© 2009 South-Western Cengage. All rights reserved. Chapter 8 Variable Pay and Benefits

8–2 Variable Pay: Incentives for Performance Variable PayVariable Pay  Compensation linked to individual, group/team, and/or organizational performance. Basic assumptions:Basic assumptions:  Some people perform better and are more productive than others.  Employees who perform better should receive more compensation.  Some of employees’ total compensation should be tied directly to performance.  Some jobs contribute more to organizational success than others.

8–3 Developing Successful Pay-for-Performance Plans Reasons for Adopting Pay or Incentive Plans:Reasons for Adopting Pay or Incentive Plans:  Link strategic business goals and employee performance.  Enhance organizational results and reward employees financially for their contributions.  Reward employees and recognize different levels of employee performance.  Achieve HR objectives, such as increasing retention, reducing turnover, recognizing training, or rewarding safety.

8–4 Figure 8-1 Examples of Incentives

8–5 Metrics Options for Variable Pay Plans

8–6 Figure 8-2 Categories of Variable Pay Plans

8–7 Individual Incentives: Piece-Rate Systems Straight Piece-Rate SystemsStraight Piece-Rate Systems  Wages are determined by multiplying the number of pieces produced by the piece rate for one unit. Differential Piece-Rate SystemsDifferential Piece-Rate Systems  Employees are paid one piece-rate for units produced up to a standard output and a higher piece-rate wage for units produced over the standard.

8–8 Individual Incentives (cont’d) BonusesBonuses  A one-time payment that does not become part of the employee’s base pay. Special Incentive ProgramsSpecial Incentive Programs  Numerous special incentive programs have been used to reward individuals, ranging from one-time contests for meeting performance targets to awards for performance over time.

8–9 Purposes of Special Incentives

8–10 Group/Team Incentives Distribution of Group/Team Incentives Timing of Group/Team Incentives Decision Making About Group/Team Amounts Design of Group/Team Incentive Plans

8–11 Conditions for Successful Group/Team Incentives

8–12 Organizational Incentives Profit SharingProfit Sharing  A system to distribute a portion of the profits of the organization to employees.  Primary objectives:  Increase productivity and organizational performance  Attract or retain employees  Improve product/service quality  Enhance employee morale  Drawbacks  Disclosure of financial information  Variability of profits from year to year  Profit results not strongly tied to employee efforts

8–13 Employee Stock Plans Stock Option PlanStock Option Plan  A plan that gives employees the right to purchase a fixed number of shares of company stock at a specified price for a limited period of time.  Number of firms offering this has declined due to changing laws and accounting regulations.

8–14 Employee Stock Plans Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP)  A plan whereby employees gain significant stock ownership in the organization for which they work.  Advantages  Favorable tax treatment for ESOP earnings  Employees motivated by their ownership stake in the firm  Disadvantages  Retirement benefit is tied to the firm’s performance

8–15 Types of Sales Compensation Plans Salary-OnlySalary-Only  All compensation is paid as a base wage with no incentives. Straight CommissionStraight Commission  Compensation is computed as a percentage of sales in units or dollars.  The draw system make advance payments against future commissions to salesperson. Salary-Plus-Commission or BonusesSalary-Plus-Commission or Bonuses  Compensation is part salary for income stability and part commission for incentive.

8–16 Figure 8-3 Sales Metric Possibilities

8–17 Benefits BenefitBenefit  An indirect compensation given to an employee or group of employees as a part of organizational membership.  Benefit costs are 30-80% of total payroll costs. Strategic Perspectives on BenefitsStrategic Perspectives on Benefits  Benefits reflect a firm’s philosophy of social and corporate citizenship.  Benefits influence recruitment and retention decisions.  Flexible benefits allow individuals to tailor their benefits to their own situations.

8–18 Benefits Administration Benefits DesignBenefits Design   How much total compensation, including benefits, can be provided?   What part of the total compensation of individuals should benefits constitute?   Which employees should be provided which benefits?   What expense levels are acceptable for each benefit offered?   What is being received by the organization in return for each benefit?   How flexible should the package of benefits be? HR Technology and BenefitsHR Technology and Benefits  Internet-based HR information systems allows employees to change their benefit choices, track their benefit balances, and seek benefit information on-line.

8–19 Benefits Benefits MeasurementBenefits Measurement  As a percentage of payroll  Expenditures per full-time equivalent employee  Costs by employee group  Administration costs  Health-care benefits costs per participating employee Benefits CommunicationBenefits Communication  Benefits Statements  Annual “personal statement of benefits” that translates the benefits into dollars to show their worth.

8–20 Types of Benefits Government mandatedGovernment mandated   Many mandated benefits that employers in the United States must provide to employees by law. VoluntaryVoluntary   Employers voluntarily offer other types of benefits to help them compete for and retain employees.

8–21 Figure 8-4 How the Typical Benefits Dollar Is Spent

8–22 Types of Benefits

8–23 Security Benefits Worker’s CompensationWorker’s Compensation  Benefits provided to persons injured on the job.  State laws require most employers to supply workers’ compensation coverage by purchasing insurance from a private carrier or state insurance fund or by providing self-insurance. Unemployment CompensationUnemployment Compensation  A Federal/state payroll tax that funds state unemployment systems.  Involuntary unemployment and actively seeking work is required for persons to claim benefit.

8–24 Increases in Health Benefits Costs Changing Co-Payment and Employee ContributionsChanging Co-Payment and Employee Contributions  Employees are now required to pay a portion of the cost of insurance premiums, medical care, and prescription drugs. Using Managed CareUsing Managed Care  Approaches that monitor and reduce medical costs using restrictions and market system alternatives.  PPO – Preferred Provider Organization  HMO – Health Maintenance Organization

8–25 Controlling Health-Care Costs Consumer-Driven Health (CDH) PlanConsumer-Driven Health (CDH) Plan  Also known as defined-contribution health plans,  Employers contribute a set amount to employees to cover their own health-related expenses. Advantages for EmployersAdvantages for Employers  More of the increases in health-care benefits are shifted to employees  The focus of controlling health-care usage falls on employees, who may have to choose when to use and not use health-care benefits.

8–26 Controlling Health-Care Costs Health Savings Accounts (HSAs)Health Savings Accounts (HSAs)  Often combined with high-deductible insurance plans  Both employees and employers can make contributions to an account.  Individual employees can set aside pre-tax amounts for medical care into an HSA.  Unused amounts in an individual’s account can be rolled over annually for future health expenses.  Incentives are included to encourage employees to spend less on health expenses. Health-Care Prevention and WellnessHealth-Care Prevention and Wellness

8–27 Health-Care Legislation Consolidated Omnibus Budget Reconciliation Act (COBRA) ProvisionsConsolidated Omnibus Budget Reconciliation Act (COBRA) Provisions  Requires that most employers (except churches and the federal government) with 20 or more employees offer extended health-care coverage to certain groups.   Employees who voluntarily quit   Widowed or divorced spouses and dependent children of former or current employees   Retirees and their spouses whose health-care coverage ends

8–28 Health-Care Legislation Health Insurance Portability and Accountability Act (HIPAA) of 1996 ProvisionsHealth Insurance Portability and Accountability Act (HIPAA) of 1996 Provisions  Allows employees to switch their health insurance plan from one company to another, regardless of pre- existing health conditions.  Health plans must continue to cover sick employees.  Require employers to provide privacy notices to employees.  Regulate the disclosure of protected health information without authorization.

8–29 Retirement Benefits Social Security Act of 1935Social Security Act of 1935  Established a system providing old age, survivor’s, disability, and retirement benefits.  Benefit payments are based on an employee’s lifetime earnings.  Administered by the Social Security Administration.

8–30 Pension Plans Pension PlansPension Plans  Retirement programs established and funded by employers and employees. Defined-benefit plansDefined-benefit plans  Employees are promised a definite pension amount based on age and length of service. Defined-contribution plansDefined-contribution plans  Employer makes an annual payment to an employee’s account with the benefit payout determined by the financial performance of the employee’s retirement.

8–31 Pension Plans (cont’d) Employee Retirement Income Security Act (ERISA)Employee Retirement Income Security Act (ERISA)  Regulates pension funds to assure their soundness.  Requires many firms to offer retirement plans to all employees if offered to any employees.  Accrued benefits must be paid to departing employees.  Requires minimum funding for IRS approval and purchase of plan termination insurance.

8–32 Financial and Family-Oriented Benefits Insurance benefitsInsurance benefits  Life, disability, long-term care, legal, etc. Financial benefitsFinancial benefits  Credit unions, purchase discounts, thrift plans, savings plans, stock investment plans Family-oriented benefitsFamily-oriented benefits

8–33 Family-Oriented Benefits Family Medical Leave Act (FMLA)Family Medical Leave Act (FMLA)  Employers with 50 or more employees  Employees who have worked at least 12 months and 1,250 hours in previous year  Employers must allow eligible employees to take up to a total of 12 weeks of unpaid leave during any 12- month period for:  Birth, adoption, or foster care placement of a child  Caring for a spouse, a child, or a parent with a serious health condition  Serious health condition of the employee

8–34 Family-Oriented Benefits Child-Care AssistanceChild-Care Assistance Benefits for Domestic PartnersBenefits for Domestic Partners  Domestic Partners or Spousal Equivalents

8–35 Time-Off and Other Miscellaneous Benefits Work breaksWork breaks Holiday payHoliday pay Vacation payVacation pay Sick leaveSick leave Paid-time-offPaid-time-off Leaves of AbsenceLeaves of Absence  Family Leave  Military Leave  Election Leave  Jury-duty Leave  Funeral Leave