Compensation and Benefits.docx

Chapter 6 Compensation and Benefits 0635000Section 1 Learning Objective 08636000 Be able to explain the goals of a compensation plan. 0635000Section Notes 08636000 Most of us would not do a job without getting paid! That’s what this chapter is about, creation of compensation packages. WorldatWork offers several certifications in the area of compensation: Certified Compensation Professional (CCP) Certified Benefits Professional (CBP) Certified Sales Compensation Professional (CSCP) Certified Executive Compensation Professional (CECP) These certifications involve taking a multiple-choice exam online or at one of the WorldatWork testing locations. The exams test for knowledge, experience, and skills in each of the compensation certification areas and can be a valuable asset to you when applying for HR positions. The goals of a compensation plan should be to attract the best candidates, motivate people to stay with the company, and improve morale and satisfaction. Compensation should also reward performance. Happier employees usually mean happier customers, and happier employees are fairly compensated. Organizational growth and manufacturing can create higher profitability. Indirect cost savings might include savings on disability claims or sick days. 0635000Key Takeaways 08636000 A compensation package is an important part of the overall strategic HRM plan, since much of the company budget is for employee compensation. A compensation package can include salary, bonuses, health-care plans, and a variety of other types of compensation. The goals of compensation are to attract people to work for your organization and to retain people who are already working in the organization. Compensation is also used to motivate employees to work at their peak performance and improve morale. Employees who are fairly compensated tend to provide better customer service, which can result in organizational growth and development. 0635000Exercise and Solution 08636000 1. Visit a website that gives salary information for a variety of jobs, such as www.salary.com. Using the search box, type in your ideal job and research salary information. What is the median salary for the job you searched? What is the lowest salary you would be willing to accept for this job? At which point would you be completely satisfied with the pay for this job? Answer: Answers will vary greatly for this question. Consider asking students to share their findings in small groups. Or, if you are able to use a computer lab, this would be a good in-class activity. When discussing this question, you can make the point that determining compensation for employees is not a willy-nilly process, that every salary posted is a combination of strategic thinking and tie in to the company’s overall objectives. 0635000Extra Discussion Question 08636000 Discuss at least three indirect cost savings by implementing a fair compensation plan. Answer: When employees feel they are paid fairly, there is less overall turnover in the company, fewer sick days are taken and disability claims might be lessened. All of these costs can be high, so ensuring a fair (in the employee’s view) compensation plan is an important step to making sure these types of costs are reduced. 0635000Key Term 08636000 compensation package Includes all aspects of how employees are rewarded for their work, such as pay, benefits, bonuses, and 401(k) plans. 0635000Section 2 Learning Objectives 08636000 1. Be able to explain the internal and external considerations of compensation package development. 2. Know how to develop a compensation philosophy. 0635000Section Notes 08636000 A company should first determine the organizations philosophy regarding compensation. For example: From the employee’s perspective, what is a fair wage? Are wages too high to achieve financial health in your organization? Do managers and employees know and buy into your compensation philosophy? Does the pay scale reflect the importance of various job titles within the organization? Is your compensation good enough to retain employees? Are state and federal laws being met with your compensation package? Is your compensation philosophy keeping in line with labor market changes, industry changes, and organizational changes? Other considerations before developing a compensation strategy might include the regional differences in cost of living. If giving a lower salary than industry and regional average, what additional benefits will be offered to make up the differences? Many companies use set pay scales; is this a viable option for your organization? HR professionals should also look at the balance of salary versus other rewards. Most companies have a written compensation policy. It can include a market compensation policy, which pays what the market (regional and job type) pays. A market plus policy means that a percentage of market plus some will be paid. In a market minus philosophy, a percentage less than the market is paid. Internal factors when choosing a policy might include the employer’s ability to pay, the type of industry, the skills necessary to perform the job and the presence of unions and union contracts. External factors might include the economic state of the country, unemployment rates, surpluses of employees. 0635000Key Takeaways 08636000 Before beginning work on a pay system, some general questions need to be answered. Important starting points include questions ranging from what is a fair wage from the employees’ perspectives to how much can be paid but still retain financial health. After some pay questions are answered, a pay philosophy must be developed based on internal and external factors. Some companies implement a market compensation philosophy, which pays the going market rate for a job. Other companies may decide to utilize a market plus philosophy, which pays higher than the average. A company could decide their pay philosophy is a market minus philosophy, which pays less than the market rate. For example, an organization may decide to pay lower salaries but offer more benefits. Once these tasks are done, the HR manager can then build a pay system that works for the size and industry of the organization. 0635000Exercise and Solution 08636000 1. Think of your current organization or a past organization. What do you think their pay policy is/was? Describe and analyze whether you think it was or is effective. If you haven’t worked before, perform an Internet search on pay policies and describe/analyze the pay policy of an organization. Answer: If a student has never worked before, ask them to consider the pay policy of a company or business they frequent often. The possible answers might include a market compensation policy, market plus philosophy, or market minus philosophy. Effectiveness factors might include the ability to retain employees, motivate employees, and the number of sick days employees take. 0635000Extra Discussion Question 08636000 Research salary for an administrative assistant in San Francisco and the salary in Write down the salaries in both cities. Why might they are different? Answer: When I researched this on salary.com, administrative assistants in San Francisco had a median salary of $43,000, while in Savannah, GA, the median was $32,000. Reasons for differences include the labor supply in that area, the cost of living in the region, and the economic situation. 0635000Key Terms 08636000 market compensation policy A compensation policy that pays similar to what the market offers. market plus philosophy A compensation policy that determines the going rate and adds a percentage to the market rate, so pay is higher than the market. market minus philosophy A compensation policy that determines the going rate and subtracts a particular percentage, so pay is less than the market. 0635000Section 3 Learning Objectives 08636000 1. Explain types of job evaluation systems and their uses. 2. Be able to define and discuss the types of pay systems and factors determining the type of pay system used. 3. Know the laws relating to compensation. 0635000Section Outline 08636000 A job evaluation system determines which job is more important than other job, and pay is set based on this. In a paired comparison system, individual jobs are compared with every other job based on a ranking system. Scores are then added and it is a quick way to see the relative value of one job versus another. In some organizations, such as the Navy, a job classification system is used. With this type of system, every job is classified and grouped based on the skills and knowledge required. In a point factor system, the value of a job is calculated by points assigned to specific skills needed for a job and points are given for compensable factors. For example, knowledge, autonomy and supervision might be compensable factors. In the Hay profile method, specific statements are introduced and each statement is given a point value within three categories (knowhow, problem solving and accountability). These statements are used to create the job description and the pay system. After performing a job evaluation, we can begin to hone in on the specific pay systems. Many organizations have a process where they create pay grade levels and group different jobs together, providing a pay range for the specific job. The going rate model, an analysis of the specific job is performed and is considered when creating the pay package. In a management fit model, each new hire salary decisions are left up to the manager. The downside to this model may be potential discrimination and halo effects. Other considerations might include skill-based pay (pay is based on skills as opposed to job title), competency based pay (rather than looking at specific skills, traits or characteristics are looked at when determining pay), broadbanding (similar to a pay grade system, but all jobs are assigned a specific pay category) and a variable pay system (base pay, but certain achievements will relate directly to pay). Pay theories related to compensation include the equity theory. This means that employees will compare their pay and inputs to their coworkers. The expectancy theory says that employees will put in as much effort as reward they expect to receive. The reinforcement theory says that if high performance is followed by a reward, desired behavior will likely occur in the future. When implementing an incentive pay program, the program should be easy to understand and communicated to all employees. The goals that must be reached to obtain the incentive should be challenging, but not so challenging it is unattainable. Some of the laws relating to pay are shown in this slide. Comparable worth refers to the fact that people should be paid similar for similar work performed. The Equal Pay Act (1963) makes it illegal to pay different wages to men and women if they are performing different jobs. Fair Labor Standards Act (FLSA) was established in 1938 and sets minimum wage for jobs, overtime laws and child labor laws. The minimum wage can be higher than the federal requirement in some states. The Federal Unemployment Tax Act provides payments of unemployment compensation to workers who have lost their jobs. 0635000Key Takeaways 08636000 ??job evaluation system should be used to determine the relative value of one job to another. This is the first step in setting up a pay system. ? Several types of pay systems can be implemented. A pay grade system sets up specific pay levels for particular jobs, while a going rate system looks at the pay through the industry for a certain job title. Management fit gives maximum flexibility for managers to pay what they think someone should earn. ? HR managers can also develop pay systems based on skills and competency and utilize broadbanding, which is similar to pay grades. Another option might include variable pay. ? There are several motivational theories in regards to pay. First, the equity theory says that people will evaluate their own satisfaction with their compensation by comparing it to others’ compensation. The expectancy theory says people will put in only as much work as they expect to receive in rewards. Finally, the reinforcement theory says if high performance is followed by a reward, high performance is likely to happen in the future. ? Other pay considerations include the size of the organization, whether the company is global, and the level of communication and employee involvement in compensation. HR managers should always be aware of what others are paying in the industry by performing market surveys. ? There are several laws pertaining to pay. Of course, the EEOC ensures that pay is fair for all and does not discriminate. FLSA sets a minimum wage and establishes standards for child labor. FUTA requires employers to pay unemployment taxes on employees. FECA ensures that federal employees receive certain benefits. 0635000Exercises and Solutions 08636000 1. Name and describe three considerations in developing a pay system. Which do you think is best? Answer: Considerations include the company philosophy, the job evaluation system (paired comparison, job classification, Hay profile method) used, and theories related to pay systems (equity theory, reinforcement theory and expectancy theory). Which pay theory do you think is the most important when developing your pay system? Why? Answer: Answers will vary based on opinion. The three theories discussed in the chapter include the equity theory, reinforcement theory, and expectancy theory. Visit http://www.dol.gov/dol/topic/wages/minimumwage.htm (please note, sometimes web address change so you may need to search for the information), which publishes minimum wage data for the United States. View the map and compare your state with the federal minimum wage. Is it higher or lower? Which two states have the highest minimum wage? The lowest? Answer: Information may change from this writing. As of October 2011, Washington State had the highest minimum wage at $8.67 per hour. Oregon has a minimum wage of $8.50 per hour. Federal law supersedes state minimum wage laws, however the lowest are Georgia and Wyoming at $5.15 per hour. 0635000Extra Discussion Question 08636000 What are the desirable traits of incentive compensation plans? Rank them based on your opinion, from the most important to the least important. Answer: The desirable traits include communication of the plan, the plan is attainable but challenging, easily understandable and tied to company goals. The ranking will depend on student opinion; however, all are probably equally important from an incentive program success perspective. 0635000Key Terms 08636000 job evaluation The process of determining the relative worth of jobs to determine pay structure. paired comparison Individual jobs are compared with every other job, based on a ranking system, and an overall score is given for each job, determining the highest valued job for pay decisions. job classification system A job evaluation system in which every job is classified and grouped based on the knowledge and skills required for the job, years of experience, and amount of authority for a particular job. point-factor system A job evaluation system that determines the value of a job by calculating the total points assigned to compensable factors. compensable factors The aspects of a job that are assigned points in a point-factor system. Hay profile method A proprietary job evaluation method that focuses on three factors called know-how, problem solving, and accountability; this method is most applicable to management positions. pay grading The process of setting the pay scale for specific jobs. pay grade levels A compensation model that looks at all jobs within the organization and assigns each job a pay level or pay grade. delayering and banding Similar to pay grade levels, but this structure offers more flexibility in that there are fewer pay grades, called bands, which allows for greater flexibility. going rate model In this pay model, analysis of the going rate for a particular job is the basis for determining what people within the organization should be paid. management fit model In this model, each manager makes a decision about who much a new hire should be paid. equity theory A theory that says people will evaluate their own compensation by comparing their compensation to others’ compensation. expectancy theory The expectancy theory says that employees will put in as much work as they expect to receive reward for. reinforcement theory A theory that says that if high performance is followed by some reward, then it is more likely that the desired behavior will occur in the future. comparable worth States that people should be given similar pay if they are performing the same type of job. Equal Pay Act Passed in 1963, the act makes it illegal to pay different wages to men and women if they perform equal work in the same workplace. Fair Labor Standards Act (FLSA) A federal law established in 1938 that sets a minimum wage for jobs and other conditions for pay. Federal Unemployment Tax Act (FUTA) FUTA provides for payments of unemployment compensation to workers who have lost their jobs. Federal Employees Compensation Act (FECA) Provides federal employees injured in the performance of their jobs compensation benefits, such as disability. 0635000Section 4 Learning Objective 08636000 1. Explain the various types of benefits that can be offered to employees. 0635000Section Outline 08636000 A mandated compensation is required to be paid by the Federal Government. They include Social Security, Medicare, unemployment, and workers’ compensation. The percentages paid per employee can vary from year to year. Cobra or (Omnibus Budget Reconciliation Act) requires companies to allow employees to extend their group health coverage for 36 months. Incentive programs can include commissions, bonuses, profit sharing, stock options, team pay, and merit pay. Medical insurance includes providing healthcare, dental, and long- and short-term disability. Types of medical plans include fee-for-service plans, where employees pay for medical services and are reimbursed at the benefit level. An HMO plan usually has greater coverage, but limits employees’ ability to see a doctor of their choosing. Sometimes a co-payment is required. In a PPO plan, the medical plan allows employees to see doctors outside of the network, and allows more freedom for the employee. Disability insurance provides income to individuals if they are injured or need long term care resulting from an illness. 401(k) plans are when a set dollar or percentage of salary is set aside for employees retirement. Usually, the employer matches a specific amount. Paid time off can include paid holidays, sick leave, paid vacation or any combination of the three. 0635000Key Takeaways 08636000 ? Before beginning work on a pay system, some general questions need to be answered. Important starting points are questions such as what is a fair wage from the employee’s perspective and how much can be paid but still retain financial health. ? After some pay questions are answered, development of a pay philosophy must be completed. For example, an organization may decide to pay lower salaries but offer more benefits. ? Once these tasks are done, the HR manager can then build a pay system that works for the size and industry of the organization. ? Besides salary, one of the biggest expenses for compensation is medical benefits, including health, vision, dental, and disability benefits. ? Social Security and unemployment insurance are both required by federal law. Both are paid as a percentage of income by the employee and employer. ? Depending on the state, workers’ compensation might be a requirement. A percentage is paid on behalf of the employee in case he or she is hurt on the job. ? A mandatory benefit, COBRA, was enacted to allow employees to continue their health insurance coverage, even if they leave their job. ? There are three main types of health-care plans. A fee-based plan allows the insured to see any doctor and submit reimbursement after a visit. An HMO plan restricts employees to certain doctors and facilities and may require a copayment and/or deductibles. A PPO plan is similar to the HMO but allows for more flexibility in which providers the employee can see. ? Pension funds were once popular, but as people tend to change jobs more, 401(k) plans are becoming more popular, since they can move with the employee. ? Profit sharing is a benefit in which employees receive a percentage of profit the organization earns. Stock ownership plans are plans in which employees can purchase stock or are granted stock and become an owner in the organization. ? Team rewards are also a popular way to motivate employees. These can be in the form of compensation if a group or the company meets certain target goals. ? Paid time off, or PTO, can come in the form of holidays, vacation time, and sick leave. Usually, employees earn more days as they stay with the company. ? Communication with employees is key to a successful benefits strategy. 0635000Exercises and Solutions 08636000 1. Of the benefits we discussed, which ones are required by law? Which are not? Answer: Mandated compensation includes social security, Medicare, unemployment insurance, workers compensation and COBRA. Voluntary include incentives, medical insurance, 401(k) plans and paid time off (PTO). 2. Research current Federal Insurance Contributions Act (FICA) tax rates and Social Security limits, as these change frequently. Write down each of these rates and be prepared to share in class. Answer: As of October 2011, FICA rates were at 7.65%. Social Security rates are 4.2% on earnings up to $106,800. 3. Describe the considerations when developing medical benefits. Which do you think would be the most important to you as the HR manager? Answer: The cost of medical benefits is the most important concern. Also, medical benefits can help retain employees, so a balance of cost and retention are important considerations. 4. Visit websites of three companies you might be interested in working for. Review the incentives they offer and be prepared to discuss your findings in class. Answer: Many students will find extra incentives such as bonuses or other incentive plans to be interesting. Flexible scheduling, telecommuting and in-house benefits, such as gyms and daycare, might be attractive as well. 0635000Extra Discussion Question 08636000 Research the cost of Medicare taxes for employers. Answer: As of October 2011, the tax was 1.45% on all earnings. 0635000Key Terms 08636000 disability insurance A type of insurance that provides income to individuals (usually a portion of their salary) should they be injured or need long-term or short-term care resulting from an illness. Pension Benefit Guaranty Corporation (PBGC) A US government agency created by the Employee Retirement Income Security Act (ERISA) to protect pension benefits in private sector pension plans. Consolidated Omnibus Budget Reconciliation Act (COBRA) A law enacted in 1985 that requires companies to allow employees to extend their group health-care coverage for up to thirty-six months. vesting period For 401(k) plans, a certain time period before the employer will match the employee funds contributed. straight commission plan An incentive plan in which the employee receives no base pay and the entire pay is based on meeting sales goals. base pay The minimum pay an employee receives. stock option A type of incentive that allows the employees to buy stock at a fixed price. employee stock ownership plan A type of incentive that gives employees stock (ownership) in the organization. cost of living annual increase (COLA) A pay increase not tied to merit but given to employees as an annual inflationary increase. OASDHI A federally mandated retirement program that stands for Old Age, Survivors, Disability, and Health Insurance Program and includes Social Security and Medicare. 0635000Chapter Case 08636000 The Author discusses the case for Chapter 6: http://blip.tv/play/sDyCsI4dAA 0635000Additional Case Study Exercise 08636000 There is much current debate on the topic of executive compensation. In 1980, a Chief Executive Officer made $42 for every dollar earned by a worker. In 1990, the gap was $85. By 2000, the figure reached $531 for every dollar taken home by a worker. In 2010, the average CEO of a Standard and Poor’s 500 Company earned $11.4 million. The breakdown of pay is: $1,093,989 Salary $251,413 Bonus $3,833,052 Stock Awards $2,384,871 Option Awards $2,397,152 Nonequity Incentive Plan Compensation $1,182,057 Pension and Deferred Compensation Earnings $215,911 Other Compensation Do you find executive compensation mentioned to be excessive? Why or why not? For companies using a broadbanded pay system, how does CEO pay fit into this system? Do you think the high salary can be justified when a company is using a broadbanded system? How can HR professional manage this issue, assuming their organization pays the CEO much higher than workers? Answers: This case brings about one of the challenges in our current economy about CEO pay and requires critical thinking skills to address the questions. Some students may feel the pay is justified; however, it is important to note that often, CEO pay does not fit into the pay systems that other employees are put into. HR professionals should be transparent when discussing CEO salary and point out the reasons for the higher differential in salary, since most of the time, the CEO may be a founder or owner of the organization. In addition, often HR does not set the salary of upper level executives, as it is the Board of Director’s responsibility. I use this topic as a debate in my classes. 0635000Useful Outside Resources 08636000 The Human Resource Certification Institute: http://www.hrci.org/ Society for Human Resource Management: http://www.shrm.org/Pages/default.aspx YouTube videos: HR That Works Compensation Strategy: http://www.youtube.com/watch?v=xIx-5nMnQHo   Example of compensation software-NuVu HR: http://www.youtube.com/watch?v=CUAKyYFxxu0&feature=related   Professor Judi McLean Parks at Olin Business School discusses the “other” side of compensation: http://www.youtube.com/watch?v=RBQmqVFxTZM&feature=related   Short funny Dilbert video on vacation time: http://www.youtube.com/watch?v=-Bdqepo4_vQ&feature=related   Importance of compensation communication: http://www.youtube.com/watch?v=7pc4UtaqO2M