Legal Environment/Total Rewards: A Changing Landscape
In the race for profit, employee pay has traditionally been seen by businesses as a competitive liability, and the trend for much of the 20th century was for employers to search for the cheapest, most efficient labor to protect their bottom line. Because of this approach, the U.S. government took several steps during the 20th century to protect employees from extortionary measures by employers to drive down wages and drive up productivity. However, as Chen and Hsieh point out in their 2006 article "Key Trends in the Total Reward System of the 21st Century," recent decades have seen a dramatic shift in the way that corporations and human resources professionals view the issue of employee pay. Instead of being viewed as a liability, employee pay is increasingly being seen in a positive light, as a method for securing top talent, stabilizing turnover, and motivating production. While the laws put into place in the 20th century were designed to prevent employers from underpaying their workforce, they also provide some limitations for the ways in which employers can use pay as a reward. In this period of increased scrutiny of corporate salaries and bonuses, however, the laws in place may not be sufficient to prevent unfair reward practices.
The development of federal legislation regulating the pay of workers had its roots in the national dialogue about employee rights that took place in the United States in the first two decades of the 20th century. It was a complicated issue, bound up in the competing agendas of free market capitalists and labor union organizers. Congress passed its first law regulating employee pay, the Davis-Bacon Act, in 1931. The law is limited to public works contracts entered into by the Federal Government, and stipulates that the minimum wage for workers involved in the project be set forth in the contract, that the wage be at least equal to the prevailing local wage for the same work, and that overtime be paid at least 1.5 times the minimum wage (Bohlander & Snell, 2010). This law has been controversial for a few reasons. Some argue that it is founded on racial prejudice; many who supported the law's passage did so because they did not want the cheap labor provided by African-American workers to undercut the wages commanded by white workers. Secondly, the law forces contractors on federal projects to hire labor at the same rate as the local union wages -- a figure that is often substantially higher than the market rate for the same labor. This policy, many claim, leads to an unfair advantage for skilled union workers over unskilled workers who would be willing to work for less, and results in bloated labor costs in taxpayer-funded projects. The Walsh-Healey Act of 1936 extended these stipulations to public contracts for equipment and supplies, and refined the overtime requirement to include any time worked beyond eight hours a day or forty hours a week (Ibid).
Despite their controversial nature, one of the benefits of these Acts is that they set the stage for later legislation that was more broadly protective of employees. In 1938, Congress passed the most far-reaching and influential labor legislation: the Fair Labor Standards Act (FLSA). This legislation sets a national minimum wage for workers involved in the production of goods, and in retail and services businesses whose sales exceed a prescribed amount. It also extends the overtime requirements of previous legislation to these private sector jobs. This Act puts a firm floor on the amount employees can pay hourly non-exempt workers. The wage has been adjusted many times to account for inflation, and currently stands at $7.25 (U.S. Department of Labor). Any work beyond forty hours a week must be paid at 1.5 times the worker's hourly wage, adjusted to include any bonuses or incentives paid during the period (Bohlander & Snell, 2010).
After setting in place laws to protect workers from being exploited through pay, the Federal government turned its attention to ensuring that pay was not used as a method of discrimination against workers. In response to the growing number of women entering the workforce in the mid-20th century, Congress passed the Equal Pay Act in 1963 requiring all employers to pay equal wages for equal work, regardless of the worker's gender. While this Act has helped to stem some discriminatory wage practices, it has been difficult to enforce since its enforcement relies heavily on the knowledge and reporting of workers who have suffered discrimination. One problem with its enforcement is that the statute of limitations on reporting wage discrimination was for many decades set at two years from the commencement of the discrimination, regardless of when the employee became aware of the discrimination (U.S. Equal Employment Opportunity Commission).
This problem was to some extent rectified by the Lilly Ledbetter Fair Pay Act of 2009. This act set the date for the beginning of the statute of limitations as the date of the last instance of discriminatory pay -- not the first instance as had been previously interpreted by the courts. This provides a much more realistic timeframe for employees to become aware of discriminatory practices and to take action against them within the prescribed period.
These important pieces of legislation have gone far in regulating the practices of those businesses who seek to manage the bottom line by keeping labor costs as low as possible. But what implications do they have for those businesses who see pay as an important and worthwhile human resources investment? Do they provide any guidance or limitations on the use of pay as a total rewards incentive approach?
To some extent, they do. The FSLA, for instance, requires that bonuses and other pay incentives be considered as part of the base wage in tabulating overtime pay. This should be of concern to the manager or human resources professional who sees bonuses and pay incentives as an important component of performance management but must also balance the expenditure of overtime pay for hourly employees. This approach, as Chen and Hsieh (2006) point out, is on the rise as companies recognize the effectiveness of monetary incentives on employee satisfaction and productivity. One possible way of balancing the desire to offer monetary rewards with the need to keep overtime costs down is to offer instantaneous rewards instead of periodic rewards. By offering instantaneous monetary rewards instead of the traditional periodic model, HR managers can target reward offerings for periods in which overtime is likely to be low. Additionally, instantaneous rewards tend to be more effective at motivating performance than periodic rewards, whose disbursal may be too far removed from the performance to form a clear link in the employee's mind (Chen & Hsieh, 2006).
Beyond the FSLA requirements, the Equal Pay Act also has clear consequences for those creating a strategic human resources plan. Chen and Hsieh recommend a "differential" approach to rewards rather than the traditional "unitary" approach. The unitary approach offers one rewards program to all employees, while the differential approach recognizes that "each employee has different characteristics, needs, and abilities that can best be met with different types of rewards" (6). While the differential approach may be more efficient at targeting the best means of motivating employees, it provides many opportunities for discriminatory practices, and must be carefully monitored internally to ensure that rewards that are offered to different genders, though perhaps not the same, are at least equitable.
While the Federal labor laws do have implications for pay-based and monetary incentives, those companies pursing a "total rewards" approach to employee satisfaction and retention have many other options for non-monetary incentives and rewards. One way to secure talent and inspire loyalty is through benefits. As health care insurance costs go up, employer-provided health care is becoming less tenable…