Compensation and Benefits

Compensation and Benefits


Compensation and benefits have long been key drivers in recruiting, attracting and retaining employees. Human resource professionals are integral to creating a compensation and benefits model that attracts talent, enhances engagement and retains employees—all while adhering to appropriate regulations and disclosure rules.

Compensation Equity

Employers create compensation and benefits packages to attract and retain employees and believes that employees. As part of these efforts, HR strives to ensure that employees are compensated equitably and without gender discrimination.  

The Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964 are the two key pieces of federal legislation that prohibit gender-based wage discrimination in the workplace. Jobs that have the same functions and similar working conditions and that require substantially the same skills must be compensated equally with allowable pay differences based on factors such as experience, qualifications, seniority, geographic location, performance and other factors not prohibited by law.

According to the U.S. Bureau of Labor Statistics, in the  fourth quarter of 2017 women who were full-time wage and salary workers had median weekly earnings of $769, which is approximately 81 percent of the median weekly earnings of male full-time wage and salary workers ($946). This raw wage differential, however, does not attempt to compare men and women doing similar work. The challenge for policymakers is determining how much of the wage differential between women and men is attributable to discrimination, legitimate pay practices or other workplace dynamics and what policy changes might help address it. 

Over the past few years, policymakers have increased their focus on pay equity. Congress introduced multiple bills aimed at addressing the pay differential between men and women, but some legislative proposals raised concerns in the human resource community as to whether they may unduly restrict employers' flexibility to compensate employees fairly based on legitimate criteria, such as cost-of-living differences among geographic locations and different work responsibilities within similar job categories. Federal contractors are currently prohibited from discriminating against employees who disclose compensation information and legislative proposals to apply these rules to all employers have also been discussed in Congress. 

Outlook:

At the federal level, President Trump has said that he supports equal pay for equal work and his daughter and advisor, Ivanka, has been a vocal proponent of compensation equity, but the White House has not offered a specific proposal. House and Senate Democrats reintroduced the Paycheck Fairness Act (PFA) but the legislation is unlikely to move forward in this Congress. The PFA would allow employers to base employee pay differentials only on seniority, merit and production. The PFA would also shift the burden of proof to the employer in discrimination claims, making it easier for plaintiffs to challenge employer pay practices.

At the state level, several jurisdictions—most notably California, Delaware, Oregon and Massachusetts; various municipalities; and Puerto Rico—have passed some form of pay equity legislation. Of those, a majority have included a prohibition on asking about a job candidate's salary history due to concerns that this practice may lead to basing the new employee's pay on his or her previous salary and may perpetuate a gender-based salary gap from one job and one employer to another. 

 

Some new and proposed state laws include a concept that appears close to or is approaching "comparable worth" using a standard of "similarly situated," which requires that jobs with comparable skills and responsibilities or jobs of comparable worth to the employer should be paid the same. Congress rejected this concept during the original Equal Pay Act debate because it would mandate the same pay for different jobs.

 

Another emerging trend is the inclusion of a safe harbor for employers that conduct voluntary self-evaluations of pay and are actively working to address any discrepancies. For example, the Massachusetts law provides employers an affirmative defense to liability against a claim of pay discrimination if the organization has completed a self-evaluation of its pay practices in good faith within the past three years prior to commencement of the action, and if the organization can demonstrate that it was a reasonable self-analysis and that it has made progress to eliminate any improper pay differences based on sex identified by the evaluation. 


Executive Compensation

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which included changes to the executive compensation deduction rules in Section 162(m) of the Internal Revenue Code (Code), which will impact the way many companies design and administer executive compensation programs.

The changes under Code Section 162(m) became effective on January 1, 2018, for calendar year companies (or will become effective for tax years after December 31, 2017, for non-calendar year companies).  Specifically, Code Section 162(m) limits the deduction that covered companies may take for annual compensation paid to any individual who served as the CEO or CFO at any time during the taxable year and the three other most highly compensated officers (other than the CEO and CFO) for the taxable year.

Once an individual becomes a covered employee for any taxable year beginning after December 31, 2016, that individual will remain a covered employee for all future years, including after termination of employment or even death. This is a change from the prior rules, under which a covered employee for any given taxable year was determined based on the individual's status and compensation at the end of that year and did not carry forward for future years.

The exception under Code Section 162(m) for qualified performance-based compensation and commissions is eliminated. This means all compensation paid to a covered employee in excess of $1 million would be nondeductible, including post-termination and post-death payments, severance, deferred compensation and payments from nonqualified plans. Companies subject to Code Section 162(m) includes corporations that have publicly traded equity and publicly traded debt, as well as foreign private issuers that meet the new definition of a publicly held corporation (even if not subject to the executive compensation disclosure rules of the Securities Exchange Act) and possibly other corporations that are not publicly traded, such as large private C or S corporations. Code Section 162(m) had previously applied to corporations with publicly traded equity only.


Outlook: President Trump supports rolling back Dodd–Frank and replacing it with "new policies to encourage economic growth and job creation." It is possible that the new administration could maintain some parts of the law, but the details are unclear at this point. The SEC currently has three Commissioner vacancies and therefore lacks a quorum to proceed to a vote on rules or other matters, leaving the impact of the following compensation policies unclear:

  • Pay Ratio.  The SEC's CEO pay ratio rule mandates that most public companies disclose to the SEC the total annual median compensation of all employees (excluding the CEO); the total compensation of the CEO; and the ratio of the two amounts. Public companies subject to the rule must comply with it for the first fiscal year beginning on or after January 1, 2017. In October 2016, the SEC issued guidance on how to make these disclosures.

  • Clawback Policies. Although not yet finalized, these SEC-proposed rules would require securities exchanges and associations to establish clawback policies. Under these clawback policies, current and former executives would be required to return incentive-based compensation that would not have been awarded based on a company's accounting restatement. The rule applies to incentives resulting from accounting metrics, stock prices and total shareholder returns. Republican SEC Commissioners have argued that the list of officers the rules would apply to is much broader than Dodd–Frank requires.

  • Pay For Performance. In April 2015, the SEC proposed rules that would require companies to disclose the relationship between executive pay and the company's shareholder return, as well as how their shareholder return compares to that of their peers. The rules would require companies to disclose this information from the previous five fiscal years. The SEC's public comment period for the proposed rules closed in July 2015 and timing of the final rule is not certain.


Expansion of Employer-Provided Education Assistance

Section 127 of the Internal Revenue Code allows employers to provide and employees to exclude from income up to $5,250 per year in employer-provided tuition reimbursement for courses at the associate, undergraduate and graduate level. This benefit was reauthorized in one manner of another for more than 30 years and finally became a permanent part of the Internal Revenue Code in 2012, largely due to the advocacy efforts of SHRM and the SHRM-led Coalition to Preserve Employer Provided Education Assistance. A comprehensive and flexible benefits package is an essential tool in recruiting and retaining talented employees. Providing tax-free educational assistance and student loan repayment are important tools that employers utilize in order to accomplish this goal.  Section 127, and now, with the expansion of this provision, provides employers the ability to invest in their own people, and to ensure that they are prepared for the increasingly competitive global marketplace.

​Outlook: During the tax reform process, the House bill, proposed eliminating employer-provided education assistance. The final bill, H.R. 1, did not contain the provision, essentially preserving tuition assistance. Efforts will now shift to expand and increase the benefit.  The Employer Participation in Student Loan Assistance Act (HR 795), introduced in the House by Representatives Rodney Davis (R-IL), Jared Polis (D-CO), Scott Peters (D-CA) and Elise Stefanik (R-NY), would expand Section 127 of the Internal Revenue Code to include student loan repayment. 

Additionally, the HELP for Students and Parents Act (HR 1656) introduced in the House by Representatives Pat Meehan (R-PA) and Susan Del Bene (D-WA), would exclude from income, up to $5,250, the amount that an employer contributes toward an employee’s student debt repayment or 529 savings account an employee provides for their child. Provides a tax credit to employers based on 50 percent the amount contributed to these accounts.  
In October 2017, Senators Jeff Flake (R-AZ) and Catherine Cortez Masto (D-NV) and House members, Representatives Jason Smith (R-MO), Rodney Davis (R-IL), Henry Cuellar (D-TX), Susan Del Bene (D-WA) and Danny Davis (D-IL) have introduced S.2007/H.R. 4135, the Upward Mobility Enhancement Act, to increase the amount allowed under Section 127. The Legislation would allow employers to voluntarily provide up to $11,500 per calendar year in education assistance for their employees. This amount will be indexed for inflation.