada, and the United States are part of a trade bloc known as NAFTA—the North Atlantic Free Trade Agreement 2. NAFTA called for the elimination of duties and the phasing out of tariffs over a period of 14 years 3. Trade restrictions were removed under NAFTA from such industries as motor vehicles and automotive parts, computers, textiles, and agriculture 4. The labor side of NAFTA is the North American Agreement on Labor Cooperation (NAALC) 5. Created to promote cooperation between trade unions and social organizations in order to champion improved labor conditions B. Canada 1. Constitutional monarchy that is also a parliamentary democracy and a federation consisting of ten provinces and three territories 2. Per capita GDP—$41,500 3. Labor force—18.85 million 4. The market-based Canadian economy is very similar to that of the United States’ 5. Canadian law holds that labor and employment law fall within the exclusive jurisdiction of the provinces 6. Federal legislation cannot override provincial laws, even when the industry or employer primarily conducts business overseas (except in the cases where the industries are expressly assigned to federal jurisdiction) 7. English Statute of Labourers of 1562 established working hours and wages 8. Eventually repealed in the early nineteenth century—became part of the English common law and later became part of the common law governing all the provinces other than Quebec 9. Quebec has the Civil Code of Quebec which came into effect in 1866; a modernized version of the Civil Code came into effect on January 1, 1994 10. Wage and Salary a. Canada does possess a statutory minimum wage law b. At the federal level, there is an obligation placed upon provincial governments to establish minimum rates of pay by or under an Act of the legislature c. In 2012, Alberta has the lowest minimum wage rate in Canada (i.e., $9.95) d. The highest rate (i.e., $11.00) can be found in Nunavut 11. Paid time off benefits a. Canadian employment law holds that employees are entitled to between eight and nine annual paid holidays as well as two weeks paid vacation time along with a sum of money as vacation pay (increasing to three weeks after six years of employment) b. The amount of vacation pay is equal to two percent of the employee’s pay for the preceding year per week of vacation c. Employees are eligible for a total of 17 weeks of benefits during pregnancy and after childbirth 12. Protection benefits a. Pensions and retirement benefits i. Canada has two state pension plans ii. One for Quebec residents only and one for the rest of Canada iii. Both funded by matching contributions from employers and employees and fully portable upon employment changes, much like 401(k) plans in the United States b. Health and disability benefits i. Medical and basic hospital care in Canada is paid for by provincial medical insurance plans with compulsory coverage for all residents and funding revenue derived from both general federal taxation and from provincial taxes ii. Even though public health plans normally do not provide employed persons with prescription drugs except while they are hospitalized, additional benefits are provided by private supplementary insurance by employers, including dental and vision care iii. Employers also provide long- and short-term disability benefits for sickness or injury as part of a benefits package C. Mexico The “Labor and Social Security” article of the constitution is still in effect Employment relationships in Mexico fall under the Federal Labor Law which was last revised in January of 1997 and clearly defines the terms worker and employer for the purpose of individual employment Per capita GDP—$15,300 Labor force—19 million Wage and salary a. The Mexican government requires that two minimum wage rates be applied: i. The first, general minimum wage, applies to all workers and the amount depends upon the region of the country ii. The second is the occupational minimum wages that are higher than the general minimum wages b. Occupations that require greater skill, knowledge, and experience are compensated at higher rates 6. Paid time off benefits a. Workers are entitled to paid time off during public holidays and workers required to work during a mandatory holiday are entitled to double pay b. Female employees are entitled to maternity leave—six weeks prior to giving birth and six weeks after birth on full salary c. Employees are entitled to six vacation days after being employed for one year and to two more days for each subsequent year, up to a maximum of twelve days 7. Protection benefits a. Social security i. Social security programs in Mexico are administered by the Mexican Social Security Institute ii. Protect employees in the matters of occupational accidents and illnesses, maternity, sicknesses, incapacitation, old age, retirement, and survivor pensions, daycare for children of insured workers, and social services iii. The system is financed by contributions from workers, employers, and the government, with contributions based on salary levels, and with workers earning minimum salary exempt from making contributions, whereas employers bear the bulk of the contributions to the different insurance funds iv. Workers with at least 52 weeks worth of payments into the system who withdraw are entitled to continue making voluntary payments v. Cash benefits take the form of transfer payments in the early stages of illness or incapacitation, depending on the medical condition and its effects on work and pensions vi. In-kind benefits take the form of medical attention, including surgery and medicines, hospitalization services, and so forth b. Pension and retirement benefits i. Effective July 1, 1997, all workers must join the mandatory individual account system, which is slowly replacing the former social insurance system ii. At retirement, employees covered by the social insurance system before 1997 can choose to receive benefits from either the social insurance system or from the mandatory individual account system c. Health benefits i. Medical services are normally provided directly to patients (including old-age pensioners covered by the 1997 law) through the health facilities of the Mexican Social Security Institute ii. Benefits include general and specialist care, surgery, maternity care, hospitalization or care in a convalescent home, medicines, laboratory services, dental care, and appliances, and are payable for 52 weeks, but may in some cases be extended to 104 weeks iii. In addition, the wife of an insured man also receives postnatal benefits in kind, and medical services are provided for dependent children up to age 16 (age 25 if a student, no limit if disabled) d. Other benefits i. A national system of worker housing exists paid for by employer contributions in the form of payroll tax fixed at five percent and helps workers obtain sufficient credit for the acquisition of housing ii. Workers not employed after age 50 are entitled to receive the full balance of contributions made in their name to the housing fund III. South America A. Overview 1. The biggest trade bloc in South America used to be Mercosur, or the Southern Common Market, comprised of Argentina, Brazil, Paraguay, Uruguay, and Venezuela as the main members and Bolivia, Chile, Colombia, Ecuador, and Peru as associate states 2. The second-biggest trade bloc was the Andean Community of Nations made up of Bolivia, Colombia, Ecuador, Peru, Venezuela, and Chile 3. These two trade blocs merged as of a declaration signed on December 8, 2004 at the Third South American Summit and formed one large trade bloc known as the South American Community of Nations that plans to model itself on the European Union B. Brazil 1. The Consolidation of Labor Laws (Consolidacao das Leis do Trabalho) accords many employee benefits the status of fundamental constitutional rights and in general the employment relationship in Brazil is highly regulated by statute 2. Brazilian law states that any/all benefits habitually granted by the employer, whether expressly or tacitly, are considered part of the employee’s salary for all legal purposes and cannot be abolished 3. In practice, employers discharge employees arbitrarily because there is a substantial supply of readily available workers who are willing to accept lower pay 3. Per capita GDP—$12,000 4. Labor force—107.10 million 5. Wage and salary a. Minimum wage imposed b. In accordance with the Federal Constitution, the minimum wage rate is nationally uniform and set by law c. The minimum wage is fixed by a Provisional Measure, namely an Act of the Executive having the force of law, in accordance with Article 62 of the Federal Constitution and placed before Congress for conversion into law d. In 2011, this wage was 545 R$ (Reais) 6. Protection benefits a. Social security i. The social security system that went into effect in 1991 details various benefits for workers in Brazil ii. Comprehensive social security benefits are provided by law to all workers regarding retirement for illness, old age, or length of service; death benefit pensions; assistance during imprisonment of worker; savings fund; social services; professional rehabilitation assistance; work accident payments; maternity leave payments; family salary support; accident insurance; and sick leave benefits b. Pensions i. Social insurance is provided to employed persons in industry, commerce, and agriculture, domestic servants, some categories of casual workers, elected civil servants, and the self-employed ii. The monthly benefit is equal to 70 percent of average earnings plus 1 percent of average earnings for each year of contributions, up to a maximum of 100 percent iii. Employees contribute 8.5 percent of gross earnings, and voluntary contributors and members of cooperatives contribute 20 percent of declared earnings iv. Employers are required to contribute 20 percent of payroll (22.5 percent of payroll for employers in the financial sector), 15 percent of earnings for work cooperatives, 12 percent of payroll on behalf of domestic workers, and 2.7 percent of earnings for rural employers c. Health benefits i. Medical services are provided directly to patients in rural and urban areas through the Unified Health System and include such benefits as general, specialist, maternity, and dental care; hospitalization; medicines (some cost sharing is required); and necessary transportation IV. Europe A. Overview 1. The European Union (EU) is a unique international organization that aims at becoming an economic superpower while still retaining quintessential European practices such as high levels of employment, social welfare protection, and strong trade unions 2. Under the laws of all Member States, employers must provide employees with a written document about the terms of the employment contract 3. The concept of “employment at will” does not exist in the EU as in the United States 4. The EU makes use of Directives and Community Legislations to ensure that some minimum standards are adopted by member states 5. All member states either have specific legislation or unfair dismissal or general civil code provisions that apply to termination of employment contracts 6. The EU Website reports that community labor law was designed with the aim of ensuring that the creation of the Single Market did not result in a lowering of labor standards or distortions in competition 7. On the basis of article 137 of the treaty, the Community shall support and complement the activities of the Member States in the area of social policy, particularly minimum requirements at the EU level in the fields of working and employment conditions, and with regard to the information and consultation of workers B. Germany 1. Germany’s employment laws provide considerable voice to labor and job security to employees and the German Civil Code provides numerous statutes that deal with individual employment as well as collective agreements 2. There have been increasing concerns about the aging workforce and high unemployment bankrupting the social security system but for now Germany has managed to bring the deficit to within the EU debt limit 3. Per capita GDP—$39,100 4. Labor force—44.01 million 5. Wage and salary a. Minimum wage in Germany is not mandated by the government, and is established through the collective bargaining process b. Two types of collective agreements: i. Association agreements are made between trade unions and employers’ associations ii. Company agreements are made between trade unions and individual employers c. An extension of either type of agreement to other sectors or employers may be granted upon the request of at least one party to the collective agreement 6. Paid time off benefits a. The statutory minimum vacation has been set at 24 working days (or four weeks since Saturdays are counted) b. Younger workers have a right to a vacation of 25 to 30 working days; disabled workers have an additional five days of vacation c. Under the terms of the Maternity Leave Law, time away from work as a result of maternity leave or other limits on work by pregnant women and mothers must be counted as time worked for the purpose of determining entitlement to vacation time 7. Protection benefits a. Pensions i. Germany has a statutory pension system analogous to the Social Security system in the United States ii. Employers offer the company pension plan and a tax-favored investment plan iii. Employees have three different sources for their pension benefits: statutory pension insurance, company pension plans, and private life insurance b. Health insurance i. German laws stipulate guidelines for the minimal health welfare of workers ii. For blue collar workers (and some white collar workers) mandatory state health insurance premiums are shared equally by the insured and by the employer iii. Employees whose income exceeds a certain amount can opt out of the state plan and purchase private health insurance V. Asia A. Overview 1. Asia has several trade blocs including the Asia-Pacific Economic Cooperation, the Asia-Europe Economic Meeting, the Association of Southeast Asian Nations, and the South Asian Association for Regional Cooperation 2. Given the wide variation and diversity in the world’s largest and most populous continent, however, there is no unifying economic body like the EU or NAFTA that represents all the countries of Asia B. India 1. The Directive Principle of State Policy has statutes that affect various aspects of the employment relationship such as working conditions and participation in management 2. There are wide variations between the public and private sectors, with the Ministry of Labour and labor laws governing employment relationships in the public sector and more employer discretion allowed in the private sector 3. Per capita GDP—$3,900 4. Labor force—498.4 million 5. Wage and salary a. Minimum wage is fixed by an authority dual system b. Minimum wage rates are determined by the government for certain sectors, and a collective agreement determines others c. Minimum wage rates for occupations that are largely nonunionized or have little bargaining power may be set in accordance with the Minimum Wages Act, 1948 d. The central government sets minimum wages for 45 different occupations, including agricultural workers, construction and road maintenance workers, workers in mines, railway workers, and stone breaking or crushing workers e. In addition, states have set minimum wages for 1,232 different occupations in their respective regions f. Minimum wage rates apply only to those scheduled occupations that have more than 1,000 employees working in the applicable state g. E.g., in Delhi the minimum wage rate ranged between 279 and 339 rupees per day in 2013 h. Wage rate varies by the level of job skill and industry 6. Paid time off benefits a. Leave is usually calculated for each year based on the number of days worked in the previous year and if worker does not take all of the accumulated leave it is allowed to roll over to the succeeding calendar year up to a maximum of 30 days b. There is no statutory provision of paternity leave but maternity leave is allowed in the form of paid time off and possible medical bonus 7. Protection benefits a. Pensions i. First and current laws regarding pensions were passed in 1952 (employees’ provident funds), with amendments in 1972 (payment of gratuity), 1976 (employees’ deposit-linked insurance), 1995 (employees’ pension scheme), and 1995 (national social assistance program) ii. In 2004, a voluntary old-age, disability, and survivors’ benefits scheme was enacted iii. Voluntary coverage exists for employees of covered establishments with monthly earnings of more than 6,500 rupees, with the agreement of the employer and for establishments with less than 20 employees if the employer and a majority of the employees agree to contribute iv. Provident fund contributions include 12 percent of basic wages (10 percent of basic wages in five specified categories of industry) in covered establishments with less than 20 employees and some other specific cases v. The maximum monthly earnings for contribution purposes are 6,500 rupees (1 USD = 50.8 rupees) b. Health Benefits i. State governments arrange for the provision of medical care on behalf of the Employees’ State Insurance Corporation ii. Services are provided in different states through social insurance dispensaries and hospitals, state government services, or private doctors under contract C. People’s Republic of China 1. The PRC Labor Law was established in 1995, resulting in a break from the traditional “iron rice bowl” system of employment, with a shift from state-owned enterprises to private ones, a move which has given rise to new employment relationship issues 2. Under the older welfare system the workforce was considered the property of the State and many benefits such as housing, medical, and retirement schemes were payable directly by the state-owned enterprises to the employees 3. Since the introduction of the PRC Labor Law the employment relationship is now defined by individual contracts 4. Per capita GDP—$9,100 5. Labor force—795.4 million 6. Wage and salary a. According to China’s Labour Act, 1994, the State possesses the responsibility to implement a system of guaranteed minimum wages b. There is no national minimum wage rate in China; instead, minimum wage rates are set by region c. Separate standards are stipulated by provincial, regional, and municipal peoples’ governments for their respective regions and reported to the State Council for consent d. The provisions concerning minimum wages apply to enterprises, private non-enterprise entities, individual industrial and commercial households with employees (the employing entities), and the laborers who have formed a labor relationship with them e. The minimum wage rate varies by region - in 2011, the monthly minimum wage was 1,300 yuan in Gaunghzho (the highest in China) and 1,120 yuan in Shanghai with the lowest amount in Anhui Province and Jiangxi Province at 500 yuan 7. Paid time off benefits a. Employees who have worked for one or more years are entitled to be paid annual leave but there are no binding laws about this; national policy guidelines recommend 5 to 15 days b. Employees who have worked for more than one year are entitled to “home leave” if they do not live in the same place as their spouse or parents c. Women are entitled to no less than 90 days of maternity leave starting 15 days prior to birth 8. Protection benefits a. Pensions i. There has been a new law to decouple the employment relationship from the social insurance system, setting up a unified basic pension system ii. The system now has social insurance and mandatory individual accounts iii. Coverage includes employees in urban enterprises and urban institutions managed as enterprises and the urban self-employed iv. Employees of government and communist party organizations and of cultural, educational, and scientific institutions (except for institutions financed off-budget) are covered under a government-funded, employer-administered system v. An employee contribution to mandatory individual accounts is 8 percent of gross insured earnings vi. The minimum earnings for employee contribution and benefit purposes are equal to 60 percent of the local average wage for the previous year vii. The maximum earnings for employee contribution and benefit purposes vary, but they may be as much as 300 percent of the local average wage for the previous year viii. Employer contribution to mandatory individual accounts is as high as 20 percent of insured payroll based on local regulations b. Health insurance i. A unified medical insurance system exists with all employers and workers participating in this system; employers contribute six percent of payroll employees contribute two percent of their salary. ii. Health insurance is based on Basic Medical Insurance Fund consisting of a Pooled Fund and Personal Accounts iii. Employees’ contributions go directly to their Personal Accounts and 30 percent of employer contributions are paid into this account iv. The social insurance fund reimburses the cost of the medical benefit from 10 percent up to 400 percent of the local average annual wage
Health care note: With rising health care costs, the ability of citizens to receive adequate care is of heightened concern in all countries.
CHAPTER 16 Challenges Facing Compensation Professionals Learning Objectives 1. Explain the impact of economic recession and underemployment on compensation practice. 2. Point to the reasons for rising wages in China. 3. Describe the challenges associated with executive compensation. 4. Summarize the challenges associated with health care reform. 5. Describe the influence of changing workforce demographics on employee benefits practice. 6. Summarize the issue of marriage between same-sex individuals and the U.S. Supreme Court ruling on the Defense of Marriage Act. Outline I. Overview II. Fallout from the “Great Recession” What Is an Economic Recession? III. Underemployment: Implications for Compensation A. The Compensation-Productivity Gap IV. Executive Compensation V. Rising Wages in China VI. Challenges in Healthcare Reform VII. Workforce Demographics Shifts A. Labor Force Diversity B. Relevance for Employee Benefits C. Considerations for Employee Motivation VIII. Marriage Between Same-Sex Individuals and the U.S. Supreme Court Ruling on the Defense of Marriage Act IX. Discussion Questions and Suggested Answers Lecture Outline I. Overview 1. Four key issues that will shape the work of compensation professionals: a. Fallout from the “Great Recession” b. Rising wages in China c. Challenges in health care reform d. Workforce demographic shifts II. Fallout from the “Great Recession” A. The U.S. Economy Experienced an Economic Recession 1. Between December 2007 and June 2009, lasting 19 months 2. The term “Great Recession” is widely used to describe the significance of it 3. Was the longest recession since World War II B. What Is an Economic Recession? 1. Economic recession refers to a general slowdown in economic activity 2. Evidence of economic recessions include: a. Reduced gross domestic product (GDP) b. Increased unemployment rates 3. Reduced consumer spending is one of the primary causes of economic recessions 4. Consumers’ demand for products and services declines
• Example: Lower consumer demand General Motors and Chrysler respond to lower consumer demand for their products by cutting production levels in order to avoid excess inventory
5. Significant layoffs of employees occur due to lower demand
Example: Layoff activity The number of layoffs, separations, and initial claimants rose dramatically during the recession began decreasing following the recession numbers following the recession remain substantially higher than prior to the recession Period Layoff Events Separations Initial Claimants 2005 4,881 884,661 834,533 2006 4,885 935,969 951,155 2007 5,363 965,935 978,712 2008 8,259 1,516,978 1,670,042 2009 11,824 2,108,202 2,442,000 2011 6,596 1,112,710 1,289,273 2012 6,051 1,152,258 1,777,143
6. Reduced production adversely affects other companies’ operations 7. Reduced demand for products and services across industries contributes to the recession
a. Example: Reduced demand for products and services The Federal Reserve Bank: 86 percent of industries have cut back production since the beginning of the Great Recession the reduction is the most widespread since 1969 (the Federal Reserve Bank began tracking this information in 1969)
8. GDP a. Declined each quarter during the Great Recession b. Began rising following the end of the recession c. Will take some time to get back to pre-recession levels III. Underemployment: Implications for Compensation A. Underemployment: Implications for Compensation Underemployment refers to employees who wish to work full-time but are forced to work part time for economic reasons such as: a. Poor business conditions b. Inability to find a job
Example: Underemployment in the U.S. The number of underemployed individuals rose dramatically since recession Period Number Underemployed October–November 2007 4,201,000 October–November 2008 7,217,333 October–November 2009 8,907,333 October–November 2010 8,902,666 October–November 2011 8,443,333 October–November 2012 8,114,000 Absolute Change, 2007–2012 3,913,000 Percent Change, 2007–2012 93
The mean hourly earnings of the underemployed were below those of full- time workers, both: a. Overall b. In each educational group
Example: Underemployed v. Full-time Workers Education Group Underemployed Full-time workers Difference All workers $12.80 $20.96 $8.16 High school students 7.07 8.20 1.13 College students 13.04 12.67 0.37 High school dropouts 11.23 12.11 -0.88 High graduates 11.78 16.67 4.89 1-3 years of college 13.83 18.96 5.13 Bachelor’s degree 14.35 26.17 11.82 Master’s or higher 21.46 32.07 10.61 degree
• The mean hourly earnings for full-time workers were higher than underemployed workers by 64 percent The difference between the mean hourly earnings of the underemployed and those of full-time workers ranged between $0.88 and $11.82 in each of the five education groups whose members were not enrolled in school
Malemployment occurs when job holders possess greater education, skills, or knowledge than is required to perform their jobs
• Example: malemployment Person holding a bachelor’s degree in psychology Works as a part-time grocery store clerk Both underemployed and malemployed
Longer term implications of underemployment a. Underemployed workers are likely to have lower future earnings i. Employers provide less or no training b. Underemployment may slowdown the economic recovery from recession i. Lower current pay and anticipated lower future earnings will likely reduce the consumption of goods and services ii. Holds back increases in spending, business production, and employment levels B. The compensation-productivity gap 1. The gap between real hourly compensation and labor productivity shows whether workers’ pay is keeping up with productivity 2. Real hourly compensation measures the purchasing power of a dollar 3. Nominal hourly compensation is the face value of a dollar 4. Increases in the costs of goods and services cause nominal pay to be less than real pay
Example: Let’s assume, An employee accepted a job at $10 per hour nominal pay: $10 real pay: $10 A year later the price of goods and services increased on average five percent nominal pay: $10 real pay: $9.50 Hourly real pay declined by 5 percent or $0.50
5. Productivity growth promotes rising living standards 6. Increases in productivity growth indicate companies’ investments in a. Capital equipment i. New manufacturing facilities ii. Research and development labs iii. Sales distribution centers b. Information technology through structured databases i. Example: physicians may access databases to help them diagnose health conditions based on patients’ symptoms and health histories ii. Example: companies can identify customers for new products and services based on variety of factors such as household income and purchasing history 7. The gap between real hourly compensation and labor productivity widened a. 1947-1973 i. The annual change in productivity averaged 2.8 percent ii. Real hourly compensation growth averaged 2.6 percent b. 1973-1979 i. The annual change in productivity averaged 1.1 percent ii. Real hourly compensation growth averaged 0.9 percent c. 1979-1990 i. The annual change in productivity averaged 1.4 percent ii. Real hourly compensation growth averaged 0.5 percent d. 1990-2000 i. The annual change in productivity averaged 2.1percent ii. Real hourly compensation growth averaged 1.5 percent e. 2000-2011 i. The average annual growth in productivity is 2.3 percent ii. The average annual growth in real compensation is 0.9 percent 8. Reasons for the compensation-productivity gap a. High unemployment following recessions leave employees with relatively lower power to bargain for higher pay i. The supply of individuals seeking work is greater than company demand for new workers b. Most companies lose profit during economic recessions, and generally increase their profits following recessions i. Companies promote profits, in part, by holding down employees’ pay IV. Executive Compensation Executive compensation practices under scrutiny of many from the public, labor unions, federal government, and some boards of directors Company boards of directors set executive pay The Dodd-Frank Act requires transparency in setting executive compensation and shareholder advisory vote about their support or lack thereof (“say-on-pay”) In Europe, four countries instituted laws that provide shareholders with the right to cast a binding vote to approve or disapprove proposed executive compensation packages Many unanswered questions remain about U.S. executive compensation practices: Do shareholders have sufficient knowledge about the qualifications of the executive and whether the proposed compensation package is fitting? Should all shareholders have an equal say on pay? That is, would it be appropriate to count votes in proportion to the number of shares? Should we assume that individuals will factor in executive compensation practices as part of their decision to invest in a company or to divest from it? V. Rising Wages in China 1. Many U.S. companies relocated manufacturing facilities from the United States to other countries such as China due to lower their labor costs 2. The cost of labor in China has been increasing rapidly 3. Rising costs are reducing the competitive advantage gained from relocating manufacturing facilities to China 4. Among developing Asian countries, China’s average pay rate is highest 5. Minimum wage rose rates an average of 24 percent 6. Average monthly income for migrant workers increased 13 percent 7. Chinese policy makers are supportive of increased wages a. Encouraging higher wages promotes domestic consumption b. Increased domestic consumption will decrease the country’s reliance on exports to sustain growth c. Reduced reliance on exports is necessary as labor costs within China increase rapidly 8. Labor shortages contributed to wage increases in China a. One-child policy i. Rapidly aging Chinese population ii. Reduced number of young workforce entrants iii. The largest segment of the Chinese population is in the 35-44 age range VI. Challenges in Healthcare Reform A. Overview 1. The Patient Protection and Affordable Care Act (PPACA) was signed by President Barack Obama on March 23, 2010 2. PPACA was amended by the passage of the Health Care and Education Reconciliation Act of 2010 3. These laws provide the basis for health care reform in the United States 4. The goal of the health care reform is to reduce the number of uninsured U.S. residents by 32 million in 2016 5. The estimated cost of the health care reform through the year 2019 is $971 billion 6. The Health Care and Education Reconciliation Act adds several requirements a. There are a multitude of revisions to PPACA such as: i. Limiting the penalty to companies that choose not to offer health insurance b. Adding a variety of provisions that will enable more students and families to qualify for financial aid i. Loans will be administered directly by the U.S. Department of Education B. Key Considerations for Employers 1. The new legislation will require most employers to provide health care insurance to employees 2. Beginning 2014, employers with 50 or more full-time employees that do not offer health insurance coverage must pay a $2000 penalty per employee 3. There are higher fines for employers that offer unaffordable health insurance 4. It is expected that the cost of health care insurance will become more expensive to employers due to the new requirements a. Elimination of the lifetime benefits cap b. Limits waiting periods before new employees may receive health care coverage to a maximum of 90 days VII. Workforce Demographic Shifts A. Labor Force Diversity 1. Labor force diversity will continue to increase based on age, gender, race, and ethnicity due to: a. Changes in the composition of the population b. Labor force participation rates across demographic groups 2. The projected growth of the labor force will be affected by the aging of baby-boom generation a. Born between 1946 and 1964 b. Will be 54 to 72 years old in 2018 c. The number of workers in this age group is expected to increase significantly between 2008 and 2018 3. Labor Force Participation Rate During the Period 2008-2018 a. Age i. For younger workers: expected to decline from 58.8 percent to 54.5 percent ii. For older workers: expected to rise from 39.4 percent to 43.5 percent b. Gender i. For women: all age groups are projected to increase slightly ii. Projected growth for women is 9 percent iii. Projected growth for men is 7.5 percent iv. Women’s share is expected to increase by less than 1 percent (from 46.5 percent in 2006 to 46.9 percent by 2018) v. Men’s share is expected to decline by less than 1 percent (from 53.5 percent in 2008 to 53.1 percent by 2018) c. Ethnicity i. Hispanic labor force is expected to reach 30 million ii. White non-Hispanics will far outnumber the Hispanics (approximately 107 million versus approximately 30 million) B. Relevance for employee benefits 1. An employer-sponsored benefits program is most effective when the needs and preferences of the workforce are similar 2. Differences in employee preferences and needs necessitates flexible benefit offerings
Example: Likely Preferred Benefits Demographics Life Events Benefits Unmarried male and female employees Physical fitness programs (uncoupled employees) Generous vacation allowances Employees with dependent elderly Elder care benefits parents or relatives Flexible work schedules Married male and female employees Flexible work schedules Employees with children, male or Day care assistance female, coupled or uncoupled Life insurance Health insurance with dependent coverage Education benefits for children Older workers (nearing retirement) Retirement plans with accelerated benefits accumulation
Insurance with prescription drug benefits
Generous sick-leave allowances Disability insurance
Retiree health care benefits
3. Benefits professionals may use surveys to gather information about employee a. Demographics b. Needs c. Preferences d. Recent or anticipated life changes e. Preference on benefits 4. Current offerings can be compared with the survey results C. Considerations for employee motivation 1. It is expected that employee benefits will motivate employees to perform better 2. However, it might not be applicable in many settings due to the changing demographics of the U.S. workforce 3. Variation across generational and regional norms regarding: a. Appropriate age of marriage b. Age at which an employee gets concerned with life insurance VIII. Marriage Between Same-sex Individuals and the U.S. Supreme Court Ruling on the Defense of Marriage Act In recent decades, more companies have chosen to offer the same employee benefits to domestic partners of employees, sometimes, the partner’s dependent children Some states have established legislation that grants domestic partners the same rights to receive the same benefits as married spouses Definitions of domestic partners vary. For example, one definition includes unmarried partners in either heterosexual or same-sex relationships. In other cases, domestic partnership is recognized for individuals in a same-sex relationship The Defense of Marriage Act of 1996 prohibits recognition of marriage between same-sex individuals. However, more than a dozen states since that time have instituted laws that legalize same sex marriage, including Iowa, Massachusetts, Rhode Island, and New York Legalized same-sex marriages provided equal protection under state laws, but not federal laws In fact, until June 2012, the Defense of Marriage Act prohibited same-sex spouses from being recognized as beneficiaries for federal benefits such as Social Security or leave under the Family and Medical Leave Act. Subsequently, challenges to this prohibition took place in the courts In June 2013, the U.S. Supreme Court ruled that Section 3 of the Defense of Marriage Act is unconstitutional. Specifically, the Court’s ruling applies to the part of the law, which had previously denied federal benefits to gay and lesbian couples in states where such unions are permitted. The ruling means that same-sex couples lawfully married in their state can receive the same federal benefits as heterosexual couples, such as possible tax advantages by filing jointly, benefits for veterans’ spouses and inheritance-tax exemptions. Instructor Manual for Strategic Compensation: A Human Resource Management Approach Joseph J. Martocchio 9780133457100, 9780135192146
