Chapter 3 Compensation and Benefit Management

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Teachers Guide
This case highlights how the compensation system can help retain employees. It also draws students attention to the advantages and disadvantages of different forms of direct compensation (e.g., base salary and commission). Lastly, students are given an opportunity to think of how indirect compensation (e.g., medical benefits) can further enhance employees loyalty to the company.

Think It Over
1 By using only commissions to compensate salespeople, the income of a salesperson would depend solely on the sales he was able to generate. This constitutes a strong motivational force for him to work hard. However, this pay method may make salespeople feel insecure as their income may fluctuate over time. Because of the huge pressure they are under to generate sales, salespeople may resort to unethical or inappropriate means to promote the companys products (e.g., misleading potential customers, withholding information from customers). 2 I think John should have a compensation package that combines a base salary with commissions. This would ensure that his salespeople earn enough to cover their basic costs of living, especially during an economic recession. John should provide salespeople who are employed as permanent staff at the company with medical insurance coverage. As society has become increasingly concerned about corporate social responsibility, medical insurance coverage is a very common fringe benefit at most companies. If this benefit is not available at Johns company, its corporate image will be adversely affected. Moreover, the provision of medical insurance coverage for salespeople can also help preserve or improve their physical and psychological well-being. Their sense of belonging and loyalty to the company will thus be enhanced.

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Teachers Guide
Draw students attention to the differences between time-based pay and performance-based pay.

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Check Your Progress

Q1 Direct compensation refers to the rewards that are directly related to the services provided by an employee. Examples include wages (or salaries), incentives, commissions and bonuses. (Any one of the above) Q2 Time-based pay refers to the rewards given to an employee in return for his services for a specified time period. Performance-based pay refers to compensation that is directly linked to an employees work performance.

Additional Information
In a survey conducted by Towers Watson in 2010, which covers 22,000 employees across 22 countries, nearly 60% of employees consider benefits when deciding to leave or stay with an employer. Most employees also expect more regular communications about rewards and benefits, and simpler plans and administration.

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Teachers Guide
Remind students of the concept of corporate social responsibility mentioned in Chapter 4 of Business Environment and Introduction to Management.

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Teachers Guide
Highlight the differences between direct and indirect compensation.

Check Your Progress

Q3 Indirect compensation refers to indirect financial or non-financial payments that employees receive from their employers. Examples include medical insurance coverage, retirement benefits, leave arrangements, and other personal services and family friendly benefits. (Any one of the above) Q4 The major advantages of indirect compensation are:
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 Enhance employees sense of belonging: A company offering a wide variety of indirect compensation demonstrates that it cares for employees and their family members. This will enhance employees sense of belonging and loyalty to the company. Eventually, this can lead to enhanced employee relations. Enhance corporate image: If a company provides generous employee benefits, it will be perceived by the general public as a socially responsible employer. This helps the company establish a positive corporate image and may persuade more customers to buy its products. Enhance employees well-being: Indirect compensation can help preserve or improve the physical and psychological well-being of employees and their family members. Employees productivity and satisfaction towards the company will thus be increased. (Any two of the above)

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Additional Information
According to the HKIHRM January 2010 Hong Kong Pay Trend Survey of 81 companies providing data on benefits, 38 firms had a guaranteed-bonus policy. In 2010, these companies awarded a guaranteed bonus to their employees, with the average bonus being 1.01 months of base pay. The survey covered 125 prominent Hong Kong companies from 13 business sectors. The survey was aimed at tracking pay adjustments and benefit management in Hong Kong.

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Check Your Progress

Q5 A compensation package that combines a base salary with commissions can be used to compensate a sales manager working for a real estate agency. The base salary serves to provide basic financial support for the sales manager. As the amount of the commissions depends on the sales he generates, this can provide a strong incentive for him to work hard.

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Additional Information
According to the Employment Ordinance, an employee can accumulate paid sick leave after he has been employed under a continuous contract. Paid sick leave is accumulated at a rate of two days per month during the first 12 months of employment. Thereafter, paid sick leave is accumulated at a rate of four days per month, and can be accumulated up to 120 days.

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Additional Information
Severance pay serves to: comfort terminated employees. This is given on compassionate grounds as terminated employees often experience financial problems. show the public that the company is a caring employer. Severance pay can be regarded as a means of preserving or even enhancing a firms corporate image.

Additional Information
In Hong Kong, the Employment Ordinance requires an employer to provide severance pay to a terminated employee according to a prescribed formula. In brief, the formula computes severance pay according to two factors: (1) the employees last months salary; and (2) the employees length (years) of service.

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Additional Information
Most Hong Kong companies offer medical insurance coverage for their employees. The most common form of medical insurance coverage allows employees to receive free outpatient services. Some outpatient plans limit the number of visits per year, while some limit the medical fees per visit (e.g., HK$150 per visit). Some medical insurance benefit plans also cover dental services, hospitalisation and surgical services.

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Check Your Progress

Q6 The major types of pay for time not worked include holidays and paid leave, sick leave, maternity leave and severance pay. (Any three of the above) Q7 The employee benefits for a clerk working in an office can include medical insurance coverage, retirement benefits and annual paid leave. (Any other reasonable answers)

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Teachers Guide
Draw students attention to the differences between internal equity and external equity.

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Additional Information
The job ranking method only ranks jobs according to their overall degree of difficulty. However, this method cannot show the exact difference in difficulty among jobs. For example, although this method can show that a job with a ranking of 3 is more difficult than a job with a ranking of 1, this does not mean that the former is three times as difficult as the latter.

Additional Information
The worth of a particular job depends on the job class to which it belongs. When using the job classification method, the HR manager needs to: 1 Determine the number of job classes at the company (usually 5 to 15). 2 Develop a relevant class description for each of these classes according to the compensable factors. 3 Determine the worth or value for each class based on the relevant class description. 4 Assign jobs to the appropriate classes based on these jobs characteristics and the class description. The worth of a given job thus depends on the class to which it belongs. Overall, this method is simple to use. However, this method may also involve a great deal of subjective judgement. An example of a job class description is given as follows: Class/Grade CL-1

Nature of assignment Performs routine clerical work with heavy data entry, data maintenance and filing Serves as backup for receptionist

Level of responsibility Work is assigned in terms of objectives, priorities and deadlines Works under moderate degree of supervision Completed work is evaluated on conformance to policy and guidelines.

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Check Your Progress

Q8 Internal equity concerns whether a given jobs pay rate is fair when compared with other jobs at the same company. External equity concerns whether a jobs pay rate at a given company is comparable to the pay rate at other companies. To maintain both internal and external equity, an HR manager needs to rely on: job evaluation to decide on the relative worth of all the jobs within the company (for internal equity); and
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compensation and benefit surveys to price these jobs with reference to market conditions (for external equity).

Q9 The two major methods for conducting a job evaluation are: Job ranking method: This involves ranking jobs from the simplest to the most difficult. Job classification method: This involves grouping jobs into various classes or grades and assigning a similar worth for jobs within the same class.

Additional Information
The results from the compensation and benefit survey will often be used in conjunction with the job evaluation results to determine the companys pay rates. The subjects of the evaluation are also characterised by stable tasks and stable job specifications (e.g., marketing manager, computer programmer). As a general rule, at least 30% of the jobs in a surveyed organisation should be studied in order to obtain more representative results.

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Additional Information
As companies often refer to the survey to adjust their own pay rates, they would like to have the survey conducted in the same area and industry in which they are operating. By knowing the pay rates offered by others in the same industry, companies can adjust theirs to be in line with market conditions.

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Additional Information
Since the mailing method relies solely on respondents own interpretation of the questionnaire, it should only be used to survey jobs that have a standard meaning throughout the industry.

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Check Your Progress

Q10 The major methods for conducting a compensation and benefit survey are: By personal interview: This involves interviewing respondents of the companies being studied face-to-face. By mail: An HR manager may mail questionnaires to the companies being studied. By telephone: An HR manager can conduct the survey by telephone (i.e., interview the companies being studied by phone).

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Q11 The following are issues which managers need to pay attention to when analysing the compensation and benefit survey results: Examine the characteristics (e.g., size and type of business and the major areas of operations) of the surveyed companies to see if it is appropriate to compare his company with these companies. Examine the surveyed companies total compensation packages instead of referring only to the base salary. Check carefully if jobs at his company are comparable to the surveyed jobs. Similar job titles at different companies may be very different in nature. Examine carefully whether the market situation has changed drastically since the survey was completed. Employees compensation depends greatly on market conditions. (Any three of the above)

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Additional Information
An HR manager first needs to plot average pay rates against the pay grades. He then draws a line through the points to make a wage curve (also called wage line). The wage curve indicates which particular pay grade should correspond to which level of average pay rates. In case certain average pay rates differ greatly from the rates offered by other companies, the HR manager may use prevailing market pay rates to replace average pay rates on the wage curve. Prevailing market pay rates can be obtained from the compensation and benefit survey.

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Check Your Progress

Q12 A wage curve shows the systematic relationship between the pay rates a company currently pays for each pay grade, and the worth of each pay grade based on job evaluation. The wage curve helps HR managers identify jobs that are overpaid or underpaid. They may then make relevant adjustments (i.e., decreasing or increasing the current pay rates) to ensure fairness within the company. Q13 A pay range represents the range of pay rates paid for each pay grade. Some companies use pay ranges to reward employees in the same pay grade because employees within a pay grade may still vary in experience, skills, seniority and actual performance.

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Discussion Questions
1 As the administrative staff would expect the same amount of pay regardless of their performance, they would be demotivated. They would have no incentive to work hard to support the salespeople. As all staff members are essential people who facilitate the companys operations, they should be entitled to the same fringe benefits unless there are good grounds to justify differential treatment. Offering the same benefits to all staff helps the company maintain fairness among its employees, thus fostering a harmonious working atmosphere within the company. Considering the job nature of a salesperson and an administrative staff member, there is no reason why overtime allowances and medical insurance should only be given to the former. Both types of employees have the chance to work overtime and both need medical insurance to protect or improve their health. Travel allowances and entertainment allowances, however, seem to be more relevant to the work of salespeople rather than administrative staff. This is because administrative staff are seldom required to travel or to entertain clients. As a result, it is appropriate for Andy to give the entertainment or travel allowances to the sales staff only. However, he should also provide overtime allowances and medical insurance for the administrative staff. 3 I should provide the administrative staff with medical insurance and overtime allowances. I should also explain to them why they are not entitled to travel and entertainment allowances (mainly due to their job nature).

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Discussion Questions
1 It is likely that the two are related. Under the current overtime policy, some employees might be enticed to work overtime for overtime pay. It is unhealthy for employees to work overtime for a prolonged period of time without proper rest. This would reduce employees leisure time with their family and friends. In sum, this working situation would adversely affect employees physiological and psychological well-being, and consequently increase their chance of falling ill. 2 Charles should improve the medical insurance coverage for his employees to maintain and improve their physical well-being. This would enhance employee relations. In the long run, the costs incurred by such expenses will be justified in terms of improved work productivity, employee loyalty and commitment, etc.
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The new overtime policy is a good move for improving the health of the staff. However, to implement it effectively, Charles should first define what frequently call in sick actually means. Perhaps he should consult his employees as well as examine their previous sick leave records to come up with a more concrete and appropriate definition (e.g., how many days of sick leave per year). From another perspective, it should be noted that the overtime work is attributed to the restaurants labour shortage. Hence, if the companys financial resources allow, Charles should think of increasing the number of employees (or recruiting part-time workers during peak hours) in the long run.

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Teachers Guide
Students should answer this question after they have studied Appendix 2.

ASSESSMENT

Short Questions
3.1 Monetary benefits: Wages Bonuses Commissions (Any two of the above) (Any other reasonable answers) Non-monetary benefits: Insurance coverage Retirement benefits Leave arrangements Company sponsored travel Discounts for buying specific merchandise Company parking Child care (Any two of the above) (Any other reasonable answers)

3.2

Indirect compensation can serve the following purposes: Employee benefits are an important means of attracting job applicants and retaining
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existing employees.

Companies can use indirect compensation to enhance employees physical health (e.g., by providing medical insurance coverage) and psychological well-being (e.g., by providing annual leave and company-sponsored recreational activities).

3.3

Direct compensation refers to the rewards that are directly related to the services provided by an employee. Indirect compensation refers to indirect financial or non-financial payments that employees receive from their employers. Since direct compensation is directly related to employees services to the company, and is mainly in the form of cash and given on a more regular basis, its motivational effect is stronger. Its impact on employees work motivation and job satisfaction is more direct. On the other hand, indirect compensation can be in various forms but is mainly in the form of non-financial rewards. It is usually not given on a regular basis. Thus, its motivational effect on employees is weaker. Its impact on employees motivation to work and job satisfaction is less direct.

3.4

As for a five-star hotel, the provision of benefits (e.g., discounted room rates, hotel facilities, medical insurance coverage, retirement benefits, etc.) can make hotel staff perceive their employer as a caring employer. Their sense of belonging and loyalty to the company will be enhanced. Eventually, this can lead to enhanced employee relations. This also helps preserve or improve the staffs physical (e.g., medical insurance coverage) and psychological (e.g., leave arrangement) well-being. Employees productivity and satisfaction towards the hotel will increase. By providing a generous indirect compensation package, the hotel will also be regarded as a socially responsible employer in the eyes of the public. This can enhance the hotels corporate image.

3.5

The major difference between a bonus and merit pay is that a bonus is a one-off payment but merit pay usually becomes part of the employees base salary. Therefore, merit pay has longer-term financial implications (i.e., burden) for the employer. Given the relatively high salary of the marketing manager at a large electrical appliance retail store, merit pay has a longer-term financial implication (i.e., burden) for the employer. A bonus is more suitable for compensating the marketing manager as it is directly linked to his actual (mainly sales) performance. This can motivate the manager to work hard (including providing better customer services to clients) to generate more sales for the retail store.

3.6

The job ranking method involves ranking jobs from the simplest to the most difficult. The job
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classification method involves grouping jobs into various classes or grades. All jobs in the same class are then assigned a similar worth. Since P&G is a very large multinational company engaged in various kinds of businesses, it would be difficult to rank all of its jobs from the simplest to the most difficult. Hence, it is more appropriate to use the job classification method to first group jobs into various classes before determining their respective worth. 3.7 A compensation and benefit survey aims to acquire data on the policies, practices and methods of compensation from a number of selected companies in a given geographic location or a particular industry. A compensation and benefit survey helps the HR manager better understand the compensation packages offered in the industry and ensure external equity. Based on this market information, he can then adjust his company packages (e.g., increase or decrease his company pay rates) in order to attract and retain employees.

Essay Questions
3.8 Job evaluation refers to the formal and systematic comparison of jobs to determine the worth of one job relative to another within a company. The HR manager can refer to the results of a job evaluation, together with the data from the compensation and benefit survey to assign pay rates for each job. A wage curve, which shows the systematic relationship between the pay rates a company currently pays for each pay grade and the worth of each pay grade based on job evaluation, can be plotted. The HR manager can thus compare the current pay rates of his company with the worth of the jobs in each pay grade. If some current pay rates fall above or below the average pay rate, the HR manager may consider adjusting (decreasing or increasing) the current pay rates to ensure fairness. Appropriate pay rates for all jobs within the company can thus be determined. 3.9 The job classification method involves grouping jobs within a company into various classes or grades. All jobs in the same class are then assigned a similar worth. For example, a local trading company with three major departments, namely administrative, accounting and marketing departments, may have three different job classes that classify most of its employees. The three classes are: Managerial: All three managers of the three departments Supervisory: All the officers in the three departments
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Clerical: All the clerks in the three departments

All jobs grouped in the same class are then assigned a similar worth in the trading company. (Any other reasonable answers) 3.10 As for direct compensation, the marketing manager should be compensated with a competitive base salary on a monthly basis. This can provide him with a minimum level of financial security to cover his costs of living. In addition, he will be offered merit pay and/or bonuses if he performs well. This can further motivate him to work hard. As for indirect compensation, medical insurance benefits should be provided to preserve and improve the managers physical well-being. These benefits may be extended to his family as well. He should also be provided with annual leave and retirement benefits. This can enhance his psychological well-being and make him feel more secure after retirement. All of these can help the manager develop strong loyalty and commitment to the company. (Any other reasonable answers) 3.11 As for direct compensation, the branch manager should be compensated with a base salary on a monthly basis to cover his basic cost of living. The branch manager can be provided with merit pay or a bonus if he performs well. These forms of compensation are directly related to performance and can motivate him to keep up the good work. As for indirect compensation, medical insurance benefits can be provided to preserve and improve the managers physical well-being. These benefits can be extended to his family as well. The branch manager can be provided with annual leave and retirement benefits. This can enhance his psychological well-being and makes the branch manager feel more secure after retirement. Moreover, the bank can offer a privileged mortgage rate to the branch manager to purchase a flat. All of these can help him develop strong loyalty and commitment to the bank. (Any other reasonable answers)

Case Analysis
3.12 (a) There are many different kinds of positions/jobs within the large fast food chain. Given the diverse nature of these jobs, it would be very difficult to rank all the jobs accurately. Hence, the job ranking method is not suitable for conducting job evaluations at the company. I would recommend the job classification method. It would be more appropriate to first group jobs into various classes (according to their similarity) and then decide on their respective worth.

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(b)

Peter should consider the following factors when using the results of the compensation and benefit survey: Examine the characteristics of the surveyed companies to see if it is appropriate to compare his fast food chain with them. Examine the surveyed companies total compensation packages instead of referring only to the base salary. Similar job titles at different companies may be very different in nature. Thus, Peter should check carefully if jobs at his company are comparable to the surveyed jobs. Employees compensation also depends greatly on market conditions. Thus, Peter should carefully examine whether the market situation has changed drastically since the survey was completed. (Any three of the above)

(c)

A wage curve shows the systematic relationship between the pay rates a company currently pays for each pay grade, and the worth of each pay grade based on job evaluation. With this wage curve, Peter can compare the pay rates his company is paying for each pay grade with the worth of each pay grade. Peter can then determine if some jobs are overpaid or underpaid. Based on this, he can then adjust the compensation for those who are overpaid or underpaid.

3.13 (a)

It is appropriate for Betty to grant bonuses to the factory workers. This is because bonuses are given in the form of cash and thus their motivational power should be most direct and immediate. Employees at the operational level may prefer a more immediate cash reward than stock options whose monetary benefits can only be realised at some point in the future (exercising the right when the stock price is high). Stock options are not a suitable form of direct compensation for factory workers as they may lack the knowledge and expertise to decide when they should exercise the buying right. They may not be able to maximise their returns if they exercise the rights at the wrong time.

(b)

Advantages of granting stock options to all of the managerial staff: Employees are allowed to exercise the right to buy company shares within a certain period of time. Therefore, stock options can be used as a long-term incentive.

Stock options can help develop employees loyalty and commitment to the company.

Disadvantage of granting stock options to all of the managerial staff: The motivational power will be greatly reduced if the companys share price goes down.

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(c)

The decision to give all employees a flat 5% salary increase may not be appropriate as this may considerably increase the companys financial burden. Hence, Betty should assess the impact before its implementation. She may consider other alternatives (e.g., cash bonus) which are one-off payments and will create less financial burden for the company. Giving all employees the same salary increase regardless of their individual performance may also create unfairness. Employees who perform well may think that they should receive more rewards than those who perform poorly. If they receive the same salary increase, their morale will be adversely affected.

3.14 (a)

Production workers may need time to learn the new technology. They will be afraid that the new technology will affect their productivity. As they are paid by piece rate, their salary will be affected. As a result, they may resist the introduction of new technology. Dilys can provide training for the production workers. They can learn the technical skills that can enable them to cope with the change. (i) (ii) Dilys can advertise for warehouse keepers through the Labour Department. This is because the Labour Department has wide coverage and its service is free of charge. Dilys can recruit the computer expert through a professional institution (e.g., the Hong Kong Computer Society) as she can attract a number of professionals who have experience. Or Dilys may advertise for a computer expert in the mass media (e.g., the Classified Post), a computer magazine or on the Internet as these media offer wide coverage and are cost effective. Or Dilys may turn to a commercial employment agency for help. This can save her the time of assessing and evaluating candidates (as the agency will help the company screen the applicants first).

(b)

(c)

Teachers Guide
Students may propose various job posting methods as long as they can give a reason for their choice. (d) Selecting the warehouse keepers can be simple and straightforward. Dilys can simply ask the applicants questions through a structured interview. As the company needs
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several warehouse keepers, Dilys might not devote a lot of time to many selection methods and rounds of interviews. Since the skills involved can be learned on-the-job, past experience is a plus but not a must for the applicant. Professional qualifications may not be required. Dilys may simply refer to the application form for preliminary screening. Selecting the computer expert is more complicated. Dilys may consider using a combination of selection methods to test the suitability of the applicant. Since only one computer expert is needed, the cost of hiring the wrong person can be high, so it is worthwhile for Dilys to devote more time to choosing the right applicant for the job. The applicant may need to go through several rounds of tests and interviews. (For example, an aptitude test can be conducted to assess the specific abilities required to perform the job of a computer expert.) As the skills involved are rather special and cannot be learned on-the-job, past experience in related areas or industries is a must. Dilys may need to carefully study the applications of the applicants. She may also prefer the one with relevant professional qualifications.

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