Strategic Compensation: Strategic Compensation: A Component of Human Resource Systems

STRATEGIC
COMPENSATION
A Human Resource Management Approach
Chapter 1:
Strategic
Compensation: A
Component of Human
Resource Systems
© Pearson Education Limited 2015 1-1

Learning Objectives
1. Describe what compensation is and give at
least three examples of core compensation
practices and at least three examples of
employee benefits practices.
2. Summarize at least two historical events in the
evolution of compensation practice leading to
the current strategic compensation era.
3. Discuss at least two differences between
strategic and tactical compensation.

Learning Objectives
4. Name and summarize the goals of
compensation professionals.
5. Identify the stakeholders of the compensation
and summarize their stake in the work
compensation professionals perform.

Learning Objective 1
Describe what compensation is and give at

least three examples of core compensation
practices and at least three examples of
employee benefits practices.

What Is Compensation?
• Compensation represents the rewards
employees receive for performing their job.
They are either:
– Intrinsic: intrinsic compensation represents
employees’ critical psychological states that
result from performing their jobs.
– Extrinsic: extrinsic compensation includes
both monetary and nonmonetary rewards.

Components of Total
Compensation

Elements of Core Compensation
Base pay
- Hourly pay - Annual salary
Base pay adjustments
- COLAs - Seniority pay
- Merit pay - Skill-based pay
- Incentive pay - Person-focused pay

Base Pay
Compensable factors
• An employee’s skill level
• An employee’s effort
• An employee’s level of responsibility
• The severity of the working conditions

Base Pay Adjustments
COLAs: COLAs represent periodic base pay
increases that are founded on changes in prices
as indexed by the consumer price index (CPI).
Seniority pay: seniority pay systems reward
employees with periodic additions to base pay
according to employees’ length of service in
performing their jobs.
Merit pay: merit pay programs assume that
employees’ compensation over time should be
determined, at least in part, by differences in job
performance.

Base Pay Adjustments (cont’d)
Incentive pay: incentive pay (or variable pay)
rewards employees for partially or completely
attaining a predetermined work objective.
Pay-for-Knowledge plans: pay-for-knowledge
plans reward managerial, service, or
professional workers, for successfully learning
specific curricula.
Skill-based pay: skill-based pay is used mostly
for employees who perform physical work and
increases these workers‘pay as they master new
skills.

Employee Benefits
• Discretionary benefits
• Legally required benefits

Discretionary Benefits
Three broad categories
Protection programs: provide family benefits,
promote health, and guard against income loss
caused by such catastrophic factors as
unemployment, disability, or serious illness.
Paid time-off: provides employees with pay for time
when they are not working.
Services: provides such enhancements as tuition
reimbursement and day care assistance to
employees and their families.
Legally Required Benefits
Federal legislation designed to:
• Promote worker safety and health

• Maintain family income
• Assist families in crisis
• Provide assistance in case of
– Disability
– Unemployment

Summarize at least two historical events in

the evolution of compensation practice
leading to the current strategic
compensation era.

Historical Perspective on
Compensation
• Many employers instituted so-called scientific
management practices to control labor costs,
as well as welfare practices to maintain control
over labor.
• Time-and-motion studies analyzed the time it

took employees to complete their jobs. These
studies literally focused on employees’
movements and the identification of the most
efficient steps to complete jobs in the least
amount of time.
Historical Perspective on
Compensation (cont’d)
• Welfare practices were generous endeavors
undertaken by some employers, motivated in
part to minimize employees’ desire for union
representation, to promote good management
and to enhance worker productivity.
• Competitive advantage refers specifically to a

company’s ability to maintain market share and
profitability over a sustained period of several
years.

Discuss at least two differences between

strategic and tactical compensation.

Strategic versus Tactical Decisions
• Strategic decisions: guide the

activities of companies in the market
• Tactical decisions: support the

fulfillment of strategic decisions

Competitive Strategy
• The planned use of company resources
– Technology
– Capital
– Human resources
• Competitive strategy choices
– Lowest cost strategy
– Differentiation strategy

Competitive Strategy Choices
Lowest cost strategy: focus on being

lowest cost producer/seller of goods or
services
Differentiation strategy: focus on offering

unique goods or services to the public

Lowest-Cost Strategy
Effective when jobs:
• Include predictable behaviors

• Have a short-term focus
• Require autonomous activity
• Focus on quantity of output
Ex: Ryanair (reduced operations costs)

Differentiation Strategy
Effective when jobs:
• Require highly creative behaviors
• Have a long-term focus
• Demand cooperation and independence
• Involve risk-taking
Ex: P&G differentiates Eukanuba from Iams
(Brand image and price premiums)

Name and summarize the goals of

compensation professionals.

HR’s Role
A quotation from Jay Hannah of BancFirst
Corporation:
“The HR department is the source and keeper
of critical information, which is key in today’s
workplace. With the information they provide, we
in turn can build and design strategies to hire and
retain the best workforce possible. And this may
sound cliché, but it’s very true—the real
competitive advantage is our company’s human
resources.”
Human Resources Practices
• Recruitment • Career development

• Selection • Labor-management
• Performance relations
appraisal • Employment
• Training termination
• Insuring legal
compliance

Compensation Department’s Main
Goals
Compensation professionals promote
effective compensation systems by meeting
three important goals:
• Internal consistency
• Market competitiveness
• Recognition of individual contributions

Internal Consistency
• Achieved when the value of each job is
clearly defined
• Represents
– Job structure
– Hierarchy
• Achieved using
– Job analysis
– Job evaluation
Market Competitiveness
• Compensation policies that fit with business

objectives
• Vital in attracting and retaining employees
• Are based on:

– Strategic analyses
– Compensation surveys

Individual Contributions
Pay structures: pay is determined by

employees’ credentials, job knowledge, and
job performance
Pay grades: based on compensable factors
and value
Pay ranges: builds on grades, uses
midpoints, minimums, and maximums

STRATEGIC
COMPENSATION
Chapter 2:
Contextual Influences on
Compensation Practice

Learning Objectives
1. List four groups of federal laws that apply to
compensation tactics.
2. Identify and describe at least one law in each of
the four groups of federal laws that apply to
compensation practice.
3. Define at least two federal laws that shape
discretionary benefits practices and identify the
relevant employee benefits practices to which
they apply.

Learning Objectives
4. Summarize at least three laws that apply
exclusively to federal employers’ compensation
practices.
5. Explain how labor unions influence
compensation practices.

Learning Objectives 1 and 2
1. List four groups of federal laws that apply

to compensation tactics.
2. Identify and describe at least one law in
each of the four groups of federal laws
that apply to compensation practice.

Compensation Law Themes
Four themes:
• Income continuity, safety, and work hours
• Pay discrimination
• Meeting disabilities and family needs
• Prevailing wage laws

Relevant Employment Laws
• Equal Pay Act
• Title VII Civil Rights Act of 1964
• Bennett Amendment to Title VII
• Executive Orders 11246 and 11141
• Age discrimination in employment
• Older Workers’ Benefit Protection Act
• Civil Rights Act of 1991

Four Constitutional
Amendments
Basis for laws
• Article 1, Section 8
– Congressional powers
• First Amendment
– What Congress can’t do
• Fifth Amendment
– Individual’s rights
• Fourteenth Amendment, Section 1
– State governments’ limitations
Government Makeup
• Levels
– Federal  oversees the entire United States
and its territories
– State  enact and enforce laws that pertain
exclusively to their respective regions
– Local  enact and enforce laws that are
most pertinent to smaller geographic regions
• Branches
– Executive  enforces laws
– Legislative—makes laws
– Judicial—interprets laws
FLSA of 1938
Three broad issues

– Minimum wage ($7.25/hr as of 2009)
– Overtime pay
– Child labor provisions

FLSA Exempt Positions
• Executive
• Administrative
• Learned professional
• Creative professional
• Computer positions
• Outside sales
Most other jobs are nonexempt. Nonexempt jobs
are subject to the FLSA overtime pay provision.
FLSA Exemption Criteria
Executive Management of the enterprise or a recognized department or
subdivision
Administrative Performing office or nonmanual work directly related to the
management or general business operations of the employer or
employer’s customers
Learned Performing office or nonmanual work requiring knowledge of an
advanced type in a field of science or learning, customarily acquired by
professional a prolonged course of specialized intellectual instruction
Creative Performing work requiring invention, imagination, originality, or talent in
a recognized field of artistic or creative endeavor
professional
Computer Employed as a computer systems analyst, computer programmer,
software engineer, or other similarly skilled worker in the computer field
Outside sales Making sales or obtaining orders or contracts for services or for future
use of facilities for which a consideration will be paid by the client or
customer; customarily and regularly engaged a way from the
employer’s place or places of business

Compensable Work Activities
• Waiting time
• On-call time
• Rest and meal periods
• Sleeping time and certain other activities
• Lectures, meetings, and training programs
• Travel time
– Home to work travel
– Home to work on special one day assignment
– Travel that is all in a day’s work
– Travel away from home community
Child Labor
• Age 14 and younger can’t work
• Age 14 and 15 can work
– 3 hours on school nights
– 18 hours a week during school
– 40 hours a week when school is out
• Age 16 and 17
– No hourly restrictions
– Can’t work in hazardous conditions

Equal Pay Act of 1963
• Broadened FLSA
• Enforced by EEOC
• Prohibited sex discrimination
• Defined compensable factors
• Established legal pay differentials

Compensable Factors
Factor Definition
Skill Experience, training, education, and ability
as measured by the performance
requirements of a job
Effort The amount of mental or physical effort
expended in the performance of a job
Responsibility The degree of accountability required in
the performance of a job
Working The physical surrounding and hazards of a
conditions job, including dimensions such as inside
versus outside work, heat, cold, and poor
ventilation

Legal Pay Differentials
• Payments made pursuant to a:

– Seniority system
– Merit system
– Earnings measured by quantity or
quality of production
– Differentials not based on gender

Civil Rights Act of 1964
Title VII
• Promotes equal employment opportunities
for minorities
• Defined two types of discrimination
– Disparate treatment  intentional
discrimination
– Disparate impact  unintentional
discrimination

Title VII Discrimination
Disparate treatment
– Intentional
– Workers treated unfairly because of race, color,
religion, gender, national origin
Ex: Different standards to determine pay increases

for blacks and whites

Title VII Discrimination
• Disparate impact
– Unintentional
– Unequal treatment of protected employee groups
Ex: Awarding pay increases to male and female

workers based on seniority when females had less
seniority

Equal Pay for Women
Lilly Ledbetter Fair Pay Act

– Overturned the 2007 Ledbetter Supreme
Court ruling
– Helps close the pay gap between men and
women
– Pay discrimination charge must simply be
filed within 180 days of a discriminatory
paycheck

Equal Pay for Women (cont’d)
Paycheck Fairness Act

– Strengthens the remedies available to put
sex-based pay discrimination on par with
race-based pay discrimination
– Prohibits employers from retaliating against
employees who share salary information with
their coworkers

Bennett Amendment
(to Title VII)
Allows female employees to charge

employers with Title VII violations regarding
pay only when the employer has violated the
Equal Pay Act of 1963

ADEA of 1967
• Amended 1978, 1986, and 1990

• Protection for workers age 40+ in all
employment decisions
• Eliminated minimum retirement age,
except for jobs where public safety is at
issue
OWBPA
• Places additional age-related restrictions on
employer benefit practices
Ex: Company A has 3,000 employees
– 750/25% of employees 40 or older
– 2,250/75% younger than 39
– Total annual contributions of $120,000
• 40+ paid $84,000/70%
• 39– paid $36,000/30%
– Older workers pay much more
Civil Rights Act of 1991
• Shifts burden of proof of disparate impact to
employers
• Filing of discrimination claims changed
• U.S. citizens working overseas may file suit
against U.S. businesses for discriminatory
employment practices
• Extends coverage to U.S. Senate employees
and executive branch political appointees

Pregnancy Discrimination Act
of 1978 (PDA)
• Amendment to Title VII
• Prohibits disparate impact of pregnancy
• Pregnancy treated like disability
• The protected rights include
– Credit for previous service
– Accrued retirement benefits
– Accumulated seniority

Americans with Disability Act
of 1990 (ADA)
• Prohibits discrimination of employees with
disabilities
• Reasonable accommodations such as:
– Making existing facilities readily accessible
– Job restructuring
– Modifying work schedules
• Defines “qualified individuals with disabilities”

ADA Amendments Act of 2008
• Makes important changes to the definition of
the term disability
• Changes the way that these statutory terms
should be interpreted:
1. Expands the definition of major life activities
by including two nonexhaustive lists:
- Reading, bending, and communicating
- Functions of the immune system, normal cell
growth, digestive, bowel, bladder, neurological,
brain, respiratory, circulatory, endocrine, and
reproductive functions
ADA Amendments Act of 2008
(cont’d)
2. Mitigating measures other than “ordinary
eyeglasses or contact lenses” shall not be
considered in assessing whether an
individual has a disability
3. Clarifies that an impairment that is episodic
or in remission is a disability if it would
substantially limit a major life activity when
active

Family and Medical Leave Act of
1993 (FMLA)
• Job protection during family and medical
emergencies
• Guarantees unpaid leave
• Employee returns with same or similar
– Position
– Pay
– Conditions
– Benefits

Davis-Bacon Act
• Standards for contractors with federal

contracts
• Applies to on-site laborers and mechanics
• Must pay prevailing wages
• Must offer comparable benefits

Walsh–Healey Public
Contracts Act
• Covers contractors and manufacturers

who sell supplies, materials, and
equipment to the federal government
• Coverage is more extensive than Davis–
Bacon Act
• Applies to both construction and
nonconstruction activities
Define at least two federal laws that shape

discretionary benefits practices and identify
the relevant employee benefits practices to
which they apply.

Main IRC Regulations
• Federal Insurance Contributions Act (FICA)
• Federal Unemployment Tax Act (FUTA)
• FICA taxes employees and employers to finance
the Social Security Old-Age, Survivor, and
Disability Insurance Program (OASDI)
• Federal taxes are levied on employers under
FUTA

Nondiscrimination Rules
• Prohibits employers from giving
preferential treatment to key employees
and highly compensated employees
• Key employees
– 5% owner of the employer
– 1% owner of the employer with compensation
more than $160,000
– An officer of the employer with compensation
greater than $165,000 in 2013
(cont’d)
• Highly compensated employees
– 5% owner of the employer at any time during
the year or the preceding year
– For the preceding year, had compensation in
excess of $115,000 in 2013
– In the top-paid group of employees for the
preceding year if the employer elects the
application of this clause for a plan year
Employee Retirement Income
Security Act of 1974 (ERISA)
• Regulates the implementation of various

employee benefits programs, including:
– Medical
– Life
– Disability
– Pension

ERISA Topics
• Employers’ reporting and disclosure

duties
• Funding of benefits
• Fiduciary responsibilities of programs
• Vesting rights

Consolidated Omnibus
Budget Reconciliation Act of
1985 (COBRA)
• Provide employees opportunity to continue

receiving employer-sponsored medical care
insurance temporarily if their coverage
otherwise ceases due to:
– Termination
– Layoff
– Other change in employment status
Employers Exempt from
COBRA
• Companies with fewer than 20 workers

• Church plans
• U.S. government plans

COBRA Coverage
• Up to 18 months for individuals and their
spouses and dependents
• May extend for up to 36 months for spouses and
dependents facing a loss of employer-provided
coverage because of an employee’s:
– Death
– Divorce
– Legal separation
– Other (termination, retirement, layoff)

Health Insurance Portability
and Accountability Act of
1996 (HIPAA)
• Four main provisions:
1. Guarantees ready access to coverage under
a subsequent employer’s health plan,
regardless of their health or claims
experience
2. Sets limits on the length of time that health

plans and health insurance issuers may
impose preexisting conditions
HIPAA (cont’d)
3. Counts periods of continuous coverage

under another form of comprehensive health
coverage toward a preexisting condition limit
4. Protects the transfer, disclosure, and use of

health care information

Pension Protection Act of 2006
• Designed to strengthen protections for
employees’ company-sponsored retirement
plans in two ways:
– Defined benefit plans: guarantee monthly
income for the duration of a retiree’s life
– Defined contribution plans: savings plans
that employees may contribute to for use
during their retirement
• Enables companies to enroll their employees
automatically in defined contribution plans
Patient Protection and
Affordable Core Act of 2006
(PPACA)
• Was signed into law by President Barack

Obama on March 23, 2010
• Was amended by the passage of the

Health Care and Education Reconciliation
Act of 2010

Summarize at least three laws that apply

exclusively to federal employers’

Federal Employees
Not protected by:

• Title VII of 1964 Civil Rights Act
• ADEA
• Equal Pay Act of 1963

Federal Employee Protections
• Executive Orders 11478 and 11935
• Rehabilitation Act
• Vietnam Era veterans readjustment
• Assistance Act
• Government Employee Rights Act of 1991
• Family and Medical Leave Act of 1993

Explain how labor unions influence


Decline in Union
Representation
Since 1954 (highest union representation),
the percentage of civilian workers in both the
public and private sectors represented by
unions has steadily declined
– In 2012, union representation was at 11.3%
– Approximately 15 million workers
– 35.9% government workers
– 6.6% private sector workers

Causes for Decline in Union
Representation
• Consistently lower profits than nonunion
companies
• Major employment cuts in highly unionized
companies (e.g., automobile and steel
industry)
• High-quality vehicles produced by foreign
automobile manufacturers

STRATEGIC
COMPENSATION
Chapter 3:
Traditional Bases for
Pay: Seniority and
Merit

Learning Objectives
1. Describe seniority and longevity pay practices.
2. List at least three elements of merit pay.
3. Give examples and definitions of performance
appraisal methods.
4. Explain at least three ways compensation
professionals can strengthen the pay-for-
performance link and summarize each one.
5. Discuss three possible limitations of merit pay
programs.
Describe seniority and longevity pay

practices.

Basis for Seniority Pay
• Employees become more valuable over
time
• Good employees may leave if not
compensated fairly
• Rationale based on the human capital
theory

Seniority Pay
• Designed to award job tenure
• Set base pay with time-designated increases
• Employees perceive that they are treated
fairly
• Facilitates administration of pay
• Avoids perception of favoritism
• Poor fit with most competitive strategies

Collective Bargaining
• Designed to:
– Negotiate labor contracts
– Provide grievance procedures
• Led to:
– Job control unionism
– Collective bargaining units
– Union shops

Longevity Pay
• Designed to:
– Pay grade maximum for length of service
– To reduce employee turnover
• Used for most government employees

• General Schedule system for federal
employees

General Schedule (GS)
• Divided into 15 classifications

• Based on skills, education, and experience
levels
• Employees eligible for 10 within-grade pay
increases
• Step waiting periods of 1–3 years

List at least three elements of merit pay.

Merit Pay Plans
• Pay increases based on performance
• Reward excellent effort or results
• Motivate future performance
• Help retain valued employees
• In 2013, average merit increase ranged
between 2.5 and 2.8%
• The lowest performance earned 0.2%,
average, 2.6%, and highest 4.6%
Elements of Merit Pay
• Based on objective and subjective indicators

of job performance
• Periodic performance reviews
• Realistic and attainable standards
• Pay increases reflect performance

Give examples and definitions of

performance appraisal methods.

Performance Appraisal Plans
• Trait systems: ask raters to evaluate each

employee’s traits or characteristics.
• Comparison systems: evaluate a given
employee’s performance against the
performance of other employees.

Performance Appraisal Plans
(cont’d)
• Behavioral systems: rate employees on the

extent to which they display successful job
performance behaviors.
• Goal-oriented systems: used mainly for
managerial and professional employees and
typically evaluate employees’ progress toward
strategic planning objectives.

Trait System Characteristics
- Quality of work - Judgment
- Quantity of work - Leadership responsibility
- Dependability - Decision-making ability
- Cooperation - Creativity
- Initiative

Trait-Oriented Performance
Appraisal Rating Form Example
Employee’s name: Employee’s position:
Supervisor’s name: Review period:
Instructions: For each trait below, circle the phrase that best represents
the employee.
1. Diligence
a. Outstanding b. Above average c. Average d. Below average e. Poor
2. Cooperation with others
3. Communication skills
4. Leadership

Comparison Systems
• Rates and ranks performance
• Pay raises based on ranking
• Types
– Forced distribution
– Paired comparisons

Forced Distribution Performance
Appraisal Rating Example
Instructions: You are required to rate the performance for the previous 3 months of the 15
workers employed as animal keepers to conform with the following performance
distribution:
• 15 percent of the animal keepers will be rated as having exhibited poor performance.
• 20 percent of the animal keepers will be rated as having exhibited below-average
performance.
• 35 percent of the animal keepers will be rated as having exhibited average performance.
• 20 percent of the animal keepers will be rated as having exhibited above-average
performance.
• 10 percent of the animal keepers will be rated as having exhibited superior performance.
Use the following guidelines for rating performance. On the basis of the five duties listed in
the job description for animal keeper, the employee’s performance is characterized as:
• Poor if the incumbent performs only one of the duties well.
• Below average if the incumbent performs only two of the duties well.
• Average if the incumbent performs only three of the duties well.
• Above average if the incumbent performs only four of the duties well.
• Superior if the incumbent performs all five of the duties well.
Paired Comparison Performance
Instructions: Please indicate by placing an X by which employee of each
pair has performed most effectively during the past year.
__X__ Bob Brown __X__ Mary Green
Mary Green Jim Smith
__X__ Bob Brown Mary Green
Jim Smith __X__ Allen Jones
Bob Brown Jim Smith
__X__ Allen Jones __X__ Allen Jones

Behavioral Systems
• Critical-incident technique (CIT)
• Behaviorally anchored rating scales

(BARS)
• Behavioral observation scales (BOS)

Critical Incident Technique
(CIT)
• Employees and supervisors identify and
label job behaviors and results
• Supervisors observe and record
• Requires extensive documentation

Critical Incidents Performance
Instructions: For each description of work behavior below, circle the
number that best describes how frequently the employee engages in
that behavior.
1. The incumbent removes manure and unconsumed food from the animal
enclosures.
a. Never b. Almost never c. Sometimes d. Fairly often e. Very often
2. The incumbent haphazardly measures the feed items when placing them in the
animal enclosures.
3. The incumbent leaves refuse dropped by visitors on and around the public
walkways.
4. The incumbent skillfully identifies instances of abnormal behavior among the
animals, which represent signs of illness.

Behaviorally Anchored Rating
Scales (BARS)
• Based on 8–10 expected job behaviors
• Employees rated on ability to perform

each behavior
• Ratings highly defensible
• Encourages all raters to make evaluations

in similar ways
Behaviorally Anchored Rating
Scale Example
Instructions: On the scale below, from 7 to 1, circle the number that best describes how
frequently the employee engages in that behavior.
7 The incumbent could be expected to clean the animal enclosures thoroughly and remove
refuse from the public walkways as often as needed.
|
6
|
5 The incumbent could be expected to clean the animal enclosures thoroughly and remove
refuse from the public walkways twice daily.
|
4
|
3 The incumbent could be expected to clean the animal enclosures and remove refuse from
the public walkways in a haphazard fashion twice daily.
|
2
|
1 The incumbent could be expected rarely to clean the animal enclosures or remove refuse
from the public walkways.

Behavioral Observation
Scales (BOS)
• Documents positive performance
behaviors on job dimensions
• Employees rated on exhibited behaviors
• Ratings averaged for overall rating

Goal-Oriented System
Management-by-objectives
• Supervisors and employees set objectives

• Highly effective technique
• Rated on how well objectives are met
• Mainly for professionals and managers

Performance Appraisal
Practices
• Conduct a job analysis
• Incorporate results into ratings
• Trains supervisors on use
• Implement formal appeals process

Sources of Performance
Appraisal Information
• Employee
• Supervisor
• Coworkers
• Subordinates
• Customers/clients

360 Degree Performance
Appraisal
• Uses more than one appraisal source
• Reduces recruiting and hiring costs
• Appropriate for work team evaluations

Major Types of Rater Errors
• Bias errors
• Contrast errors
• Errors of central tendency
• Errors of leniency or strictness

Bias Errors
• First-impression effect
• Positive halo effect
• Negative halo effect
• Similar-to-me effect
• Illegal discriminatory biases

Contrast Errors
• Supervisor compares employees’

performances to other employees not to
explicit performance standards
• What if the best employee is average?

Errors of Central Tendency
• Supervisors rate all employees as

average
• Usually occurs when only extreme
behaviors require documentation

Errors of Leniency or
Strictness
• Leniency errors  managers rate employees’
performances more highly than they would rate
them using objective criteria
• Causes employees to believe they are going to
receive larger pay raises than they deserve
• Strictness error supervisors rate employees’
performance lower than they would rate them
using objective criteria

Explain at least three ways compensation

professionals can strengthen the pay-for-
performance link and summarize each one.

Pay for Performance Link
• Link appraisals to business goals
• Analyze jobs
• Communicate
• Establish effective appraisals
• Empower employees
• Differentiate among performers

Discuss three possible limitations of merit

pay programs.

Limitations of Merit Pay Programs
• Failure to differentiate • Undesirable social

among performers structures
• Using nonmerit factors
• Poor measures • Undesirable competition
• Supervisor biases • Little motivational value
• Poor communication

STRATEGIC
COMPENSATION
Chapter 4:
Incentive Pay

Learning Objectives
1. Explain two reasons why companies use
incentive pay.
2. Concisely provide a contrast between incentive

pay methods and traditional pay methods.
3. List three categories of incentive pay plans.
4. Define individual incentive plans and give one

example.

Learning Objectives (cont’d)
5. Provide the definition group incentives and
summarize two examples of group incentive
plans.
6. Discuss the advantages and disadvantages of
group incentive plans.
7. Offer a definition of company-wide incentive
plans with an example.
8. List and summarize five factors in the design of
incentive pay programs.
Explain two reasons why companies use

incentive pay.

Incentive Pay
• Compensation fluctuates according to:
– A preestablished formula
– Individual or group goals
– Company earnings
• Adds to base pay

• Controls costs
• Motivates employees

Incentive Pay Assumptions
• Effective incentive pay systems are based on
three assumptions:
1. Individual employees and work teams differ
in how much they contribute to the company,
both in what they do as well as in how well
they do it.
2. The company’s overall performance
depends to a large degree on the
performance of individuals and groups within
the company.
Incentive Pay Assumptions
(cont’d)
3. To attract, retain, and motivate high performers

and to be fair to all employees, a company
needs to reward employees on the basis of
their relative performance.

Concisely provide a contrast between

incentive pay methods and traditional pay
methods.

Contrasting Incentive Pay with
Traditional Pay
• Traditional pay generally includes an
annual salary or hourly wage
– Increased periodically on a seniority or merit
basis
• Companies use incentive pay to reward
individual employees, teams of
employees, or whole companies based on
their performance

List three categories of incentive pay plans.

Incentive Pay Categories
• Individual: these plans reward employees
whose work is performed independently
• Group: these plans promote supportive,
collaborative behavior among employees
• Company-wide: these plans tie employee
compensation to a company’s
performance over a short time frame

Define individual incentive plans and give

one example.

Individual Incentive
Performance Measures
• Quantity of work output
• Quality of work output
• Monthly sales
• Work safety record
• Work attendance

Types of Individual Incentive
Plans
• Piecework plans: reward workers for
every item produced over a designated
production standard
• Management incentive plans: award
bonuses to managers when they meet or
exceed objectives based on sales, profit,
production, or other measures for their
division
Types of Individual Incentive
Plans (cont’d)
• Behavior encouragement plans:

employees receive payments for specific
behavioral accomplishments
• Referral plans: employees receive
bonuses for recruitment of highly qualified
employees

Piecework Plans
• Awards based on individual production vs.
objective standards
• Awards based on individual performance
standards using objective and subjective
criteria
• Quantity and/or quality goals

Calculation of a Piecework Award for
a Garment Worker
Piecework standard: 15 stitched garments per hour
Hourly base rate awarded to employees when the standard is not met: $4.50 per hour
That is, workers receive $4.50 per hour worked regardless of whether they meet the
piecework standard of 15 stitched garments per hour.
Piecework incentive award: $0.75 per garment stitched per hour above the piecework
standard
Guaranteed Piecework Award (No. of Total Hourly

Hourly Base Garments Stitched Above the Earnings ($)
Pay ($) Piecework Standard x Piecework
Incentive Award)
First Hour 4.50 10 garments x $0.75/garment = 12.00
$7.50
Second 4.50 Fewer than 15 stitched garments, 4.50
Hour thus piecework award equals 0

Individual Incentive Plan
Advantages
• Helps relate pay to performance
• Promotes equitable distribution of
compensation
• Helps retain best performers
• Compatible with America’s individualistic
culture

Individual Incentive Plan
Disadvantages
• Unrealistic standards may hamper
employee motivation
• Setting performance standards is time
consuming
• Factors beyond employee’s control may
affect outcomes
• May promote undesirable behaviors

Provide the definition group incentives and

summarize two examples of group incentive
plans.

Group Incentive Plans
• Reward employees for their collective
performance
• Use has increased in industry
• Two types:
– Team based or small group
– Gain sharing

Group Incentive Performance
Measures
• Customer satisfaction
• Labor cost savings
• Materials cost savings
• Reduction in accidents
• Services cost savings

Rewards Allocation Methods
• Equal incentive payments
• Differential payments based on

contribution to goals
• Differential payments according to base

pay

Gain Sharing
• Incentives based on company performance in
– Increased productivity
– Increased customer satisfaction
– Lower costs
– Better safety records
• Based on open leadership
• Involves employee participation
• Includes bonuses

Gain Sharing Programs
• Most gain sharing programs have

three components
1. Leadership philosophy
2. Employee involvement systems
3. Bonuses

Discuss the advantages and disadvantages

of group incentive plans.

Advantages of Group
Incentives
• Companies can more easily develop
performance measures for group plans
than individual plans
• Greater group cohesion

Disadvantages of Group
Incentives
• May lead to higher employee turnover
because of the free-rider effect
• Members may feel uncomfortable with the

fact that other members’ performance
influences their compensation level

Offer a definition of company-wide incentive

plans with an example.

Company-Wide Incentive
Plans
• Rewards employees when company

meets performance standards
• Two types
– Profit sharing plans
– Employee stock options

Company-Wide Performance
Measures
• Company profits
• Cost attainment
• Market share
• Sales revenue

Profit-Sharing Plans
• Current profit-sharing plans

– Award cash to employees typically on a
quarterly or annual basis
• Deferred profit-sharing plans

– Place cash awards in trust accounts for
employees

Profit-Sharing Formulas
• Fixed first-dollar-of profits

– 7% of corporate profits
• Graduated first-dollar-of profits
– 3% of the first $8 million of profits and 6% of
the profits in excess of that level
• Profitability threshold formula

Distribution Methods
• Equal payments
• Proportional payments based on annual
salary
• Proportional payments based on
contribution to profits

Advantages and Disadvantages
of Profit-Sharing Plans
Advantages
• Enable employees to share in companies’ profits
• Allow companies greater financial flexibility
Disadvantages
• Can undermine the economic security of
employees
• May fail to motivate employees if they do not see
a direct link between their efforts and corporate
profits
Employee Stock Option Plans
Companies grant employees right to

purchase share of company
• Company stock
• Company stock shares
• Stock options

List and summarize five factors in the design

of incentive pay program.

Incentive Pay Considerations
• Based on individual or group

performance?
• Acceptable level of risk?
• Replace traditional pay?
• Performance criteria evaluated?
• Appropriate time horizon?

STRATEGIC
COMPENSATION
Chapter 5:
Person-Focused Pay

Learning Objectives
1. Explain the concept and practice of person-
focused pay.
2. Describe the type of setting in which person-
focused pay is most likely to be used.
3. Name and explain the reasons companies
adopt person-focused pay programs.

4. Contrast person-focused pay with job-based
pay.
5. Provide an explanation of the advantages and
disadvantages of person-focused pay plans.

Explain the concept and practice of person-

focused pay.

Person-Focused Plans
• Rewards employees for acquiring job-
related
– Competencies
– Knowledge
– Skills
• Two main types
– Pay-for-knowledge
– Skill-based pay

Competency-Based Pay
Programs
• Pay-for-knowledge: reward managerial,

service, or professional workers for
successfully learning specific curricula
• Skills-based: used mostly for employees
who do physical work, increases these
workers’ pay as they master new skills

Competency-Based Pay
Programs
• Reward employees for improving or
acquiring new skills/knowledge
• Horizontal skills: skills at the same level
of responsibility or difficulty
– Ex: clerical employees of a retail store trained
to perform record-keeping tasks
• Employee attendance records
• Schedule salesperson’s work shifts
• Master the use of office supplies for reordering

Pay Programs (cont’d)
• Vertical skills: skills that are traditionally
considered supervisory
– Scheduling, coordinating, training, leading
others
• Depth of skills: level of expertise or
specialization an employee possesses
– HR professionals specialize in compensation:
• Job evaluation
• Salary survey analysis
• Market pay system designs
• Incentive (merit) pay system design
Vertical Skills
• Works well for work teams
– Service industry
– Manufacturing industry
• Employees
– Learn functional skills
– Perform managerial tasks

Competencies
• Uniquely combined characteristics of the
person that enables employees to fulfill job
requirements well
• Core competencies are derived from
company’s strategic statements

Describe the type of setting in which person-

focused pay is most likely to be used.

Typical Settings
• One study found that a skilled-based pay
plan in a manufacturing setting increased
plant productivity by 58%
• More than half of the companies that use
skilled-based pay plans employ between
150–2,000 employees
• Mostly found in continuous process settings,
like manufacturing in which:
• Assembly lines are used
• One employee’s job depends on the work of at
least one other worker
Typical Settings (cont’d)
• Work well in manufacturing companies
that organize work flow around high-
performance work teams where
employees are expected to:
• Perform managerial tasks like:
– Work scheduling
– Budgeting
– Quality control

Name and explain the reasons companies

adopt person-focused pay programs.

Reasons for Adoption
Reasons for adoption
– Removes entitlement label
– Connects pay to job-related abilities
– Increases employee autonomy
– Jobs require new and different worker skills
– Technological innovations
– Increased global competition

Contrast person-focused pay with job-based

pay.

Person-Focused Pay
• Compensates employees for flexibility

• Compensated for potential contributions
– Based on skills and knowledge
• Used for jobs not easily assessed

– For skills and knowledge

Job-Based Pay
• Compensates employees for current jobs
• Pay limits set for each job
• Evaluations based on job descriptions and
objectives
• Two main types
– Merit pay
– Incentive pay
Contrasting Person-Focused Pay
With Job-Based Pay
Feature Person focused Job based
Pay level Market basis for skill Market basis for job
determination valuation valuation
Base pay Awarded on how much an Awarded on the value of
employee knows or on skill compensable factors
level
Base pay increases Awarded on an employee’s Awarded on attaining job-
gain in knowledge or skills defined goal
Job promotion Awarded on an employee’s Awarded on exceeding
skills base and proficiency on job performance
past work standards
Key advantage to Job variety and enrichment Perform work and receive
employees pay for a defined job
Key advantage to Work scheduling flexibility Easy pay system
employers administration

Provide an explanation of the advantages

and disadvantages of person-focused pay
plan.

Advantages to Employees
• Can provide job enrichment
• Can provide job security
• Can make jobs more intrinsically
motivating
• Can make jobs more interesting
• Increases employees’ flexibility

Job Characteristics Theory
Employees are more motivated to perform
jobs that contain
• Skill variety: requires using different abilities
• Task identity: enables employees to do
entire job
• Autonomy: allows employees to choose
• Feedback: provides clear communications

Advantages to Employers
• Leads to enhanced job performance

• Leads to reduced staffing
• Leads to greater flexibility
• Improves quality
• Increases productivity levels

Disadvantages
• Can increase hourly labor costs
• Can increase training costs
• Can increase overhead costs
• May not mesh well with existing incentive
pay systems

STRATEGIC
COMPENSATION
Chapter 6:
Building Internally
Consistent
Compensation Systems

Learning Objectives
1. Explain the concept of internally consistent
compensation systems.
2. Summarize the practice of job analysis.
3. Describe the practice of job evaluation.
4. Give two examples of job evaluation
techniques and briefly summarize each one.
5. Explain how internally consistent
compensation systems and competitive
strategy relate to each other.
Explain the concept of internally

consistent compensation systems.

Internal Consistency
• Compares the value of each job within the
same company against the rest of the jobs
found within that company
• Represents job structure or hierarchy
• Job descriptions are its cornerstone
• Recognizes differences in job
characteristics
Job Structure Processes
• Job analysis: Job analysis is a descriptive procedure
and identifies the key similarities and differences
between jobs.
– A descriptive procedure
– Identifies and defines job content
• Job evaluation: Job evaluation reflects value judgments

and is used to establish pay differentials among
employees within a company.
– Reflects value judgments
– Compensation systems set pay levels

Summarize the practice of job analysis*
• Note: A review of O*Net, which falls within the

scope of job analysis, follows as an appendix. 6-186
© Pearson Education Limited 2015
Job Analysis
Job analysis is a systematic process for gathering,
documenting, and analyzing information in order to
describe jobs. It identifies and defines job content.
Job analyses describe:

• Job content: actual activities
– Greeting clients
• Saying “Hello”
• Asking the client’s name
• Offering beverages, etc.
• Worker requirements: minimum qualifications and KSAs
• Working Conditions: social context or physical environment

Worker Requirements
• Knowledge, Skills, and Abilities (KSAs)
• Education
• Experience
• Licenses
• Permits
• Special abilities
– Ex: HR managers must have knowledge of
recruitment, selection, training, compensation
and benefits, labor relations and negotiations,
human resource information systems, oral/written
comprehension, active listening, critical thinking
Working Conditions
• Social context
• Physical environment
– Vary along dimensions
– Based on level of noise and possible
exposure to hazardous factors

Job Analysis Process
• Determine job analysis program
• Select and train analysts
• Direct job analyst orientation
• Conduct the study
• Summarize results: write job descriptions

Job Analysis Data Gathering
Methods
• Questionnaires
• Interviews
• Observation
• Participation

Job Analysis Units
• Element: the smallest step
– Ex: connecting a flash drive into a USB port
• Task: one or more elements

– Ex: keyboarding text into memo format
• Position: a collection of tasks

– Ex: clerk typist

Job Analysis Units (cont’d)
• Job: a group of positions with similar tasks
– Bob, John, and Jason are clerk typists
• Job family: a group of two or more jobs

with similar characteristics
– Clerical job family: file clerk, clerk typist,
administrative clerk
• Occupation: a group of jobs

– Office support occupation
Writing Job Descriptions
Should include:
• Job title
• Job summary
• Job duties
• Worker specifications

Worker Specifications
• Education
• Skills
• Abilities
• Knowledge
• Other qualifications to perform job

Equal Employment Opportunity
Commission (EEOC)
• Distinguishes among the terms knowledge,
skill, and ability
• Skill refers to an observable competence to
perform a learned psychomotor act
– Ex: typing 50 words per minute
• Knowledge refers to a body of information
applied directly to the performance of a
function
– Ex: compensation professionals should know
FLSA’s overtime provisions
Equal Employment Opportunity
Commission (EEOC) (cont’d)
• Ability refers to a present competence to
perform an observable behavior or a behavior
that results in an observable product
– Ex: to mediate a dispute between labor and
management successfully

Legal Considerations
• Equal Pay Act
– Must justify pay differences
• FLSA
– Determine exemption status
• ADA
– Determine essential job functions

ADA Guidelines
Essential Job Functions
• Position has an essential function

• Requires high skills or expertise
• Decided case by case
• Nonessential jobs are marginal

Describe the practice of job evaluation.

Universal Compensable Factors
• Skill
• Effort
• Responsibility
• Working conditions

Job Evaluation Process Steps
• Select technique
• Choose committee
• Train members to evaluate
• Document plan
• Communicate with employees
• Set up appeals process

Give two examples of job evaluation

techniques and briefly summarize each
one.

Job Evaluation Techniques
• Market-based evaluation: uses market

data to determine differences in job worth
• Job-content evaluation: emphasize
company’s internal value system by
establishing a hierarchy of internal job
worth

The Point Method
• Most popular job-content method

• Uses quantitative methodology
• Evaluates jobs by comparing
compensable factors

Point Method Steps
• Select benchmark jobs
• Choose compensable factors
• Define factor degrees
• Determine weight of factors
• Determine point value
• Verify factor degrees and point values
• Evaluate all jobs
Job Evaluation Qualitative
Approaches
• Simple ranking plan
• Paired comparisons
• Alternation ranking
• Classification plans

Explain how internally consistent

compensation systems and competitive
strategy relate to each other.

Internally Consistent
• Internally consistent pay systems may

reduce a company’s flexibility to
respond to changes in competitors’
pay practices
• Narrowly defined jobs

Appendix
O*NET

O*NET Categories
• Experience requirements
• Occupational requirements
• Occupation specific requirements
• Worker requirements
• Worker characteristics
• Labor market characteristics

O*NET Content Model

Experience Requirements
• Experience and training
– Related work experience
– On-site training
– On-the-job training
• Licensing
– Licenses and certificates
– Formal education
• Additional education and training
• Organization and agency requirements
– Legal
– Employer
– Union, guild, professional association
Occupation Requirements
• Generalized work activities

• Organizational context
• Work context

Occupation-Specific
Requirements
• Occupational skills
• Occupational knowledge
• Tasks
• Duties
• Machines
• Tools
• Equipment
Workforce Characteristics
• Labor market information
• Occupational outlook

Worker Requirements and
Characteristics
• Requirements
– Basic skills
– Cross-functional skills
– Knowledge
– Education
• Characteristics
– Abilities
– Interests
– Work styles
O*NET Content Model: Worker
Characteristics (sample of full list)
Abilities
• Cognitive abilities
• Verbal abilities
1. Oral comprehension
2. Written comprehension
3. Oral expression
4. Written expression
• Idea generation and reasoning abilities
1. Fluency of ideas
2. Originality
3. Problem sensitivity
• Quantitative abilities
1. Mathematical reasoning
2. Number facility
• Memory
1. Memorization
• Perceptual abilities
1. Speed of closure
2. Flexibility of closure
3. Perceptual speed
O*NET Content Model: Worker
Requirements (sample of full list)
Basic skills
• Content
1. Reading comprehension
2. Active listening
3. Writing
• Process
1. Critical thinking
2. Active learning
3. Learning strategies
Cross-functional skills
• Social skills
1. Social perceptiveness
2. Coordination
3. Persuasion
• Complex problem-solving skills
1. Problem identification
2. Information gathering
3. Information organization

Using O*NET
• HR professionals consult the O*NET

user’s guide and most current O*NET
database
• U.S. Department of Labor Employment
and Training Administration at
http://online.onetcenter.org

STRATEGIC
COMPENSATION
Chapter 7:
Building Market-
Competitive

Learning Objectives
1. Explain the concept of market-competitive
compensation systems and summarize the four
activities compensation professionals engage in
to create these systems.
2. Discuss how compensation professionals
integrate job structures with external market pay
rates.
3. Present the basic concepts of two compensation
policy types: pay mix and pay level.

Explain the concept of market-

competitive compensation systems and
summarize the four activities
compensation professionals engage in
to create these systems.

Market-Competitive Pay Systems
Market-competitive pay systems refer to:
• A company’s compensation policy
• The imperatives of competitive advantage
• The key role in promoting recruitment and

retention of talented employees

Excessive Pay Levels
• Represent undue financial burdens
• Undermine lowest-cost strategies
• Restrict investments

Market Competitive Pay
Systems
• Conduct strategic analyses
• Assess competitors’ practices
• Integrate internal job structures with external
market pay rates
• Determine compensation policies

Four Activities of Market
Competitive Pay Systems
1. Strategic analysis entails an examination
of a company’s external market context
and internal factors.
- External market context: industry profile,
information on competition, long-term prospects
- Internal factors: financial condition, functional
capabilities
2. Compensation surveys involve the
collection and subsequent analysis of
competitors’ compensation data.
Four Activities of Market
Competitive Pay Systems (cont’d)
3. Compensation professionals integrate

the internal job structure with the external
market pay rates identified through
compensation surveys.
4. Compensation professionals recommend
pay policies that fit with their companies’
standing and competitive strategies.

Discuss how compensation

professionals integrate job structures
with external market pay rates.

Competitors’ Pay Practices
• Base pay
• Incentive awards structure
• Mix and level of discretionary benefits

Custom Developed Surveys
• Can be custom tailored
• Quality can be monitored by employer
• Usually not done in-house
• External data not readily accessible
• Can be expensive

Published Survey Sources
• Professional associations
• Industry associations
• Consulting firms
• Federal government

BLS Surveys
• National Compensation Survey
– For wages and benefit
• Employment Cost Index
– For compensation cost trends
– Used to estimate historical changes in cost of
employment
• Employer Costs for Employee
Compensation
– For compensation cost trends
– State in dollars and as percentages of total
compensation costs
National Compensation
Survey
• Average hourly wages for over 800
occupations in approximately 80
metropolitan and nonmetropolitan
locations
• Weekly and annual earnings and hours
for full-time workers
• Data at three levels: localities, broad
regions, and the nation
• Private, local, and state employees
National Compensation
Survey (cont’d)
• Wage data are shown by:
– Industry
– Occupational group
– Full-time and part-time status
– Union status
– Establishment size
– Time and incentive status
– Job level
Compensation Cost Trends
• Employment cost trends are
measured by two quarterly
indexes
– Employment Cost Index
– Employer costs for employee
compensation

ECI Data
• Changes in pay and benefits
• Data on all workers and separately
• Compensation changes by categories
• Are seasonally adjusted
• Historical changes in labor costs
• Uses fixed weights
ECEC Compensation Costs
Categories
• Major occupation
• Industry type and size
• Region
• Union status
• Employment status

Compensation Surveys
• Two essential strategic

considerations are:
– Defining the relevant labor market
– Choosing benchmark jobs

NCS Average Benefit
Provisions
Estimates published by:
• Broad occupational groups

• Employment status
• Union status
• Workers with average wages
• Census divisions
Relevant Labor Market
Qualified candidates based on:

• Occupational classification
• Geography
• Market competitors

Benchmark Jobs
• Used for:
– Job evaluations
– Compensation surveys
• Established, well-known, stable

• Common across employers
• Entire range of jobs
• Accepted for setting pay rates
Integrating the internal job structure

with external market pay rates.

Regression Analysis
• Statistical procedure designed to find the
best-fitting line between two variables
• Formula: Ŷ =a +bX
– Ŷ = predicted salary
– X = job evaluation points
– a = Y intercept (X = 0)
– b = the slope

R 2
• Explains variations in market pay rates

via job structure
• Ranges from 0.0–1.0
– 0.0 = 0% due to JS
– 0.0–.30 = small variation
– .31–.70 = average variation
– .71–.99 = large variation
– 1.0 = all variations
Compensation policies and strategic

mandates.

Compensation Policies and
Strategic Mandates
• Pay-level policies
• Pay mix policies

Pay-Level Policies
• Market lead
– Levels above market pay lines
– Best for differentiation strategies
• Market lag
– Levels below market pay lines
– Best for lowest-cost strategies
• Market match
– Pay according to market pay line
– Appropriate with differentiation strategy
Pay Policy Level Example

Pay Policy Level Example

Pay Mix Policies
• Pay mix policies refer to the combination
of core compensation and employee
benefits components that make up an
employee’s total compensation package
• Pay policy mix may be expressed in
dollars (or other currency as relevant) or
as a percentage of total dollars allocated
for an employee’s total compensation

Pay Mix Policy Example

STRATEGIC
COMPENSATION
Chapter 8:
Building Pay
Structures That
Recognize Employee
Contributions

Learning Objectives
1. Explain the concept of pay structures.

2. Specify and explain the five steps
necessary to construct a pay structure.
3. Discuss at least two considerations in
designing merit pay systems.

4. Explain at least two sales compensation

plan design considerations.
5. Describe three main considerations of
person-focused pay program design.
6. Present a summary of two pay structure
variation practices.

Explain the concept of pay structures.

Pay Structure Concept
• Pay structures represent
– Pay rate differences for jobs of unequal worth
– The framework for recognizing differences in
employee contributions
• Companies recognize these differences by
paying individuals according to their:
– Credentials
– Knowledge
– Job performance

Specify and explain the five steps

necessary to construct a pay structure.

Constructing a Pay Structure
Five steps:
1. Decide how many pay structures to

construct
2. Determine a market pay line
3. Define pay grades
4. Calculate pay ranges
5. Evaluate results

Common Pay Structures
• Exempt and nonexempt: companies
establish these pay structures for
administrative ease
• Based on job families: executive,

managerial, professional, technical, clerical,
and craft represent distinct job families
• Based on geography: companies with

multiple, geographically dispersed locations
such as sales offices, manufacturing plants,
service centers, and corporate offices
Exempt and Nonexempt Pay
Structures
• Exempt
– Not subject to overtime provisions
– Salaried supervisors, managers,
professionals, and executives
• Nonexempt
– Subject to overtime provisions
– Hourly, nonsupervisory

Market Pay Lines
• Market pay rates relative to company’s job

structure
• Pay levels corresponding with pay line are

market competitive
• Rates promote internal consistency

Pay Grades
• Based on compensable factors, values,
management philosophy
• Widths
– Narrow or wide
– Affects hierarchy and social distance
– Absolute or percentage-based job evaluation
points

Pay Ranges
• Build upon pay grades
• Pay grades represent horizontal
dimension
• Pay ranges represent vertical dimension

Pay Grades and Ranges

The Impact of Alternative
Range Spreads
Midpoint of
$25,000* Range spread
20% 50% 80% 120%
Minimum $22,727 $20,000 $17,857 $15,625
Maximum $27,272 $30,000 $32,143 $34,375
Difference
$4,545 $10,000 $14,286 $18,750
between values
Pay Compression
• When pay is small
• Threatens competitive advantages
• Caused by:
– Failure to raise pay range limits
– Scarcity of qualified applicants

Compa-Ratios
• Evaluates pay structures
• Index competitiveness of internal pay rates
based on midpoints
• Divide pay rates by midpoint
• Compa-ratio meanings
1 = market match rate
< 1 = market lag rate
> 1 = market lead rate

Discuss at least two considerations

in designing merit pay systems.

Merit Pay Systems
Considerations
• Communicate link between pay and
performance
• Use effective appraisal methods
• Establish increase amounts and types
• Settle on base pay level

Merit Pay Grid

Merit Increase Amounts
• Reflects prior job performance levels

• Needs to motivate
• Needs to be meaningful
• Influenced by the cost of living
• Indexed as a percentage of budget

Timing
• Companies typically take one of two

approaches in timing of pay raises
– Common review date or common review
period
– Employee’s anniversary date

Present Level of Base Pay
• Needs to be within limits of pay grade
• Consistent with new employees at similar
jobs
• Needs to abide by mandates of:
– Title VII, 1964 Civil Rights Act
– Equal Pay Act of 1963
– ADEA of 1967

The Merit Pay Grid
• Amounts are determined by two
factors
– Performance ratings
– Position of employees’ present base pay
rates within pay ranges

Increases within Budget
• Determine performance categories and
percentage of employees in each
• Place percent in quartiles
• Put percent and quartiles into cells
• Estimate performance distribution
• Distribute increase to each cell
• Ensure total is within budget

Explain at least two sales

compensation plan design
considerations.

Sales Objectives
• Improve sales productivity

• Improve sales coverage of current
customers
• Grow sales overall

Sales Compensation Plans
• Salary only
• Salary plus bonus
• Salary plus commission
• Commission plus draw
• Commission only

Salary-Only Plans
• Fixed base compensation

• From the employees’ perspective 
risk-free
• From a company’s perspective 
burdensome

Salary-Plus-Bonus Plans
• Set salary coupled with a bonus

• Bonuses usually are single payment

Salary-Plus-Commission
Plans
• Commissions based on percentage of
price
• Spreads risks
• Designed to attract quality sellers
• Allows employees to do other tasks

Commission-Plus Draw Plans
• Draw
– Advance pay for living expenses
– Charged against future commissions
– Recoverable or non recoverable
• Provides strong incentive to excel

Commission Only
• Straight
– Based on fixed percentage of sales price
– Ex: 10% commission, service sold $100  $10
• Graduated
– Increased percentage rates for higher sales
volume
– Ex: 5% commission, per unit for 100 units 
8% commission per unit from 101 to 500, 12%
commission per unit in excess of 500

Commission Only (cont’d)
• Multi-tiered
– Increased percentage rates for meeting and
exceeding sales goal
– Ex: 8% if total sales volume < 1,000 units, 12%
if total sales volume >1000 units

Fixed Pay and Compensation
Mix
Three main factors
• Salesperson’s influence on decision

• Competitive pay standards within industry
• Amount of nonsales duties

Describe three main considerations

of person-focused pay program
design.

Skill Blocks
• Include job descriptions
– Skills needed
– Training required
– Accurate evaluation process
• Organize jobs into family/group

– List similar skills and tasks per job
• Group skills into blocks

Transition Matters
Job-based pay to person-focused pay
• Assessment of skills
– Who assesses
– On what
– How often
• Align pay with knowledge structure

• Access to training
– Equal access to all
In-House vs. Outsourced
Training
• Expertise
– Needed and available
• Timeliness
– How soon and how often?
• Number of trainees
• Proprietary nature of topic
– Too sensitive to share?

Present a summary of two pay

structure variation practices.

Broadbands and Pay Grades

Two-Tier Wage Structure

Sample Skill Block

Broadbanding
• Consolidates pay grades and ranges
• Flattens corporate hierarchies
• Emphasizes teamwork
• Broadens job duties and responsibilities
• Promotes quicker decision making
• More latitude in pay rate decisions

Two-Tiered Pay
• New employees paid less

• Temporary or permanent rewards
• Mainly in unionized companies
• May hinder recruiting
• Can lower employees’ morale

STRATEGIC
COMPENSATION
Chapter 9:
Discretionary Benefits

Learning Objectives
1. Give an overview of discretionary benefits.
2. List the three broad components of
discretionary benefits.
3. Identify and define one example of income
protection programs, paid time off, and
services.
4. Explain the benefits and costs of
Give an overview of discretionary

benefits.

Discretionary Benefits Overview
As of March 2012:
• $13,000 per employee, on average
• 21.5% of total payroll costs, on average

Discretionary Benefits Overview
Discretionary benefits
• Are offered at the will of each company
• Employees view them as entitlements
• Employers reinforce the entitlement
mentality by awarding them regardless of
performance

List the three broad components of


Discretionary Benefit Types
• Protection programs: provide family benefits,
promote health, and guard against income loss
caused by such catastrophic factors as
unemployment, disability, or serious illnesses
• Paid time-off: provides employees time off with
pay for such events as vacation
• Services: provide enhancements such as tuition

reimbursement and day care assistance to
employees and their families
Identify and define one example of

income protection programs, paid time
off, and services.

Income Protection Programs
• Disability insurance: includes both short-
and long-term disability care
• Life insurance: protects employees’ families
by paying a specified amount to an
employee’s beneficiaries upon the
employee’s death
• Pension programs: income to employees
and their beneficiaries during some or all of
their retirement
Short-Term Disability
• Less than six months duration
• Unable to perform job
• Benefit: 50% to 100% of pretax income
• Conditions
– Recovery from injuries
– Recovery from surgery
– Treatment of an illness requiring any
hospitalization
– Pregnancy
Long-Term Disability
• Six months to life
• Unable to perform any job qualified for
• Benefit: 50% to 70% of pretax pay
• 6 to12 month waiting period
• Other benefits used first

Life Insurance
• Pays employees’ beneficiaries upon

employees’ death
• May also include

– Accidental death
– Dismemberment benefits

Life Insurance Types
• Term life insurance: provides protection to
employees’ beneficiaries only during a limited
period based on a specified number of years
• Whole life insurance: does not terminate until

payment is made to beneficiaries
• Universal life insurance: provides protection to
employees’ beneficiaries based on the insurance
feature of term life insurance

Retirement Programs
• Provide income to employees and

their beneficiaries during some or all
of their retirement

Paid Time Off Policies
• Holidays • Clean-up,
• Vacation preparation, or
• Sick leave travel time
• Personal leave • Rest period
“break”
• Jury duty
• Lunch period
• Funeral leave
• Integrated time off
• Military leave policies
• Sabbatical leave
• Volunteerism
Integrated Paid Time Off
Policies
• Combine holiday, vacation, sick leave, and
personal leave policies into a single paid
time off policy
• Provide individuals the freedom to

schedule time off without justifying the
reasons

Sabbatical Leaves
• Paid time off for professional activities
• Common in college and university settings
– Faculty members who meet minimum service
requirements
• Outside academia  Usually limited to
professional and managerial employees

Volunteerism Causes
• Improving literacy
• Providing comfort to terminally ill patients
• Serving food at shelters for individuals who
cannot afford to feed themselves
• Serving as a mentor to children who do not
have one or more parents
• Spending time with elderly or disabled
residents of nursing homes who may no
longer have living friends or family
Services
• Employee assistance programs
• Family assistance programs
• Flexible scheduling and leave
• Day care
• Tuition reimbursement
• Transportation services
• Outplacement assistance
• Wellness programs
• Smoking cessation
• Stress management
• Weight control and nutrition programs
• Financial education
Employee Assistance
Programs
• Provided for:
- Alcohol or drug abuse
- Domestic violence
- Emotional impact of AIDS and other
diseases
- Clinical depression
- Eating disorders

Advantages of EAPs for
Employer
Reduced costs:
- Turnover
- Absenteeism
- Medical costs
- Unemployment insurance rates
- Workers’ compensation rates
- Accidents
- Disability insurance
Family Assistance Programs
• Help employees provide elder care and

child care
• Making referrals to on-site child or elder
care centers
• Company-sponsored day care programs

Flexible Scheduling
• Compressed work weeks (e.g., 10-hour

days or 12-hour days)
• Flextime
• Job sharing

Day Care
• Companies subsidize child or elder day
care in community-based centers
• Elder care: self-help, meals, and
entertainment activities for the participants
• Child care: supervision, preschool
preparation, and meals

Tuition Reimbursement
• Promotes employee education
• Full or partial
• Not the same as pay for knowledge

Outplacement Assistance
Programs
Required due to:
• Layoffs due to economic hardship
• Mergers and acquisitions
• Company reorganizations
• Changes in management
• Plant closings or relocation
• Elimination of specific positions, often the
result of changes in technology
Outplacement Assistance
Services
• Personal counseling
• Career assessments and evaluations
• Training in job search techniques
• Resume and cover letter preparation
• Interviewing techniques
• Training in the use of basic workplace
technology

Wellness Programs
Emphasize, in order to keep health costs

low:
• Weight loss and nutrition
• Stress management
• Smoking cessation
• Cardiovascular fitness

Explain the benefits and costs of


Discretionary Benefits Costs
and Benefits
• Promotes competitive advantage
• Promotes employee behaviors with
strategic value
• Attracts quality employees
• Meets the needs of a diverse workforce
• Discretionary benefits can distinguish a
company from its competition
Discretionary Benefits Costs
and Benefits
• Discretionary benefits have tax
advantages
– Can translate into cost savings
– Companies pursuing differentiation strategies
might invest more in research and
development
– Companies pursuing lowest cost strategies
might be able to lower prices

STRATEGIC
COMPENSATION
Chapter 10:
Employer-Sponsored
Retirement Plans and
Health Insurance
Programs

Learning Objectives
1. State the definitions of qualified plans and
nonqualified plans and indicate the main
difference between them.
2. List nine minimum standards for qualified
plans.
3. Explain what defined benefit plans are.
4. Explain what defined contribution plans are.

Learning Objectives
5. List and summarize two types of defined

contribution plans.
6. Identify and summarize three broad classes
of health insurance programs.
7. Briefly state the rationale for consumer-driven
health care.

State the definitions of qualified plans

and nonqualified plans and indicate the
main difference between them.

Nonqualified and Qualified Plans
• Nonqualified plans refer to pension plans that do
not meet at least one of the minimum standard
provisions of the Employee Retirement Income
Security Act (presented shortly). Neither
employee nor employer contributions are
permitted on a pretax basis.
• Qualified plans meet all of the minimum
standard provisions, which permits employer
and employee contributions to be made on a
pretax basis.
List nine minimum standards for

qualified plans.
Note: In total, there are thirteen minimum standards, which

are stated next.

Minimum Standards for
Qualified Plans
The Employee Retirement Income Security Act
specifies 13 minimum standards:
1. Participation requirements
2. Coverage requirements
3. Vesting rules
4. Accrual rules
5. Nondiscrimination rules: testing
6. Key employee and top-heavy provisions
7. Minimum funding standards
8. Social Security integration

Minimum Standards for
Qualified Plans (cont’d)
9. Contribution and benefit limits
10.Plan distribution rules
11. Qualified survivor annuities
12.Qualified domestics relations orders
13.Plan termination rules and procedures
We briefly review five standards: vesting, accrual

rules, nondiscrimination rules, plan distribution
rules, and plan termination types
Vesting Rules
• Vesting is an employee’s nonforfeitable
rights to pension benefits
• Employees must be allowed to participate
in pension plans after they have reached
age 21 and have completed 1 year of
service (based on 1,000 work hours)

Vesting (cont’d)
• Companies must grant full vesting rights to
employer contributions on one of the
following two schedules:
• Cliff vesting schedules must grant
employees 100% vesting after no more than
three years of service
• The six-year graduated schedule allows
workers to become 20% vested after two
years and to vest at a rate of 20% each year
thereafter until they are 100% vested after six
years of service
Accrual Rules
• Qualified plans are subject to minimum
accrual rules based on the Internal
Revenue Code (IRC) and ERISA
• Accrual rules specify the rate at which
participants accumulate (or earn) benefits
• Defined benefit and defined contribution
plans use different accrual rules

• Prohibits employers from discriminating in
favor of highly compensated employees in
contributions or benefits, availability of
benefits, rights, or plan features
• Employers may not amend pension plans
so that highly compensated employees
are favored

Plan Distribution Rules
• Distribution refers to the payment of vested
benefits to participants or beneficiaries
• Lump sum distributions are single payments
of benefits
• In defined contribution plans, lump sum
distributions equal the vested amount
• Annuities represent a series of payments for
the life of the participant and beneficiary

Plan Termination Types
• Standard
• Distress
• Involuntary
• Qualified plans must follow strict guidelines for
plan terminations including sufficient notification
to plan participants and distribution of vested
benefits to participants and beneficiaries in a
reasonable amount of time
• Applies only to defined benefit plans

Explain what defined benefit plans are.

Defined Benefit Plans
• Guarantee retirement benefits specified in
the plan document
• Usually expressed in terms of a monthly
sum equal to a percentage of a
participant’s preretirement pay multiplied
by the number of years he or she has
worked for the employer
• Benefit is fixed by a formula

Defined Benefit Plans (cont’d)
• Level of required employer contributions

fluctuates from year to year
• Level depends on the amount necessary
to make certain that benefits promised will
be available when participants and
beneficiaries are eligible to receive them

Factors Determining Funding
Level
• Life expectancies of employees and their
designated beneficiaries
• Projected compensation levels
• Likelihood of employees terminating their
employment before they have earned
benefits

Explain what defined contribution plans

are.

Defined Contribution Plans
• Employers and employees make annual
contributions to separate accounts
established for each participating
employee, based on a formula contained
in the plan document
• Formulas typically call for employers to
contribute a given percentage of each
participant’s compensation annually
Contribution Sources
• Employer contributions: expressed as a
percentage of an employee’s wage or salary
• Employee contributions: expressed as a
percentage of the employee’s wage or salary
• Forfeitures: from the accounts of employees who
terminated their employment prior to earning
vesting rights
• Return on investments

DC Plan Accrual Rules
• The accrued benefit equals the balance in
an individual’s account
• Companies must not reduce contribution

amounts based on age
• Companies may also not set maximum

age limits for discontinuing contributions

Investment Vehicles
Defined contribution plan documents specify
how contributions may be invested. For
example:
• Company stocks
• Diversified stock market funds
• Federal government bond funds

List and summarize two types of

defined contribution plans.

Defined Contribution Plan Types
• Section 401(k) plans

• Profit sharing
• Stock bonus plans
• Employee stock ownership plans (ESOPs)

Section 401(k) Plans
• Named after the section of the IRC that created
them
• Also known as cash or deferred arrangements
(CODAs)
• Permit employees to defer part of their
compensation to the trust of a qualified defined
contribution plan
• Only private sector or tax-exempt employers are
eligible to sponsor 401(k) plans

Profit-Sharing Plans
• Set up to distribute money to employees
• Establish a profit-sharing pool (i.e., the money
earmarked for distribution to employees)
• May choose to fund profit-sharing plans based
on gross sales revenue or some basis other
than profits
• May take a tax deduction for their contributions
not to exceed 25% of the plan participants’
compensation in 2013
Employer Contribution Formulas
in Profit-Sharing Plans
• Fixed first-dollar-of-profits
• Graduated first-dollar-of-profits
• Profitability threshold

Stock Bonus Plans
• May be the basis for a company’s 401(k)
plan
• Reward employees with company stock
(i.e., equity shares in the company)
• Benefits are usually paid in shares of
company stock
• Participants of stock bonus plans possess
the right to vote as shareholders
ESOPs
• May be the basis for a company’s 401(k) plan
• Invest in company securities, making them
similar to profit-sharing plans and stock
bonus plans
• ESOPs are essentially stock bonus plans that
use borrowed funds to purchase stock
• Types of ESOPs
– Nonleveraged
– Leveraged

Hybrid Plans—Cash Balance
Plans
• Combine features of traditional defined
benefit and defined contribution plans
• Cash balance plans are defined benefit
plans that define benefits for each
employee by reference to the amount of
the employee’s hypothetical account
balance

Identify and summarize three broad

classes of health insurance programs.

Three Classes of Health
Insurance Programs
1. Fee-for-service plans
2. Managed care
3. Point-of-service plans

Fee-for-Service Plans
• Provide protection against health care
expenses in the form of a cash benefit
• Three types of eligible health expenses
– Hospital expenses
– Surgical expenses
– Physician charges
• Types:
– Indemnity plans
– Self-funded plans
Fee-for-Service Plan Features
• Deductibles
• Coinsurance
• Out-of-pocket maximums
• Preexisting condition clauses
• Preadmission certification
• Second surgical opinions
• Maximum benefits limits
Managed Care Plans
• Health maintenance organizations (HMOs)
• Preferred provider organizations (PPOs)
• Point-of-service plans (POSs)

HMOs
• Provides prepaid medical services
• Copayments represent nominal payments
• Common copayment amounts
– Between $15 and $50 for each doctor’s visit
– Between $10 and $50 per prescription drug
• Primary care physicians determine when
patients need the care of specialists

PPOs
• Select group of health care providers
• Employees choose from a list
• Financial incentives to use list
• Physicians must
• Meet quality standards
• Abide by PPO cost containment
• Accept PPO fee structure
• Does not provide prepaid benefits

Point-of-Service Plans
• Combine features of fee-for-service systems and
health maintenance organizations
• Employees pay a nominal copayment for each
visit to a designated network of physicians
• Employees possess the option to receive care
from health care providers outside the
designated network of physicians, but they pay
somewhat more for this choice

Briefly state the rationale for consumer-

driven health care.

Consumer-Driven Health Care
Plans
• Refers to the objective of helping companies
maintain control over costs while also
enabling employees to make greater choices
about health care
• Enables employers to lower the cost of
insurance premiums by selecting plans with
higher employee deductibles

Plans
• The most popular consumer-driven
approaches are flexible spending accounts
and health reimbursement accounts
• Provide employees with resources to pay for
medical and related expenses not covered
by higher deductible insurance plans at
substantially lower costs to employers

Plans
• Flexible-spending accounts (FSAs)
• Health reimbursement accounts (HRS)
• Health savings accounts (HSA)

FSAs
• Permit employees to pay for specified
health care costs that are not covered by
an employer’s insurance plan
• Prior to each plan year, employees elect
the amount of pay they wish to allocate
• Advantage  ability to make contributions
on a pretax basis
• Disadvantage  “use it or lose it”
provision of FSAs
HRAs
Purpose of HRAs and FSAs are similar but
with three differences
1. Employees do not contribute to HRAs
2. Permit employees to carry over unused
account balances from year to year
3. Employees may offer HRAs as well as FSAs
and use of these accounts isnot limited to
participation in high-deductible health care
plans

HSAs
• Medicare Prescription Drug, Improvement
and Modernization Act of 2003 permits
eligible individuals to establish HSAs to
help employees pay for medical expenses
• Three advantages
1. HSAs are portable
2. HSAs are subject to inflation-adjusted
funding limits
3. Do not limit employee choice

STRATEGIC
COMPENSATION
Chapter 14:
Compensating
Expatriates

Learning Objectives
1. Summarize the four reasons international
activities facilitate the attainment of competitive
advantage.
2. Describe and explain the four preliminary

considerations compensation professionals
should take under advisement before designing
international compensation programs.
3. List the three main components of international

compensation programs and provide a specific
example of each one.
Learning Objectives
4. Explain the three approaches available to
companies for setting expatriate employees’
base pay.
5. Summarize the three types of incentive
payments that are commonly used in
6. Give a description of two standard employee
benefits and two illustrations of enhanced
benefits for U.S. employees.
7. Describe the issue of repatriation.
Summarize the four reasons

international activities facilitate the
attainment of competitive advantage.

International Activities and
Competitive Advantage
• Lowest cost producers’ relocations to
cheaper production areas
• Differentiation and the search for new
global markets
• How globalization is affecting HR
departments
• Complexity of international compensation
programs
Lowest Cost Producers’ Relocations to
Cheaper Production Areas
• Many U.S. businesses have established
manufacturing and production facilities in
Asian countries and in Mexico because
labor is significantly less expensive than it
is in the United States

Lowest Cost Producers’ Relocations to
Cheaper Production Areas
Three key reasons for the cost difference:
• Labor unions generally do not have much
bargaining power in developing Asian countries
or in Mexico
• Asian governments historically have not valued
individual employee rights as much as does the
U.S. government
• The National Labor Relations Act requires
management to bargain with labor unions over
terms of employment, including some benefits
Differentiation and the Search for New
Global Markets
• Coke and Pepsi could distinguish themselves
from competing companies by taking on new
initiatives that depart from “business as usual”
and meet specific market needs
• China possesses a definite need for bottled
spring water because it does not maintain
adequate water purification plants
• Coke and Pepsi could distinguish themselves
from other competitors by marketing spring
water along with their regular soft drink products
How Globalization Is Affecting HR
Department
• Employee selection
– Culturally sensitive?
– Are families willing to adjust?
• Training
– Crosscultural
– In-house or outsourced
• Consulting firms conduct extensive research for
client companies to ensure the most effective
deployment of expatriates worldwide focusing on
pay and benefits issues for expatriates
Complexity of International
Compensation Programs
• How to further corporate interests abroad and
encourage employees to take foreign
assignments
• How to minimize financial risks to employees
and make their (and their families’)
experiences as pleasant as possible
• How to promote a smooth transition back to
life in the United States after completing
assignment overseas (repatriation)
Complexity of International
Compensation Programs (cont’d)
• How to promote their lowest-cost and
differentiation strategies in foreign markets
• Must reasonably adhere to U.S.
employment law for U.S. workers working
for U.S. companies abroad, which is
sometimes difficult with foreign laws and
policies

Describe and explain the four

preliminary considerations
compensation professionals should
take under advisement before
designing international compensation
programs.

Preliminary Considerations
• Defining international employees:
host country nationals, third country
nationals, and expatriates
• Term of international assignment
• Staff mobility
• Equity: pay referent groups
International Employees
• Host country nationals (HCNs)
– Citizens work for U.S. company in own country
– Ex: Japanese citizens work for GE in Japan
• Third country nationals (TCNs)
– Citizens of one country work for a U.S.
company in another country
– Ex: Australian citizens working for GE in China
• Expatriates
– U.S. citizens work for a U.S. company in
another country
– Ex: U.S. citizens employed in Citibank’s London
office
Term of International Assignment
• Short term
– Less than one year
– Do not require major changes in domestic
compensation packages
• Extended (long) term
– More than one year
– Necessitates changes to promote a sense of
stability and comfort (ex., housing allowances,
educational expense coverage for children)

Staff Mobility
• From the United States to host country and
back
• From the United States to one host country
and then to another host country
• May require financial incentives (ex.
relocation bonuses)

Equity: Pay Referent Groups
• Domestic employees
• Host country employees
• Commensurate with performance or
knowledge attainment

List the three main components of

international compensation programs
and provide a specific example of each
one.

Compensation Components for
U.S. Expatriates
• Core compensation
– Base pay
– Incentive compensation
• Foreign service premium
• Hardship allowance
• Mobility premium
• Standard employee benefits
– Protection programs
– Paid time off
Compensation Components for
U.S. Expatriates (cont’d)
• Enhanced benefits
– Relocation assistance
– Education reimbursements for
expatriates’ children
– Home leave benefits and travel
reimbursements
– Rest and relaxation leave and allowance

Explain the three approaches available

to companies for setting expatriate
employees’ base pay.

Setting Base Pay
• Home country based
– Similar to pay norms for domestic employees
• Host country based

– Similar to pay norms for native employees
• Headquarters based
– Neither based on home nor host country’s pay
levels, but on pay norms in the company’s
headquarters
Purchasing Power
• Stability of currency
– U.S. dollar and foreign money
– Exchange rate fluctuations
• Inflation
– Increase in prices of goods and services
– Increase in inflation lowers purchasing
power

Balance Sheet Approach
• To protect an employee’s standard of
living
• Strategic value
– Protects expatriates’standard of living
– Allows companies to control costs

Inflation Rates

Appropriateness
• Home country is referent point
• Expatriates keep close ties to the
United States
• Assignment is of limited duration
• Repatriation after assignment
• Guarantee of no financial hardship

Major Expenditures
• Housing and utilities
• Goods and services
• Discretionary income
• Taxes
Information sources
• Returning expatriates
• Consulting and research companies
• U.S. State Department indexes
Quarters Allowances

Discretionary Income
Expenditures
• Pension contributions
• Savings and investments
• Insurance payments
• Mortgage equity payments
• Alimony
• Child support
• Student loans
• Car payments
Tax Considerations
• Tax protection
• Tax equalization

Tax Protection
• Employers reimburse expatriates

when actual tax is greater
• Expatriates pay entire tax when

actual tax is less or equal

Tax Equalization
• Employers deduct hypothetical tax

• Employers pay real tax from
hypothetical
• Reimbursements settled after payment
• Equitable treatment any assignment

Summarize the three types of incentive

payments that are commonly used in

Incentive Compensation
• Foreign service premiums
– To encourage expatriate assignments
• Hardship allowances
– For tough work and living conditions
• Mobility premiums
– For willingness to relocate to an
assignment

Hardship Allowances
• Set by U.S. State Department based
on:
– Foreign living conditions
– Physical challenges like climate
– Poor health conditions
• Over 150 countries designated
• Supplements between 5% and 35%
of base pay
Hardship Location Differentials

Give a description of two standard

employee benefits and two illustrations
of enhanced benefits for U.S.
employees.

International Employee
Benefits
• Two types
– Standard
– Enhanced
• Considerations
– Total remuneration
– Benefit adequacy
– Tax effectiveness
– Recognizing local customs and practices
Standard Benefits
• Expatriates continue to participate in
Social Security program
– Retirement insurance, benefits for
dependents, and Medicare
• Family and Medical Leave Act also applies
to expatriates
• State workers’ compensation laws
generally do not apply
• Expatriates typically receive the same
annual vacation benefits as do their
domestic counterparts
Enhanced Benefits
• Relocation assistance
• Education reimbursement
• Home leave and travel reimbursement
• Rest and relaxation leave and
allowance

Relocation Assistance
• Temporary quarters before moving

• Transportation expenses
• Reasonable traveling expenses
• Temporary quarters upon arrival
• Moving and storing household goods

Describe the issue of repatriation.

Repatriation Issues
• Losing supplements and allowances
• International work experience not
valued
• Reintegration into domestic workforce
• Leaving company

Strategic Compensation: Strategic Compensation: A Component of Human Resource Systems

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STRATEGIC

© Pearson Education Limited 2015 1-1

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Describe what compensation is and give at

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• Legally required benefits

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• Promote worker safety and health

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Summarize at least two historical events in

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• Time-and-motion studies analyzed the time it

• Competitive advantage refers specifically to a

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Discuss at least two differences between

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• Strategic decisions: guide the

• Tactical decisions: support the

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Lowest cost strategy: focus on being

Differentiation strategy: focus on offering

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• Include predictable behaviors

Ex: Ryanair (reduced operations costs)

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Name and summarize the goals of

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• Recruitment • Career development

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• Compensation policies that fit with business

• Vital in attracting and retaining employees

• Are based on:

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Pay structures: pay is determined by

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1. List four groups of federal laws that apply

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Three broad issues

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• Payments made pursuant to a:

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Ex: Different standards to determine pay increases

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