Copyright © 2015 by HRCP, L.C. Compensation and Benefits PHR 19% - SPHR 13%

Copyright © 2015 by HRCP, L.C.

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Compensation Compensation and Benefitsand Benefits

PHR 19% - SPHR 13%PHR 19% - SPHR 13%


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Why People Work


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Compensation Motivating

Legal

AdequateEquitable

Secure

Cost/benefit effective

Strategic Objectives of Compensation

Compensation Objectives


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Wage Level Decision

How much should we pay our employees? To attract an adequate supply of labor. To keep present employees reasonably satisfied

with their compensation. To avoid costly turnover.


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Factors Influencing Wage Level Most significant factors influencing wage levels:

Organizational Size

Unionization

Productivity (Ability to Pay)


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Wage Surveys

Four conditions

1.Reciprocity2.Anonymity3.Low Cost4.Timeliness


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Wage Structure Decision How much should each job be paid relative to other jobs

in the organization? Based on the job demands, not on how well the job

holder performs. The wage structure must allow for individual variances

based on performance, experience, and seniority. The major objective of the wage-structure decision is to

provide equal pay for jobs of equal worth and an acceptable set of pay differentials for jobs of unequal worth.


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Job Evaluation The systematic approach of determining the relative

worth or value of each job in an organization. The purpose of job evaluation is to eliminate pay inequities and create a wage structure that identifies appropriate pay ranges for different jobs.

The relative worth of each job is established by identifying factors that define “worth” and by comparing the requirements of each job with these factors.


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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.Advantages of job-ranking method:It is the simplest of all the evaluation methods and it requires little time or paperwork.Disadvantages of job-ranking method:The differentials between the ranks are assumed to be equal when they usually are not.Evaluating each job as a whole is not conducive to a careful analysis and cannot provide an accurate measurement of worth.Difficult to use in organizations with large numbers of jobs.


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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.Specifying a number of grades and writing broad descriptions of the types of jobs in each of the grades. Each job description is compared with the descriptions for the grades.The job grades range from high to low, and each grade has a verbal description and examples of the kinds of jobs that fit into it.Advantage: It standardizes the wages for similar jobs and maintains pay differentials between jobs within an extremely large organization.Disadvantage: Its stability makes it unresponsive to such factors as regional wage differences and labor-market variances.


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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. The point method consists of the following steps:

1.Identify key jobs.

2.Identify job factors used to determine pay levels.

3.Weight the factors according to their contribution to the overall worth of the job.

4.Divide each job into degrees that range from high to low and assign points to each degree.

5.Reach a consensus about degree assignments.

6.Develop a wage curve using key jobs.


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Sample Chart

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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X

Y

Pay $

Points

Wage Curve Based on 15 Key Jobs

Broadbanding


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Factor Comparison Method

1. Identify key (benchmark) jobs

2. Identify job factors

3. Rank jobs

4. Assign monetary amounts to each job on each

factor

5. Compare unique jobs with key jobs


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Hay Guide Chart Profile

The Hay Guide Chart-Profile Method is 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. This method uses three compensable factors:• Know-how• Problem solving• Accountability

Because the compensable factors of the Hay Method are defined so broadly and generally, this system can be used for many different industries and many different jobs.


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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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Pay Grades

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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Compa-ratio

A compa-ratio is a number that is calculated by dividing a person’s wage rate by the midpoint of the pay range for that grade and multiplying it by 100. This number provides a standardized index for assessing how much people should be paid relative to the job they hold. People should have higher compa-ratios if they are higher performers or if they have more seniority. Comparisons between the compa-ratios of men versus women can test for evidence of gender discrimination. The compa-rations should be about the same unless one group has substantially more seniority or higher performance. Likewise, the average compa-ratio of one race should not be substantially different than the average compa-ratios of other races unless there are differences in seniority or performance.


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Pay Adjustments

Administrative problems may arise when the wage structure has to be adjusted due to inflation, legislation or internal changes within the organization, such as job redesign. What are some of the issues involved in adjusting the wage curve?


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Individual Pay Decision

• Performance: Performance differences are clearly the most reasonable and well-accepted justification for paying differential amounts.

• Experience: A common justification for giving some employees more money is that they have more experience.

• Seniority: Pay differentials based on seniority or length of service are found in many compensation systems.

• Potential: Occasionally, organizations pay higher than average wages to individuals who demonstrate outstanding potential.


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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 Factors that Effect Compensation

InflationInterest ratesIndustry competitionForeign competitionEconomic growthDemographic trends


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Demographic Trends

The labor market is primarily influenced by five demographic forces:

birthrates participation rates immigration education unemployment


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Unemployment Levels

How does an increase or decrease in unemployment rates influence a company's compensation system?


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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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Expectancy Theory

The basic idea of Expectancy Theory is that motivation is determined by the outcomes people expect to occur as a result of their actions.


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When Employees Believe that Pay is Inequitable1. People may alter their inputs. 2. People may alter their outcomes.3. People may cognitively distort their inputs or outcomes.4. People may distort the inputs or outcomes of others.5. People may change objects of comparison.6. People may leave the field.


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Pay for Performance

Financial incentives that are directly tied to productivity

Individual Group Company-wide incentive plans Some combination of all three.


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Merit Increase Guidelines : Fixed Increase or Discretionary Increase

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.


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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 %

Compa-ratio


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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

Piece Rate Plans


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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.

If a worker is paid $12.00 per hour and the task usually requires eight hours, the worker receives an additional $4.00 per hour for each hour saved under eight hours.

A worker who completes an eight-hour task in seven hours receives a $4.00 premium.


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Restriction of Output

Soldiering, gold bricking, or rate restriction Establishes low level of performance as a group

norm. Individuals within the group police each other’s

behavior and provide negative sanctions and peer group pressure on individuals who exceed the group standard.

Supervisors can avoid restriction of output by confronting groups with data that show how increased production reaps employee financial rewards and the success of the organization.


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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

Restriction of Output


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Individual Incentive Plans

Piecework and the standard hour plans -individuals control their own rates of performance, independent, and productivity measurable.

Commission – independent, sales measureable Merit pay - supervisor subjectively evaluates the

performance and decides which ones are better performers.


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Skill and 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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Skill/Knowledge Based Pay

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

weekend and holiday pay


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Group Incentives

Group incentive systems are preferred when:• individuals are required to work together, • group productivity can be determined more

easily than individual productivity• high level of cooperation is required• groups are cohesive.


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Profit Sharing

Cash

Provides greater motivation because employees immediately see that their efforts have created greater compensation

Deferred Not taxed immediately Money invested Will be taxed at a later

time Help develop retirement

plan


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Gainsharing

Scanlon Plans

Rucker Plans

Improshare


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Employee Stock Ownership Plan An ESOP is formed by creating a trust, into

which a company makes tax deductible contributions of cash or stock.

The proceeds are used to buy shares of the company’s stock which are allocated to individual employee accounts.

Employees who have an ownership interest in a firm are more concerned about the efficiency and profitability of the firm than employees who do not share in the ownership.


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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%

Base Pay and Incentive Pay Balance


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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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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.


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FASB

Financial Accounting Standards Board – 2006

Must report the fair value of their stock options as

an expense on their financial statements for tax

purposes.


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Employee BenefitPrograms

Part 2


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Mandatory Wage Replacement Benefits1.Social Security 2.Workers’ Compensation – Unit 6

3.Unemployment Compensation – Unit 6


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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

A pension is the income individuals receive during retirement as a deferred payment for past services rendered.


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Individual Savings PlansThe most popular savings

plans include:

• 401 (k) Plans• 403 (b) Plan• IRAs• SEPs• Keogh (H.R. 10)• SIMPLE• Roth IRAs• DB/k

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.

Requires employers to send timely notices to employees regarding their right to elect different investments. Notice must be provided at least 30 days before the participants are eligible to elect new investments for contributions automatically invested in employer stock.

Created the DB/k, is available only to employers with fewer than 500 employees starting in 2010.


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Health Insurance

Medical InsuranceDental InsuranceDependent Care


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Accidental Death or Dismemberment InsuranceAccidents and illnesses that result in death are the most serious personal losses, but a permanent disability can also create a serious financial strain.


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Life Insurance

Income Replacement

Life insurance and income-continuation plans help to alleviate difficulties.


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PAID FOR TIME NOT WORKED Paid holidays

Paid vacations

Paid personal leave

Union activities

Reporting time

Sabbatical leaves

Paid funeral leave

Jury duty

Military Leave


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Recognition Awards

Organizations use a variety of recognition programs to influence the attitudes and behaviors of employees.

• cash awards• stock• jewelry• clothing• theater tickets• dinner for two• lunch• parties• time-off from work• plaques/pictures


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Health Care Benefits

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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HMO

The cost is fixed regardless of the frequency, extent, or kind of health service that has been furnished; and the cost is fixed under a community rating system or a group rate based on an estimate of how much it is likely to cost to provide services to the employee group. Employees can obtain basic health services as frequently as they need them at a fixed monthly cost.


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Consumer-Directed Health Care

Programs that have been approved by Congress and qualify for special tax treatment.

Flexible Benefit Plans

Flexible Spending Arrangements (FSA)

Health Reimbursement Arrangements (HRA)

Health Savings Accounts (HSA)

Private Health Exchange


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Flexible Benefits

Advantages Select benefits that are

for their situations - age, marital status, number of dependents, and physical health.

Employees are more satisfied with the program.

Better informed about the benefits they have.

Disadvantages Administrative

procedures are complex. Flexibility is limited by the

tax laws; employees may receive cash refunds, but they are treated as taxable income.

Cost of benefits may increase.


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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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Cost Benefit Analysis & Cost ManagementMethods used for measuring and analyzing the costs of employee benefit plans:

• Annual cost method• Cost per employee per year• Percent of payroll• Cents-per-hour


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Employee Retirement Income and Security Act

Under ERISA, welfare benefit plans generally include any plan, fund, or program maintained by an employer.


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ERISA Covered Programs

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 BenefitPrograms

Employers can use a variety of communication strategies, including employee handbooks, online benefits portals, agent enrollment sessions, employee newsletters, lunch-and-learn sessions, customized benefits booklets, and frequently-asked-questions materials.


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Summary Plan Document

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 Laws

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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Compensation Laws

Copeland Act & Anti-Kickback Law

The Copeland Act was passed during the Great Depression to prohibit the unfair treatment of employees who needed jobs so desperately that employers could take advantage of them, i.e., deductions that a federal contractor can make from employees’ wages. Contractors have to demonstrate that their payroll deductions are proper, and they have to file weekly statements showing the wages actually paid and the deductions made.

The Anti-Kickback Law was passed in 1948 as an amendment to the Copeland Act, making it illegal for a federal contractor to threaten or otherwise induce employees to give part of their rightful compensation to the contractor.


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Compensation Laws

Walsh-Healey Act (Public Contracts Act)

Extended the Davis-Bacon Act to non-construction federal contractors.

Sets basic labor standards and minimum-wage rates for all work done under a federal contract exceeding $10,000. The minimum-wage standards are established by the secretary of labor rather than local prevailing rates.

The act requires that overtime be paid at the rate of one-and-one-half times the base rate for work exceeding 40 hours per week.


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Compensation Laws

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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Compensation Laws

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 withBonus

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 Paidon 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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Minimum Wage

The purpose of minimum wage standards are to ensure a living wage for all laborers and to reduce poverty. The laws are intended to help low-income families, females, and minority workers.


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Fair Labor Standards Act

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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Equal Pay Act

Permissible Wage Differences• A bona fide seniority system, where wages or

salaries are based on length of service.• A merit pay system where pay is determined by

legitimate performance measures.• A system that measures earnings by quantity or

quality of production.• A differential based on any factor other than

gender, such as differentials between regular and temporary employees or geographic differences.


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Comparable Worth Controversy

Should employers be required to establish the value or worth of all jobs?

A point method of job evaluation can eliminate pay disparity.

Several comparable worth cases have gone before the courts. The courts recognize the theory of comparable worth but have not been willing to require employers to adopt common criteria for all jobs.


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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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FMLA

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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HIPAA

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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Affordable Care ActThe Patient Protection and Affordable Care Act (PPACA), commonly called the Affordable Care Act (ACA) or colloquially Obamacare, is a United States federal statute signed into law by President Barack Obama on March 23, 2010


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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.


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The Federal Wage Garnishment Act Restricts the amount of an

employee’s disposable earnings that can be deducted to pay a garnishment. The law limits the amount that can be garnished in one week to not more than 25 percent of an employee’s disposable weekly earnings, or the amount that is 30 times the FLSA minimum wage-whichever is less.


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ERISA Terms to Know

Employee Retirement Income Security Act

Designed to ensure that employees covered under

private pension plans & employee welfare benefit plans would receive the

benefits promised.

• Eligibility • Vesting• Portability• Funding• Fiduciary • Reporting• Disclosure• Compliance testing• Contributory• Noncontributory


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ERISA Reports

Summary plan description

Announcements of material modifications

Summary annual report

Plan document Annual report

Vesting statement Plan modifications Financial statements,

an actuarial report, and an insured plan report


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QDRO

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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COBRA

Consolidated Omnibus Budget Reconciliation Act

COBRA was designed to protect people who leave an employer from losing their benefit coverage.


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TAXES

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.

Federal, state, and local income taxes

employee’s share of Social Security tax.

Workers’ compensation taxes

Unemployment taxes Social Security tax.


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Highly Compensated Employees (HCE’s)• Owned more than five percent of the capital or profits in the employer’s business at any time during the year or the preceding year, or• For the preceding year, received compensation of more than $100,000 and was in the top 20 percent of the business’ employees when ranked by compensation.


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Independent ContractorsIRS 20-Factor Test

1. Instructions

2. Training

3. Integration

4. Personal Services

5. Assistants

6. Length of Relationship

7. Work Hours

8. Amount of Work

9. Location

10. Sequence of Work

11. Reports

12. Payment

13. Expenses

14. Tools

15. Investment

16. Profit

17. Multiple jobs

18. Availability

19. Termination

20. Liability


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Compensation Budgets

Bottom-up Approach

Requires supervisors to forecast the pay increases they will recommend for each of their subordinates during the coming plan year.

Top-down Approach

Estimating the pay increase budget for an entire organization and then allocating an amount to each manager or supervisor.


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How to Calculate the Costof Labor Cost Management

To determine a firm’s labor costs:

# of Employees

X

(Average Cash Compensation + Average Benefit Cost)


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International Compensation

Expatriate Pay and Allowances

Additional compensation - base salary, premiums for foreign service and hardship, and allowances for cost of living, housing, storage, and taxes.

Most companies pay at least an extra $10,000 a year for accepting the foreign post, plus another $10,000 if the assignment is considered hazardous or a hardship.

Living quarters. Goods and services/a car/travel for employees and their

families Increased tax liability.

Documents

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