Compensation and Benefits Chapter 9 Chapter 9 Objectives 1.Describe the basic issues involved in...

Compensation and Benefits

Chapter 9

Chapter 9 Objectives

1. Describe the basic issues involved in developing a compensation strategy

2. Discuss how organizations develop a wage and salary structure

3. Identify and describe the basic issues involved in wage and salary administration

4. Discuss the basic considerations in understanding benefit programs

5. Identify and describe mandated benefits

6. Identify and describe nonmandated benefits

7. Discuss contemporary issues in compensation and benefits

1. Describe the basic issues involved in developing a compensation strategy

2. Discuss how organizations develop a wage and salary structure

3. Identify and describe the basic issues involved in wage and salary administration

4. Discuss the basic considerations in understanding benefit programs

5. Identify and describe mandated benefits

6. Identify and describe nonmandated benefits

7. Discuss contemporary issues in compensation and benefits

Developing a Compensation Strategy

• If effective, a firm’s compensation system can: • Improve cost efficiency.• Ensure legal compliance.• Enhance the success of

recruitment efforts.• Reduce morale and turnover

problems.

• People form equity beliefs based on two factors:• Inputs (I): The perceptions that people have concerning what

they contribute to the job (e.g., skill and effort).• Outputs (O): The perceptions that people have regarding the

returns they get (e.g., pay) for the work they perform.

• People judge the equity of their pay by comparing their outcome-to-input ratio (O/I) with another person’s ratio, who is referred to as one’s “referent other.”

Influences of Compensation on Attitudes and Behavior – Equity Theory

• Equity: O/I ratios of the individual and his or her referent other are perceived as being equal.

• Inequity: O/I ratios of the individual and his or her referent other are perceived as being unequal.

• When employees’ O/I ratios are less than that of their referent others, they feel they are being underpaid.

• When employees’ O/I ratios are greater, they feel they are being overpaid.


• When underpaid, employees tend to decrease inputs or escape the situation.

• Overpaid employees consider overpayment just as satisfying as equity or somewhat dissatisfying, but not nearly as dissatisfying as underpayment.


• Employees believe their pay is equitable when they perceive these circumstances:

Establishing Pay Rates Within an Organization


• Achieving internal consistency• Determine the overall importance or worth of each job.

• Job evaluation is the systematic process for determining the worth of a job.

• Standards for job evaluation• Consistency• Freedom from bias• Correctability• Representativeness• Accuracy of information


Achieving Internal Consistency (Cont.)• How job evaluation is conducted: Point-Factor Method:

• Step 1: Select and define the compensable factors used to determine job worth.

• Step 2: Determine the number of levels or degrees for each factor.

• Step 3: Carefully define each degree level.

• Step 4: Weigh each compensable factor in terms of its relative importance.

• Step 5: Assign point values to the degrees associated with each compensable factor.

• Step 6: Calculate the total point value for a job by summing the points earned on each compensable factor.


Achieving Internal Consistency (Cont.)• Assigning jobs to pay grades

• Jobs are grouped into pay grades based on the total number of points received.

• Pay grades: Job groupings in which all jobs assigned to the same group are subject to the same range of pay.

• Companies must decide how many pay grades to establish.


Achieving external competitiveness• Collecting salary survey information

• Provides information on pay rates offered by a firm’s competitors for certain benchmark jobs.

• Establishing a pay policy• A pay policy stipulates how well a

company will pay its employees relative to the market.

• Majority of firms pay at the market rate.• When setting its pay policy, a company

must consider its strategic plan.


Achieving external competitiveness• Establishing pay rates

• Market rates identified by salary surveys are used for benchmark jobs.

• For non-benchmark jobs, pay rates are set based on the pay policy line.

• Pay policy line: A regression line that shows the statistical relationship between job evaluation points and prevailing market rates.


Recognizing employee contributions• An organization must establish a pay

range for each pay grade.• Each employee must then be placed

within that range based on their contribution to the organization.

• Pay range specifies the minimum and maximum pay rates for all jobs within a grade.


Recognizing Employee Contributions• Establishing a pay range

• Most employers set market rate as the midpoint of the range.

• The spread from the midpoint usually varies, becoming larger as one progresses to higher pay grades.

• The mechanism for placing each employee within a pay range differs for new and existing employees.

• New employees are usually paid at the bottom of the pay range unless their qualifications exceed the minimum.


Recognizing Employee Contributions• Skill-based pay

• A compensation approach that grants employees pay increases for acquiring new, job-related skills.

• Usually implemented as follows:• Identify tasks that need to be performed.• Determine what skills are needed to perform the tasks.• Develop tests or measures to determine whether an individual has

learned the skills.• Price each skill based on its value to the organization.• Communicate to employees the skills they can learn and how much

they will be paid for learning them.


Recognizing Employee Contributions

Skill-based pay• Strengths

• Financial incentive to improve skills.

• Effective communication and problem solving skills.

• Commitment to the organization.

• Weaknesses• Additional labor costs.• May lead to inequity perceptions.• Not cost-effective if company does

not use the new skills.• Problems determining the skill

levels of different employees.• Administrative burden.• Least effective in bureaucratic

organizations.

• The law imposes constraints on organizational pay practices in two major areas: • Minimum wage and overtime • Pay discrimination

Legal Constraints on Pay Practices

• Minimum wage and overtime• The Fair Labor Standards Act (FLSA) primarily

regulates minimum wage and overtime pay practices.• The act exempts small organizations and certain types of

employees from its minimum wage and overtime requirements.

• Job categories exempted include executive, administrative, professional, and outside sales employees.


• Minimum wage and overtime (cont.)• Minimum wage provisions: If a state’s minimum wage

level differs from the federal minimum wage level, the employer must pay the higher of the two rates.

• Overtime provisions: All nonexempt employees who work in excess of 40 hours/week, must be paid for overtime worked, no less than one-half times the employee’s regular pay rate.


• Pay and discrimination• The Equal Pay Act (EPA)• The gender pay gap• Comparable worth and the law


Pay and Discrimination• The Equal Pay Act

– Prohibits sex discrimination in pay.– The ‘‘equal pay for equal work’’

standard requires that jobs requiring an equal level of skill, effort, and responsibility and performed under similar working conditions must be paid equally.

– Unequal pay for equal work is allowed if differences are based on seniority, productivity, merit, or any factor other than sex.


Pay and Discrimination• The gender pay gap

• Despite the existence of EPA, pay gap still exists between the sexes.

• This pay gap has been attributed to women working part-time, staying for a shorter period in the workforce, and being less effective in negotiating starting salaries.

• The ‘‘equal pay for equal worth’’ standard is called comparable worth.


http://www.google.com/imgres?imgurl=http://www.evetahmincioglu.com/web/blog/wp-content/uploads/2010/03/equal-pay.jpg&imgrefurl=http://www.evetahmincioglu.com/web/blog/2010/03/18/womens-smaller-paychecks-hurt-hubby-too/&usg=__knDI0d1gTyZ0ak8mNaYdUh_rdug=&h=394&w=250&sz=23&hl=en&start=1&itbs=1&tbnid=uFtTPJmR9seFMM:&tbnh=124&tbnw=79&prev=/images?q=gender+gap+in+pay&hl=en&gbv=2&tbs=isch:1

Pay and Discrimination• Comparable worth and the

law– To win a comparable worth

case, plaintiffs must prove disparate impact caused by intentional discrimination.

– Employers can win the case if they can prove that pay differences are not the result of intentional discrimination.


Christmas Vacation

Questions:1.What are Clark’s issues in this scene?2.Is Clark legitimate in his expectations of a Christmas bonus?3.What are some strategies that Clark’s company could have employed to avoid any potential backlash to cutting Christmas bonuses?4.Was Clark’s psychological contract violated? How might this impact his future work?5.Is performance truly tied to compensation at Clark’s company?6.If the company was concerned with increasing cash flow, what are some low-cost alternatives to monetary compensation that might have been alternatively employed?

http://www.dilbert.com/strips/comic/1997-04-15/

http://www.dilbert.com/strips/comic/1997-01-22/

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The Strategic Importance of Benefits and Services

• Employee Benefits and Services– Are in-kind (noncash) payments to employees for

their membership or participation in the organization.– Are available on a noncontingent basis—employees

receive the same benefits and services regardless of job performance.

• Key Strategic Challenge– Offering benefits and services that maximize the

return on the employer’s investments.

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Recruiting and Retaining Talent


Controlling Costs of Benefit and

Services

Controlling Costs of Benefit and

Services

Achieving Business Objectives

Achieving Business Objectives

Strategic ChallengesStrategic

Challenges

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Controlling Benefit and Services Costs

• In 1929—Total benefits payments averaged 5% of total pay.

• In 2007—Benefits were 30% of total pay (about $17,000 per employee).

• Wages and salaries are 40 times greater than 60 years ago; benefits and services are 500 times greater

Employer Costs for Benefits and Services (Cost per Hour Worked and as Percentage of Total Compensation, Private Industry)

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• Innovative benefits and services packages are important for attracting and retaining employees.– Flexible benefits plan

• Provides all employees with a base benefits and services package and then allows employees to choose some additional benefits and services from a wide array of options.


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Mandatory Protection Programs

• Social Security Insurance

• Unemployment Compensation Benefits

• Workers’ Compensation and Disability Insurance

• Family and Medical Leave

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Social Security Insurance• Enacted in 1935 as a forced savings plan

intended to provide older Americans with a reliable source of income in retirement.

• Medicare provisions were added in 1966.• Federal Insurance Contributions Act (FICA)

– 6.2% of the first $106,800 income for retirement and disability

– 1.45% of total income for hospital insurance (Medicare)

– Equal payroll tax contributions (7.65%) from the employer and the employee

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Unemployment Compensation• Is an insurance program that provides

unemployment compensation as income for employees who lose their jobs.

– Jointly administered by federal and state governments.

– Tax rates for employers are based on location and employer history of layoff and dismissals.

– Level of benefits ranges 50-70% of base salary.

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Workers’ Compensation• Covers costs and lost income due to

injuries or illnesses that result from on-the-job events

– Administered by states

– Fully financed by employers

• Managing workers’ compensation costs:

– Use health care cost-containment strategies (audit bills, develop preferred providers, etc.)

– Implement job safety programs

– Combine with disability management

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Family and Medical Leave

• Family and Medical Leave Act (FMLA)– Covers employers with 50 or more workers– Required to grant up to 12 weeks of unpaid leave annually

• For birth/adoption of a child

• To care for immediate family member with serious health condition

• For employee with serious health condition

– Employee keeps preexisting health coverage and must be allowed to return to same or equivalent job.

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Voluntary Protection Programs

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Legal Considerations – Retirement Plans• Qualified Plan

– Covers a broad class of employees

– Receives favorable tax treatment from IRS

• Nonqualified plan

– Covers only select groups of employees (e.g., senior management)

– Doesn’t adhere to the strict tax regulations, doesn’t receive favorable tax treatment.

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Types of Pension Plans • Defined Benefit Plans

– Benefits are fixed but vary with age and length of service• Require funding to match benefit payouts.• Provide predictable income after

retirement• Penalize employee mobility• Are regulated by ERISA• Are being replaced by

defined contribution plans

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Types of Pension Plans (cont’d)• Defined Contribution Plans

– Contribution is fixed, payout is variable.

– Each employee has separate account.

– Employer may agree to match a percentage of employee contributions.

– Employer may contribute (contributory plan) or not (noncontributory plan).

• 401(k)s and 403(b)s– Employer and employee contribute to the fund.

– Employee makes investment decisions.

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Legal Considerations• Employee Retirement Income Security Act of 1974

(ERISA )– Protects benefits for workers covered by private pension plans;

prohibits unfunded plans

– Specifies provisions for vesting (time when employer’s contribution belongs to employee)

– Portability: transfer of retirement funds to IRAs

• Pension Benefit Guaranty Corporation (PBGC)– Administers an insurance program guaranteeing payment of

retirement benefits if a plan is terminated.

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Legal Considerations

Largest PBGC Claims by Firms in Default since 1975

Largest 5 Claims Year Claim Vested

Participants

1. United Airlines 2005 $7,093,803,951 122,541

2. Bethlehem Steel 2003 $3,654,380,116 97,015

3. US Airways 2003 $2,861,901,511 58,823

4. LTV Steel 2002 $1,959,679,993 80,961

5. National Steel 2003 $1,161,019,567 35,404

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Health Care Benefits and Services• Medical Care Costs

– Most employees underestimate the medical benefit’s cost to the employer and view medical care as an entitlement.

– Employers pay an average of $11,500 for a health insurance plan that covers a family of four.

– Out of every benefits and services dollar spent, a quarter goes to health care.

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Types of Health Insurance Plans

Conventional Insurance Plans

Conventional Insurance Plans

Health Maintenance Organizations

(HMOs)

Health Maintenance Organizations

(HMOs)

Point of Service Plans (POSs)

Point of Service Plans (POSs)

Preferred Provider

Organizations (PPOs)

Preferred Provider

Organizations (PPOs)

Consumer-Driven Plans

Health Savings Accounts (HSAs)

Consumer-Driven Plans

Health Savings Accounts (HSAs)

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Percentage of Enrolled Workers by Type of Health Care Plan

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Wellness Programs

• Wellness Programs– Proactive programs to prevent health problems

• May include:

– On-site exercise programs

– Stress-management training

– Assistance to stop smoking

– Weight-loss programs

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Employee Assistance Programs (EAPs)

• Assist employees with chronic personal problems that hinder job performance and attendance

• Employees referred to confidential counseling services

• Includes help with alcohol and drug dependencies, domestic problems, mental disorders, financial problems

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Paid Leave• Off-the-Job Paid Leave

– Holidays and Vacations • Vacation pay or payment in lieu of vacation• Deferral of vacation (banking) or loss of vacation days• Mandated vacations in other countries

– Other Paid Leaves• Volunteering, adoption, paternity and maternity leave, a day off for an

employee’s birthday, and sabbaticals

• On-the-Job Paid Leave– Rest periods, lunch periods, washup times, and clothes-changing and

getting-ready times

– Use of onsite physical fitness facilities

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Work-Life Benefits and Services• Scheduling Alternatives

– Empower employees to decide how, when, and where to get their jobs done.

• Flextime• Compressed workweeks• Telecommuting• Job sharing

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Prevalence of Work/Life Benefits and Services

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Work-Life Benefits and Services• Child Care Benefits and Services

– Scholarships for children of employees

– Subsidized tutoring– Care for sick children– Subsidized college educations– On-site or subsidized child care– Child care referrals– Extended leaves– Benefits for employees with

special needs children– Workplace schools– Employer-sponsored summer

camps

• Elder Care Services– Elder care referral services– Extended leaves beyond the

mandated FMLA requirement.– Emergency elder care services– Subsidies to help cover the cost of

elder care – Long-term care insurance.

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Work-Life Benefits (cont’d)• Domestic Partner Benefits and Services

– Employers provide domestic partner benefits and services to attract and retain talent, comply with the company’s nondiscrimination policy, and comply with local laws.

– Federal laws do not require employers to provide domestic partner benefits and services.

Compensation and Benefits Chapter 9 Chapter 9 Objectives 1.Describe the basic issues involved in...

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