Compensation and Benefits OBHR E-100 November 6, 2007

© Houghton Mifflin Co. All rights reserved. Figure 11.1 Components of the Compensation System

Types of Equity External Equity: Comparisons of similar jobs in different organizations Internal Equity: Relationship among jobs within a single organization Individual Equity: Comparisons among individuals in the same job within the same organization

External Equity Salary surveys Within Industry – products and services Geographical Occupational – experience and skills Pay level policy Match, lead, lag the market

Internal Equity Job evaluation Job ranking Job classification or grading Point method Compensable factors – dimensions of the job that will be the basis for paying employees e.g. skills, knowledge, abilities, working conditions Hay a widely used system based on “know-how, problem-solving, and accountability”

Individual Incentives Commissions Bonuses Skill-Based Pay Merit Pay

Variable Pay Goal: Reward Employees Who: Understand the goals of the organization Know their role in accomplishing these goals Accept that their rewards are related to their contribution to the goal attainment of the organization

Motivation – Expectancy Theory Expectancy – Individual perception that effort will result in desired performance. Instrumentality – Perceptions of the probability that performance will result in rewards. Valence – The subjective value or desirability of the award.

Barriers to Pay-for-Performance Success Nature of the Task Performance Measurement Amount of Payout

Examples employees not having these understandings (being “misaligned”) What is being signaled to co-workers when well- intentioned but ineffective employees are given merit increases similar to more effective employees? What does it say when executives are given large bonuses after the organization has had a below- average year, and only small increases are given to other workers? What is being signaled if bonuses are paid even when the organization did not earn the profits necessary?

Benefits Mandatory programs Optional programs

Mandatory Programs Social Security Unemployment Compensation Workers’ Compensation

Social Security ( Mandatory for most of working population Provides Limited income in retirement Survivor benefits for Spouses Unmarried children up to 18, 19 if in school Children any age if disabled before age 22 Parents over 62 Medicare – separate health insurance program for those over 65 (

Issues with Social Security Changing Demographics (

Unemployment Compensation Temporary income for out-of-work employees Recipients must be looking for work Income is at the rate of 50 to 80% of normal pay Managed by each state in accordance with Federal guidelines

Workers’ Compensation No fault disability insurance for workers injured or killed on the job Employers pay premiums based on worker injury experience Established in accordance with state laws so provisions vary Is the only recourse for workplace injuries for employees

Optional Benefit Programs Health Life Disability Retirement Paid Time Off Others

Issues in Health Care Design and Cost Containment Deductible Coinsurance Coordinating Benefits Preferred Provider Organization (PPO) Health Maintenance Organization (HMO) Health Savings Accounts – High Deductible Plans

© Houghton Mifflin Co. All rights reserved. Figure 13.3 Percent Change in Health Spending Compared to Other Indicators Source: The Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits 2004 Annual Survey (Menlo Park, CA: Henry J. Kaiser Family Foundation, 2004).

Types of Retirement Plans Defined Contribution Benefits are a function of contributions plus investment gains or losses 401(k) or thrift plans Tax-deferred contributions Defined Benefit Benefits based on a formula that includes length of service and average earnings

Paid Time Off Compensation for Time Not Worked Holidays Vacation Sick Leave Personal days Other Leaves (paid and unpaid)

Other optional benefit programs Tuition assistance Work / life Child care Elder care Employee assistance program Discounts

© Houghton Mifflin Co. All rights reserved. Table 13.4 Most Popular Family Workplace Initiatives Source: Adapted from Society for Human Resource Management, “2001 Benefits Survey,” April (Available at:

Professional Development World at Work Formerly the American Compensation Association Intensive Certification Programs for Compensation Professionals – Training & Testing Publications