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Transcript of Compensation and Benefits
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Compensation Compensation and Benefitsand Benefits
PHR 19% - SPHR 13%PHR 19% - SPHR 13%
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Total Rewards:
Financial & Non Financial
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Strategic Objectives of Compensation
Compensation has a strong influence on job satisfaction, productivity, labor turnover, and
other organizational processes.
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Co
mp
ens
atio
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yste
m
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Discussion Question:
What are the objectives of a compensation system?
What happens if all of these objectives are not considered simultaneously?
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Compensation Motivating
Legal
AdequateEquitable
Secure
Cost/benefit effective
Strategic Objectives of Compensation
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Determinants of Pay
Many factors besides the job market influence pay levels, and these factors need to be considered as a whole.
What are the major factors that influence pay?
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Wage Decisions
1. Wage-level decision
2. Wage-structure decision
3. Individual wage decision
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The Wage-levelDecision
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Discussion Question:
What would be the consequences of a wage-level decision that pays wages that are significantly higher than the market rate?
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Establishing the Wage Level
1. To attract an adequate supply of labor.
2. To keep present employees reasonably satisfied with their compensation.
3. To avoid costly turnover.
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Factors Influencing the Wage Level
Most significant factors influencing wage levels:
Organizational Size
Unionization
Productivity (Ability to Pay)
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Wage Surveys
What four conditions must be met for do-it-yourself wage
surveys to be useful?
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Discussion Question:
What are the major limitations of information gained from wage surveys?
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Job EvaluationMethods
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Wage-Structure Decision
How much each job should be paid relative to other jobs in the organization.
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Job Evaluation
The systematic approach of determining the relative worth or value of each job in an organization.
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Ranking Method
The simplest method of developing a wage structure is to have the job-evaluation committee rank the jobs from highest to lowest in value.
What are the advantages and disadvantages of the ranking method?
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Classification/Grading Method
Job descriptions for each job are compared with a classification scheme that ranks the
jobs in a hierarchy of job worth.
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Point Method
The compensable factors of key jobs are used to develop the wage curve. Points are assigned to each factor, and the
total points are associated with a specific pay level.
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Wage curve passes through the midpoint of each pay grade
$
Illustration of a Wage Curve Using the Point Method of Job Evaluation
Points
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Compensable Factor
Weighted percentage Degree/Points
1 2 3 4 5
Skill (40%) 20 32 48 72 100
Responsibility (30%) 15 24 36 54 75
Effort (20%) 10 16 24 36 50
Working Conditions (10%) 2 8 12 18 25
Example:
Regrind Operator Compensable Factor Degree Points
Skill 3 48
Responsibility 2 24
Effort 4 36
Working Conditions 4 18
Total Points 126
Point Assignments for Four Compensable Factors
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Discussion Question:
In developing a wage curve, why is it so important for the key jobs to be equitably paid jobs?
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X
Y
Pay $
Points
Wage Curve Based on 15 Key Jobs
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Factor Comparison Method
Identify key (benchmark) jobs
Identify job factors
Rank jobs
Assign monetary amounts to each job on each factor
Compare unique jobs with key jobs
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Guide Chart-Profile Method
A job evaluation system that is basically a factor comparison system, although it is also very
similar to the point method since it uses points.
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Job Pricing and PayRate Administration
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Job Pricing
The process of placing a dollar value on the worth of a job is referred to as
job pricing.
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Labor grades
1 2 3 4
Points
5 6 7 8
Hourly wage
Maximum for labor grade 2
Starting wage for labor grade 2
Maximum
Trend line
Minimum limit line
Pay range
Red circle rate
Pay Grades Constructed Along the Wage Curve
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Points
$
10%
20%
Two Pay Ranges
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Discussion Question:
What are compa-ratios and how can they be used?
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Discussion Question:
What are red circle rates? What alternative methods does a company have for handling red circle rates?
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Adjustments for Inflation
Administrative problems may arise when the wage structure has to be adjusted due to inflation or internal changes within the organization, such as job redesign.
What are the consequences of adjusting the wage curve?
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Individual Pay Rate Determination
The relative pay of individuals who perform similar jobs in the same company.
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Pay Decisions
Pay decisions are controlled by two basic processes.
1. The design of the wage structure
2. The formal budgeting process
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Economic FactorsAffecting
Compensation
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Economic Factors Affect Compensation
Inflation Interest rates Industry competition Foreign competition Economic growth Demographic trends
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Demographic Trends
The labor market is primarily influenced by five demographic forces:
birthrates participation rates immigration Education unemployment
How can demographic trends in the labor market impact wages?
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Discussion Question:
How does an increase or decrease in unemployment rates influence a company's compensation system?
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Incentive CompensationSystems
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Money & Motivation Theories
How is money viewed in the following theories?
Need Theory
Self-determination Theory
Expectancy Theory
Equity Theory
Goal Setting Theory
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Discussion Question:
According to Expectancy Theory, what should a supervisor do to motivate an employee?
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Efforts to Reduce Inequity
Inequity can exist when people are either overpaid or underpaid. Both conditions or inequity motivate individuals to establish a more equitable exchange.
What methods do individuals use to reduce inequity?
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Incentive Compensation
Plays a strategic role in increasing organizational effectiveness.
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Performance Rating*Expected Number
of Employees
Fixed Increase Amount
orDiscretionary
Increase Range
Outstanding: Truly exceptional performance
1 in 10 12% 10-15%
Excellent: Constantly exceeds standards 2 in 10 8% 7-9%
Good: Occasionally exceeds standards
4 in 10 5% 4-6%
Average: Occasionally meets standards
2 in 10 3% 2-3%
Fair: Marginal performance 1 in 10 1% 0-1%
* Note to supervisors: This column shows the number of employees in a typical department who would normally be rated in each category.
Merit-Increase Guidelines: Fixed Increase or Discretionary Increase
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Salary Increase Matrix using the Compa-ratio Approach
PerformanceCompa-ratio
0.80 - 0.89 0.90 - 0.99 1.00 - 1.09 1.10 - 1.20
Outstanding 7.0 - 8.0 % 6.0 - 7.0 % 5.0 - 6.0 % 4.0 - 5.0 %
Above Average 5.0 - 6.0 % 4.0 - 5.0 % 3.5 - 4.5 % 3.0 - 4.0 %
Average 3.0 - 4.0 % 2.5 - 3.5 % 2.0 - 3.0 % 1.5 - 2.5 %
Below Average 1.0 - 2.0 % 0.8 - 1.8 % 0.6 - 1.6 % 0.4 - 1.4 %
Unsatisfactory 0 % 0 % 0 % 0 %
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$
Number of units produced
Straight piecework: 25 cents/unit
Taylor’s differential piece-rate plan: 22 cents/unit if less than standard; 27 cents/unit if more than standard
Standard
A Comparison of Straight Piecework & F.W. Taylor’s Differential Piece-Rate Plan
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The Standard Hour Plan
Workers are paid an hourly wage, but the hour is
measured in units produced rather than in minutes.
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The Halsey Premium Plan
Workers receive a guaranteed hourly wage plus a percentage (33 percent was recommended) of the wage for any time saved.
The actual production standards are determined by past performance rather than by time-and-motion studies.
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Discussion Question:
What is "restriction of output," and why does it occur?
What can be done to avoid it?
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Units per hour
60 Standard
56 Group norm
Starting date Two and one-half weeks later
Illustration of Group Norms Restricting Productivity: Individual Productivity of a New Employee
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Discussion Question:
What conditions are necessary for these individual incentive plans to operate effectively: piecework, merit pay increase, commission sales, and the standard hour plan?
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Skill & Knowledge Based Pay
Reward employees for their ability to perform an array of related tasks or skills rather than
for the actual work performed.
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Performance Level
Skill Level Marginal AcceptableAbove
StandardExceptional
1 $8.00 8.36 8.75 9.15
2 8.48 8.87 9.30 9.72
3 9.00 9.42 9.87 10.33
4 9.55 10.00 10.50 11.00
Skill x Performance Pay Matrix Hourly Rates of Pay
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Differential Pay
overtime
shift pay
hazard pay
on-call pay
call-back pay
geographic differentials
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Discussion Question:
What conditions make a group incentive system superior to an individual incentive system?
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Profit Sharing & Gainsharing
Pay based on the performance of the entire organization.
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Discussion Question:
What are the advantages and disadvantages of "cash" profit-sharing plans and "deferred" profit-sharing plans?
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Gainsharing
Scanlon Plans
Rucker Plans
Improshare
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Employee Stock Ownership Plans
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Strategic Alignment of
Base Pay & Incentive Pay
What factors should be considered in balancing base pay and incentive pay?
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Job AClerical position in a credit union
Job BMetal worker in a metal shop
Job CSales supervisor at a used car lot
Profit sharing
Individual incentive
Base pay
10%
5%
85%
Group bonus
Base pay (determined partly by individual performance)
20%
80%
Profit sharing
Group incentive
Individual incentive
Base pay
15%
15%
40%
30%
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Discussion Question:
In fine tuning an incentive system, what problems would occur if excessive weight were placed on individual incentives? on group incentives? on profit sharing? on base salary?
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Average Annual Pay of Factory Workers, High School Teachers,Engineers, and Chief Executive Officers: 1990-2000
1960 1970 1980 1990 2000 2010
Worker $4,665 6,933 15,008 20,862 28,600 32,840
Teacher 4,995 8,626 15,970 29,143 40,350 54,390
Engineer 9,828 14,695 28,486 49,772 62,760 89,086
CEO* 190,383 548,787 624,996 1.95 mil 12.4 mil 10.9 mil
*Total compensation, including salary, bonus, and stock options.
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Stock Options
A stock option is the right to buy a company’s stock at a certain price over a certain period of time, usually ten years.
What rules govern stock options?
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Discussion Question:
What are the implications of reporting executive stock options as an expense?
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Employee BenefitPrograms
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Required Benefits
Employers are required to provide three benefits that are intended to protect employees’ incomes.
What are the three benefits required by law?
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Social Security Benefits
1. Old age or disability benefits
2. Benefits for dependents of retired, disabled, or deceased workers
3. Lump-sum death benefits
4. Medicare
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Pension Plans
Defined Benefit Pension Plan
Defined Contribution Pension Plan
What are the differences between these two plans?
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Individual Savings Plans
Deferred accounts that are approved by the IRS, called qualified plans, enjoy special
tax considerations.
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Pension Protection Act
Allows employers to automatically enroll employees in a 401(k) plan.
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Health & Accident Insurance
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Income Replacement
Life insurance and income-continuation plans help to
alleviate difficulties.
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Paid holidays
Paid vacations
Paid personal leave
Union activities
Reporting time
Sabbatical leaves
Paid funeral leave
Jury duty
Military Leave
Pay for Time Not Worked
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Recognition & Achievement Awards
Organizations use a variety of recognition programs to
influence the attitudes and behaviors of employees.
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Health Care Benefits
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Maximum freedom of choice
Minimum cost control
Minimum freedom of choice
Maximum cost control
Fee for Service
Preferred Provider
organizationPoint of service
Health maintenance organization
Group health
cooperatives
Managed Health Care Options Freedom of Choice versus Cost Control
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Discussion Question:
What are the advantages of an HMO?
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Consumer-directed Health Care
Flexible Benefit Plans
Flexible Spending Arrangements (FSA)
Health Reimbursement Arrangements (HRA)
Health Savings Accounts (HAS)
State Sponsored Health Exchange
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Discussion Question:
What are the advantages and disadvantages of flexible benefits?
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Managing EmployeeBenefit Programs
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Employee Benefits Philosophy
1. Sharing the risks of accidents and illness.
2. Forced savings for retirement or bad times.
3. Sharing the costs of special services.
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Domestic Partner Benefits
Allow employees to include domestic partners in their health insurance plans.
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Cost Benefit Analysis & Cost Management
What methods are used for measuring and analyzing the costs of employee benefit plans?
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Employee Retirement Income & Security Act
Medical, surgical, or hospital care.
Reimbursement in event of accidents, disability, or death.
Vacation and sick leave benefits.
Unemployment benefits, such as severance pay.
Apprenticeship or training programs.
Day care.
Scholarship funds.
Prepaid legal services.
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Communicating Benefit Programs
Plans must be in writing & the plan document must:
1. Establish the funding mechanism for the plan.
2. Set forth procedures for making payments and providing benefits.
3. Indicate who is responsible for administering the plan.
4. Provide for amendments to the plan.
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Summary Plan Document
Employers are required to have a Summary Plan Document (SPD) that describes each
welfare benefit offered by the employer.
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Compensation Lawsand Regulations
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Davis-Bacon Act (Prevailing Wage Law)
Requires organizations holding federal contracts to pay laborers and mechanics the prevailing wages of the locality in which the work is performed.
Overtime must be paid at one-and-one half times the local rate.
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Copeland Act & Anti-Kickback Law
What are the provisions of the Copeland Act and the Anti-Kickback Law?
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Walsh-Healey Act (Public Contracts Act)
Extended the Davis-Bacon Act to non-construction federal contractors
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Fair Labor Standards Act (Wage & Hour Law)
FLSA sets minimum wage standards, overtime pay standards, and child labor restrictions.
Under the FLSA, what determines whether an employee is exempt or non-exempt?
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Overtime Provisions
Employees receive one-and-one-half times the regular rate of pay for all hours worked in excess of 40 during a given week.
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Overtime Calculations with Bonus
EE earns $10/hr for 48-hour week, receives $24 weekly production bonus & gets 8 hours of overtime pay based on rate that includes bonus.
EE really earns $10.50/hr ($10/hr base pay plus $24 bonus divided by 48 hours required to earn it or 50¢/hr) & an overtime rate of $15.75. The EE’s earnings for that week would be:
Regular time 40 x 10.50 = $420.00Overtime 8 x 15.75 = 126.00Weekly earnings $546.00
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Overtime Calculations – Paid on Piece Rate
Hourly rate of pay for those paid on a piece rate basis is calculated by dividing money they earned by number of hours they spent earning it.
Example: worker works 50 hrs & produces 100 pieces at rate of $4/piece would have an hourly rate of pay of $8 (100 pieces times $4 per piece equals $400, divided by 50 hrs equals $8/hr). This worker’s earnings for that week would be:
Regular time 40 hours x $8.00 = $320.00Overtime 10 hours x $12.00 = 120.00Weekly earnings $440.00
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New Wage Curve
Former Wage Curve
Indirect Effect
Direct Effect
Increase in the
Minimum Wage
Direct & Indirect Effects of a Minimum Wage Increase
Labor Grades
$
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Record Keeping
The FLSA requires employers to keep records of wages, hours, and other related items.
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Equal Pay Act
The Equal Pay Act prohibits employers from paying members of one sex less than members of
the opposite sex for performing equal work.
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Permissible Wage Differences
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Discussion Question:
What is the comparable worth controversy?
What has been the position of the courts in dealing with this issue?
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Pregnancy Discrimination in Employment Act
Defines discrimination because of sex to include “pregnancy, childbirth, or related medical conditions.”
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Family and Medical Leave Act
FMLA entitles eligible employees to take up to 12 weeks of unpaid leave each year for
specified family and medical reasons.
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National Defense Authorization Act
Extended FMLA by providing 12 weeks leave for family members impacted by active military duty.
Plus 26 weeks of military caregiver leave for the families of service members injured in the line of duty.
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Health Insurance Portability & Accountability Act
HIPAA provides greater portability in health care coverage and limits the exclusions for preexisting conditions and places other restrictions on an insurance carrier’s ability to exclude a worker form insurance coverage.
What are the major provisions of HIPAA?
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Patient Protection & Affordable Care Act
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Small Business Job Protection Act
The Small Business Job Protection Act raised the minimum wage and made significant changes to pension plans.
What are the major provisions of SBJPA?
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Wage Garnishment
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Employee Retirement Income Security Act
Designed to ensure that employees covered under private pension plans & employee welfare benefit plans
would receive the benefits promised.
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Discussion Question:
What is meant by vesting, portability, fiduciary, contributory, and noncontributory as they are used to describe pensions?
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Reports Required by ERISA
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Qualified Domestic Relations Order (QDRO)
A court order that instructs a plan administrator how to pay a divorced spouse or a child or other dependent all or a portion of a pension plan benefit.
May be used to divide the pension plan as a marital asset, or to pay alimony or child support.
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Consolidated Omnibus Budget Reconciliation Act
COBRA was designed to protect people who leave an employer from losing their benefit coverage.
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IRS Regulations
IRS regulations require employers to withhold regular amounts from an employee’s pay and submit these
funds on a scheduled basis to the IRS.
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Highly Compensated
Employees
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IRS 20-Factor Test
The Internal Revenue Service uses the following common law factors, called the IRS 20-Factor Test,
to determine whether a worker is an independent contractor or a regular employee.
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EvaluatingStrategy & Program
Effectiveness
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Budgeting
Budgeting helps to ensure that future financial expenditures are coordinated & controlled.
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Cost Management
To determine a firm’s labor costs:
Labor Costs =
Employment
X
(Average Cash Compensation + Average Benefit Cost)
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Discussion Question:
What are the implications of the trend toward hiring more contingent workers?
How will the growth in the contingent workforce influence compensation and benefits practices?
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Assessment of Methods & Processes
Compare outcomes against the following six criteria:
1. Legal
2. Adequate
3. Motivating
4. Equitable
5. Secure
6. Cost-benefit effective
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International HRCompensation Issues
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Expatriate Pay and Allowances
When managers of multinational companies are assigned to work abroad, they normally draw additional compensation in the form of special expatriate allowances.
What are these special allowances?
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Compensation & Benefits for Expatriates
What considerations must be given in compensating expatriate managers?