Chapter: Compensation and Benefits

6.1 Goals of a Compensation Plan

 Continue to change and align your compensation plan with your growing company
 Compensation package- pay, healthcare benefits, benefit plans (401k), etc.
o WorldatWork Society of Certified Professionals provide exams based on
compensation
o 1st positive to attract the best people for the job
o 2ndcompetitive to motivate people to stay with your org.
o 3rdimproves morale, motivation, satisfaction, and loyalty
 Pay systems for individuals or team performance can boost performance
o Better customer service
o Helps organizational growth and expansion
6.2 Developing a Compensation Package
 Find “holes” in compensation package and develop new philosophies in line with
strategic plan
Internal and External Pay Factors
 Internal
o Compensation strategy to use?
 Market compensation policy- to pay the going rate for a job within a
market based on research and salary studies. Add/Subtract a % compared
to the median pay country wide
 Market plus philosophy  add
o Reasons: industry’s cutting edge nature req.’s best and
brightest
 Market minus philosophy subtract
o Reasons: core values, req. unskilled workforce that is easy
to replace
o Employer’s ability to pay
o Type of industry
o Value of the employee
o The job to the org.
o Union presence
 External
o Economic status
o Inflation
o Cost of living

6.3 Types of Pay Systems

  Compensation internal + external factors  job eval.  type of pay system  types of
pay  legal and pay theories = implementation of compensation strategy
Job Evaluation Systems
 Job evaluation- process of determining the relative worth of jobs to determine pay
structure
o Job ranking system
o Paired comparison- individual jobs are compared with every other job, based on a
ranking system and an overall score is given for each job, determining the
highest-valued job to the lowest-valued job
o Point factor system- determines the value of a job by calculating the total points
assigned to it.
 Compensable factors- points given to a job
 Varies from specific responsibilities and skills
 Weighed in importance to org.
o Hay profile method- proprietary job evaluation method that focuses on three
factors called know-how, problem solving, and accountability; this method is
most applicable to management positions
 Adv: Quantative method
 Disadv: expense of performing an elaborate job evaulation
 Job classification system- every job is classified and grouped based on the knowledge
and skills required for the job, years of experience, and amt of authority for that job.
Pay Systems
 Pay grading- process of setting the pay scale for specific jobs
 Pay grade levels- compensation model that looks at all jobs w/in org. and assigns each
job a pay level or pay grade.
o Fair and very rigid structure
o May not be suited for all co.’s
o Adjust according to external factors
o Lack of motivation, too much hierarchy
 Delayering and banding- cuts down the # of pay levels w/in org.
o Broader range of pay and more flexibility
 Going rate model- analysis of the going rate for a job is the basis for determining what
people w/in the org. should be paid
o Works well if market pressures or labor supply and demand pressures impact
business
Compensation Strategies
 Management fit model- every manager plans about who should be paid and what when
that person is hired
 o Discrimination and halo effects are possible
 Skill-based pay- salary levels are based on skills rather than title
 Competency-based pay- employee’s traits or characteristics
o Focused on what employee can become
 Broadbanding- all jobs in a category are assigned a specific pay category
 Variable pay system- provides a pay basis and links the attainment of certain goals or
achievements directly to their pay.
Pay Theories
 Equity theory- relational satisfaction employees gets from pay and inputs they provide to
the org. People will evaluate their own compensation by comparing it to others’ and their
inputs (the work performed) to others’ as well.
o External and internal
 External is what other people in similar org’s are being paid for a similar
job
 Internal pay focuses on employees w/in the same org.
 They look at higher level jobs, lower level jobs, and years with the
org. to make their decision on pay equity
 Expectancy theory- employees will put in as much work as they expect to receive
 Reinforcement theory- high performance followed by reward, it will continue (operant
conditioning)
Pay Decision Considerations
 Pay structure
o Size of org. and expected expansion of the org. is a factor
o Oversea op’s and the global market
 Centralized compensation system- one pay system for all employees,
regardless of where they live
 Cost of living is a problem
 Local currency
 Attitude surveys to examine motivation, fairness, among other factors can help the
compensation process
Types of Pay
 Total pay system can be broken up as: pay, incentives and other types of compensation
o Pay- hourly, monthly, salary
o Incentives- pay for performance
 Co. goals can be directly linked to employee goals
 Result: higher pay for employee and goal achievement by org.
 Traits of incentive plans:
 Clearly communicated
  Attainable, yet challenging
 Easily understood
 Tied to co. goals
Laws Relating to Pay
 Comparable worth- people should be given similar pay if they’re performing the same
type of job
 Equal Pay Act- illegal to pay different wages to men and women if they perform equal
work in the same workplace
 180-day statute of limitations for filing an equal pay lawsuit regarding pay discrimination
resets with each discriminatory paycheck
 Fair Labor Standards Act (FLSA)- min. wage for jobs, overtime laws, and child labor
laws.
o Divided workers into
 Exempt- do not fall under FLSA guidelines
 Paid a salary and includes executive, professional, outside sales,
and admin. positions
 Non-exempt- hourly employee
 Different min. wages based on state laws
o Requires overtime pay if employees work over 40hrs/wk
o Must put FLSA poster in a visible part of the workplace
o Child labor under FLSA to protect the education of children, prohibit the
employment of children in dangerous jobs, and limit # of working hours children
during the school year and other times of the year
o Tips (pg. 209)
 Federal Unemployment Tax Act (FUTA)- payments of unemployment compensation to
workers who have lost their jobs
 Federal Employees Compensation Act (FECA)- provides federal employees injured in
the performance of their job’s compensation benefits
o Elective for private co’s, but required for federal agencies

6.4 Other Types of Compensation

Mandated: SS and Medicare
 SS Act of 1935 requires employers to withdraw funds from paychecks to pay for
retirement benefits
o Payroll tax
o All org’s are legally compelled to offer this benefits
o OASDHI- Old Age, Survivors, Disability, and Health Insurance Program
o This covers both retirement income as well as Medicare once the employee
reaches retirement age
Mandated: Unemployment Insurance and Workers’ Compensation
 SS Act of 1935 and is also called the Federal Unemployment Tax Act (FUTA)
o Providing lost income for employees during involuntary unemployment, helping
workers find a new job, incentivizing employers to continue employment, and
developing worker skills if they are laid off.
 Ineligible to receive these benefits if they quite their job’
o Not necessary everywhere, but compensation benefits are offered if employee is
hurt on the job.
 Classified in risk levels, higher risk = higher cost of insurance
Mandated: COBRA
 Consolidated Omnibus Budget Reconciliation Act (COBRA)- requires companies to
allow employees to extend their group coverage for up to 36 months
o Restrictions requirement of a qualifying event (i.e. loss of benefits)
Voluntary: Incentive Pay Systems
 Straight Commission Plan- employee receives no base pay and entire pay is based on
meeting sales goals
o Base Pay- guaranteed salary the employee earns
 Spot Bonus- unplanned bonus given to an employee for meeting a certain objective
o Doesn’t need to be money
 Reward employees when the org. as a whole does well
o Profit sharing as an incentive
o Can be large expense since everyone gets a profit of a certain percentage more
than normal
 Employee ownership
o Stock options- buy stock at a fixed price
 Earns the difference between what he/she paid and the value of the stock
o Employee stock ownership plans- given stock as reward for performance
 Merit pay- links pay to how well job is performed  tied to performance appraisals
o Annual pay increase usually tied to performance
o Problem is that it’s once a year, limiting incentive flexibility
o Performance guidelines should be predetermined to make this work
 Cost of living annual increases (COLAs)- annual inflationary increase
Voluntary: Medical Insurance
 Usually includes hospital & surgical expenses and routine healthcare visits
o Allow wellness and alt. care visits too
 Vision and dental care
 Disability insurance
  Health Insurance Portability and Accountability Act (HIPAA)- federal protections for
personal health info held by covered entities, such as employers
o Employers cannot divulge or share healthcare info they have on an employee
 Fee-for-service plan- pay medical expenses out of pocket and then reimbursed for the
benefit level
o Can have initial expense of employee and the time it takes to be reimbursed
 Health Maintenance Organizations (HMOs)- greater coverage usually. Limits ability of
employees to see the doctors they choose.
 Preferred Provider Organization (PPO)- allows employees to see a physician outside the
network provided.
o Likely still pay a deductible, but allows employees more freedom to see
specialists
 Consider:
o Cost of plan
 Major key
 Developing a budget, initiating bids from possible providers, and then
negotiating the bids
o Type of coverage
 Opinions on type of coverage to ensure plan meets the needs of employees
o Quality of care
o Admin. Of the plan
 Simplicity of the plan for HR dept. to administer
 Disability insurance- income to individuals should they be injured or need long-term care
resulting from an illness
o Short-term disability insurance (STD)- provides benefits to someone if they’re
unable to work for 6 months or less
o Long-term disability insurance (LTD)- covers for a long period of time
o Provides income to the employee that is 60-80% of normal salary
Voluntary 401(k) Plans
 Pension plans- set dollar amt an employee receives when they retire from the org.
o Pension Benefit Guaranty Corp (PBGC)- created by Employee Retirement
Income Security Act (ERISA) to protect pension benefits in private sector pension
plans
 If plan can’t pay what was promised, then PBGC’s insurance programs
pays what should’ve been provided
 Financing this comes from insurance premiums paid by the co’s whose
plans PBGC protects
 Directly deposit money from their paycheck
o Tax deferred for the employee until retirement
o 401(k) goes with them if they leave co.
o Extra incentive is that many plans match what the employee puts in
  Vesting period- a time period before the employer will match funds
contributed
o Easy to administer
 Can be costly, but retention for employees is high
 Choose a vendor with a good reputation and provides ease of access for employees
o Most plans charge a fee to manage the investments of employees
o ERISA doesn’t req. employers to offer a pension or 401(k), but those who offer
must meet certain standards when administering this plan:
 Requires participants receive specific information about the plan, such as
plan features and funding
 Sets minimum standards for participation and vesting
 Requires accountability of plan’s fiduciary responsibilities
 Requires payment of certain benefits, should the plan be terminated
Voluntary: Paid Time Off
 Paid holidays- set # usually
 Sick leave- # can vary greatly. Usually 8.4 days offered to employees/year
 Paid Vacation- usually expected as part of compensation package. 9 days for 1yr of
service to 14 days with five service of service
o Vary greatly on how this is accrued
o Some allow carry over unused vacation time
 Paid Time Off (PTO)- set # of days which can be used for vacation time, holidays, or sick
leave
o Some org.’s offer paid sabbaticals
Finals notes
 Ability to recruit and retain is an important factor
 Consideration of workplace is crucial
 Communicate with employees about what is wanted