Section 1 – Benefits – Matching & T/F – 1 mark each – 14 marks

Section 2 – All topics – Multiple choice – 1 mark each – 10 marks

Section 3 – All topics – Short Answer – 2-4 marks each – 10 marks
Section 4 – Practical Analysis – Analysis – 8 Points / 2 mark each – 16 marks

TOPICS OF KEY FOCUS:

Benefits
Be able to know the purpose of each of the following from our presentations apply them to
different scenario statements:
 Canada Pension Plan (CPP) - The employer must contribute to things such as pension and
employee insurance on behalf of their employees.
- Defined benefit plan: Provides a stream of income from time of retirement until death. This is
determined by the employees’ annual earnings modified by the number of years the employee
was covered by the plan. It’s basically based on the proportion of the employees’ pay at the
time of retirement.
- Defined contribution plan: This is when an employer commits to putting a certain amount of
money in the investment trust on behalf of the employee and at the time of retirement, the
amount paid is based on whatever money is in the trust. So, it’s not exactly a guaranteed
amount.
- Hybrid pension plan: This is just a combination of the two plans.
 Employment Insurance (EI) -
 Health Care – Medical & Dental
 Wellness Programs
 Life Insurance & Accidental Death & Dismemberment (ADD) - All benefits plans have life and
accident insurance. This is expressed in terms of annual salary and workers have the option to
increase coverage at their own expense.
 Flexible Work Arrangements
 Company Pension Plans
 Employee Assistance Programs (EAP)
 Education Assistance
 Disability Plan - Short Term Disability (STD)
 Disability Plan - Long Term (LTD)

Compensation related legislation

Not on the exam!

Salary surveys & External Competitiveness

 Compensating differentials – A higher compensation level offered by an employer because of
undesirable aspects of employment (Seasonal Employment, Cost of living, Poor working
conditions, Poor industry reputation). If a job has negative characteristics, that is, if the
necessary training is very expensive (medical school, law school), job security is tenuous
(stockbrokers, CEOs), working conditions are disagreeable (highway construction, garbage
collectors), or the chances of success are low (professional sports—NBA, NFL, MLB, etc.), then
employers must offer higher wages to compensate for these negative features. This is known as
compensating differentials theory.
  Defining the relevant labor market – A relevant labor market includes employers who compete
in one or more of the following areas:
1. The same occupation or skills required - a non-profit organization like the Red Cross looking
for a chief financial officer would want to know the pay levels of senior finance positions in
both nonprofit and for-profit organizations across the country, whereas a new local
Starbucks store looking for a cashier/barista would only concern itself with local pay rates.
2. Employees within the same geographic area – As the importance and complexity of
qualifications increase, the geographic limits also increase.
3. The same products and services - From the perspective of cost control and ability to pay,
including competitors in the product/service market is crucial.

 Sources of compensation data – In-house surveys and Third-party surveys

1. In-house surveys –
 Informal Surveys - Range from a quick review of help wanted ads to a question posed to
a group of colleagues at an industry function to a few phone calls to other firms Usually
simple and quick but may have poor reliability and validity.
 Formal Surveys - Can be undertaken by internal staff or can be contracted to
compensation firms. Main advantage is that the employer controls the entire process,
ensuring the quality and appropriateness of the data.
Advantage: The employer avoids paying consulting fees which can be high.
Disadvantage: If the survey is to be done by internal staff, then someone with the required
expertise must be available. Many employers surveyed may be reluctant to reveal their
compensation practices.

2. Third-party Surveys –
 Government Agencies - Survey employers to collect labor market information. At federal
level, these include Statistics Canada; HR and Skills Development Canada, which
maintains information on collective agreements as well as other pay information. At
provincial level, government of Ontario website www.ontario.ca
 Industry Groups - Most industries have industry associations, many of which collect data
on pay rates within their industries. Many professional associations also collect data on
their own occupational groups. Example – Professional Engineers Ontario
 Compensation Consultants - There are many firms for which collecting labor market
information is an important business. For example, large international firms, smaller
firms that operate on a local or regional basis. One concern is that this data may come
mostly from their client firms and thus does not necessarily comprise a representative
sample. Example – Mercer, Hay Group, Korn Ferry
 Compensation Data Websites - Free websites providing compensation data online. For
example, Salary Wizard, salary.com, PayScale.
Advantages: Ease and cost
Disadvantages: May not cover the desired jobs, compensation characteristics, or employers.
Aggregate data are often provided, rather than company-by-company data, so it is not
possible to separate out those employers who are the most appropriate comparators for
your organization.

Base Pay Structure

 Competitive pay policies – There are three competitive pay policies: 1. Match; 2. Lead; 3. Lag.
Employers may choose to combine approaches:
 - vary the policy for different occupational families.
- vary the policy for different forms of pay.
- adapt different policies for different business units that face very different competitive
conditions.
1. Match the Market – Failure to match competitors’ rates would cause dissatisfaction among
present employees and limit the organization’s ability to recruit. Many non-unionized
companies tend to match or even lead competition to discourage unionization. A match policy
tries to ensure that an organization’s wage costs are approximately equal to those of its product
competitors and that its ability to attract applicants will be approximately equal to that of its
labor market competitors. While this policy avoids placing an employer at a disadvantage in
pricing products, it may not provide an employer with a competitive advantage in its labor
markets.
o Most common policy
o Ensures equality between different market competitors in pay
2. Lag the Market – A policy to pay below market rates may hinder a firm’s ability to attract
potential employees. However, if pay level is lagged in return for the promise of higher future
returns (e.g., stock ownership in a high-tech start-up firm), such a promise may increase
employee commitment and foster teamwork, which may increase productivity. Unmet
expectations will probably have negative effects as well. Additionally, it is possible to lag
competition on pay level but to lead on other returns from work (e.g., meaningful work,
desirable location, outstanding colleagues, cool tools, work/life balance).
o High turnover
o Lowered attraction for new candidates
o Possible demotivation of current employees
o Low cost
o Higher shareholder value if profits are high
3. Lead the Market – A lead policy maximizes the ability to attract and retain quality employees
and minimizes employee dissatisfaction with pay. It may also offset less attractive features of
the work. High pay levels reduce turnover and absenteeism. A lead policy can have negative
effects, too. It may force the employer to increase the wages of current employees to avoid
internal misalignment and murmuring. Additionally, a lead policy may mask negative job
attributes that contribute to high turnover later (e.g., lack of challenging assignments or hostile
colleagues).
o Increased market competitiveness
o Higher attraction potential
o Profits may be inadequate to sustain the company's growth

 Compa ratio calculations – A measure of distribution of employees within their pay range
calculated by dividing the mean (or Actual) salary or base pay by the midpoint of the pay range.

 Criteria to move through pay ranges - Criteria must be established to determine how placement
and movement within range will occur. Three most common criteria:
– Experience
– Seniority
– Performance

 Definitions of:
 1. Pay grade - A grouping of jobs of similar value to the organization, typically grouped by point
totals.
2. Pay range - The minimum and maximum pay rates (in dollars) for jobs in a particular pay
grade.
3. Midpoint differentials - Difference between the range midpoints of adjacent pay grades in a
pay structure, expressed in dollars. Ideally increase the % differential as you get to a higher-
level grade (higher pay). E.g. 5%-12% for clerical; 20% to 35% for executive level.
4. Range spread – The difference between the maximum and the minimum pay level, in
dollars, for a given pay range. Range spreads usually increase for pay grades higher up the
job hierarchy to recognize the greater complexity of these jobs.

Pay for Performance

 Merit pay - A merit pay system links increases in base pay (called merit increases) to how highly
employees are rated in a subjective performance evaluation. Usually granted as a % on an
annual basis.
Advantages
o Focuses attention on overall performance
o Helps to retain outstanding employees
o A means for advancement through the pay range
Disadvantages
o Very expensive since they are permanent
o Requires an effective employee appraisal system
o Need to ensure a noticeable difference in pay

 Merit bonus - A one-time (often annual) cash payment, provided to recognize good employee
performance, that does not increase base pay. Many companies will use a series of factors to
determine the annual merit bonus formulas for employee bonus payments. This formula is like
when you are taking a class and tests and assignments all have different weightings, and
individual grades for each one. When added together there is a final grade for the student’s
achievement in a course. Performance Factors might include:
o Personal Performance Multiplier (PPM) – based on individual’s achievements – PPM may be
a different acronym in different companies.
o Business Unit Performance Multiplier (BPM) – based on revenue generated or expenses
managed.
o Company/Corporate Multiplier (CM) - based on overall corporate results as per FYE (Fiscal
Year End) results.
Calculation = Annual salary x (PPM + BPM + CM) = Merit amount
Advantages
o More flexible because they are not permanent
o Can be paid out in lump sums and are more visible
o Can be related to financial conditions of firm
Disadvantages
o Need valid performance measures
o Not suitable where work is highly interdependent

 Sales commission – A percentage of gross sales revenue. Straight commission is where there is
no base pay.
 Advantages
o Relatively easy to set and measure
o Can serve as a source of feedback and as a self-correcting mechanism
o Less interdependence among sales employees than production, work output is more distinct
Disadvantages
o Income may be highly variable
o Commissions may drop in poor economic conditions
o Receive little income as they develop contacts
o Salespeople may resist doing work that does not directly contribute to new sales

 Profit share - A formal pay program in which a firm provides bonus payments to employees
based on the profitability of the firm.
o Current Distribution - A profit-sharing plan that distributes the profit-sharing bonus to
employees in the form of cash or shares, at least annually. Also known as a “cash plan”.
o Deferred profit-sharing (DPSP) - A profit-sharing plan in which the profit-sharing bonuses are
allocated to employee accounts but not actually paid out until a later date, usually on
termination or retirement.
o Combination profit-sharing - A plan that combines the current distribution and deferred
profit-sharing plans by paying some of the profit-sharing bonus on a current (cash) basis and
deferring the remainder.
Considerations in Designing Profit-Sharing Plans
o The formula for bonus determination (fixed or discretionary)
o Employee eligibility
o The basis for allocating the profit-sharing bonus across employees
o Payout frequency
o Communicating financial results and profit sharing
Advantages:
o Easy to understand
o Administration costs are minimal
o Payouts may be made even if company profits are down
o Supports teamwork ethic in the company
o Employees have the same goals and are rewarded fairly
Disadvantages:
o Employees may not see the impact of their own work to the profitability of the company
o It gradually becomes more of an entitlement than a motivational factor
o Focuses only on the goal of profitability (which may be at the expense of quality)
o For smaller companies, these plans may result in drastic swings in earnings for employees
which the employees may find difficult to manage their personal finances.

Rewards Administration
 Practical Exercise – focus on observation and analysis
 Nothing else from this lecture is on the exam!