Chapter 9 Compensation and Benefits

Chapter 9 Objectives Describe the basic issues involved in developing a compensation strategy Discuss how organizations develop a wage and salary structure Identify and describe the basic issues involved in wage and salary administration Discuss the basic considerations in understanding benefit programs Identify and describe mandated benefits Identify and describe nonmandated benefits 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.

Influences of Compensation on Attitudes and Behavior – Equity Theory 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.

Influences of Compensation on Attitudes and Behavior – Equity Theory 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.

Establishing Pay Rates Within an Organization Employees believe their pay is equitable when they perceive these circumstances: Internal consistency: Pay is fair relative to the pay coworkers in the same organization receive. External competitiveness: Pay is fair relative to the pay received by workers in other organizations who hold similar positions. Employee contributions: Pay fairly reflects their input to the organization.

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

Establishing Pay Rates Within an Organization 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.

Establishing Pay Rates Within an Organization 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.

Establishing Pay Rates Within an Organization 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.

Establishing Pay Rates Within an Organization 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.

Establishing Pay Rates Within an Organization 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.

Establishing Pay Rates Within an Organization 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.

Establishing Pay Rates Within an Organization 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.

Establishing Pay Rates Within an Organization 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.

Legal Constraints on Pay Practices 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.

Legal Constraints on Pay Practices 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.

Legal Constraints on Pay Practices Pay and discrimination The Equal Pay Act (EPA) The gender pay gap Comparable worth and the law

Legal Constraints on Pay Practices 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.

Legal Constraints on Pay Practices 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.

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

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.

The Strategic Importance of Benefits and Services Recruiting and Retaining Talent Controlling Costs of Benefit and Services Achieving Business Objectives Strategic Challenges

Controlling Benefit and Services Costs The Strategic Importance of Benefits and Services 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 12–29

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

The Strategic Importance of Benefits and Services Recruiting and Retaining Talent 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. 12–31

Mandatory Protection Programs Social Security Insurance Unemployment Compensation Benefits Workers’ Compensation and Disability Insurance Family and Medical Leave

Mandatory Protection Programs 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 12–33

Mandatory Protection Programs 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. 12–34 12–34

Mandatory Protection Programs 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 12–35 12–35 12–35

Mandatory Protection Programs 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. 12–36 12–36 12–36

Voluntary Protection Programs 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. 12–37 12–37 12–37

Voluntary Protection Programs 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 12–38 12–38 12–38

Voluntary Protection Programs 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. 12–39 12–39 12–39

Voluntary Protection Programs 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. 12–40 12–40 12–40

Voluntary Protection Programs 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 $2,861,901,511 58,823 4. LTV Steel 2002 $1,959,679,993 80,961 5. National Steel $1,161,019,567 35,404 12–41 12–41 12–41

Voluntary Protection Programs 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. 12–42 12–42 12–42

Voluntary Protection Programs Types of Health Insurance Plans Conventional Insurance Plans Consumer-Driven Plans Health Savings Accounts (HSAs) Health Maintenance Organizations (HMOs) Point of Service Plans (POSs) Preferred Provider Organizations (PPOs) 12–43 12–43 12–43

Voluntary Protection Programs Percentage of Enrolled Workers by Type of Health Care Plan 12–44 12–44 12–44 12–44

Voluntary Protection Programs 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 12–45 12–45 12–45 12–45 12–45

Voluntary Protection Programs 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 12–46 12–46 12–46 12–46 12–46

Voluntary Protection Programs 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 12–47 12–47 12–47 12–47 12–47

Voluntary Protection Programs 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 12–48 12–48 12–48 12–48 12–48

Voluntary Protection Programs Prevalence of Work/Life Benefits and Services 12–49 12–49 12–49 12–49 12–49

Voluntary Protection Programs 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. 12–50 12–50 12–50 12–50 12–50

Voluntary Protection Programs 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. 12–51 12–51 12–51 12–51 12–51