Unit 4:Total Rewards. Total Rewards: Financial & Non Financial. Inducements: Rewards for Work. Financial Compensation. Non-financial Compensation. Direct Pay Wages Salary. Job Content Interesting duties Responsibilities Achievement Recognition Challenge Advancement. Incentives
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Unit 4:Total Rewards
Financial & Non Financial
Inducements: Rewards for Work
Pay for Time Not Worked
Status and Position
Fair Company Policies
Compatible Work Schedule
Strategic Relationships Between Compensation and HR Functions
Pay and benefits can attract or discourage potential employees in the recruiting, selecting, and hiring process.
Availability of potential employees and labor market conditions influence pay and benefits.
Pay incentives influence performance levels and wage levels can bias the evaluation process.
Performance evaluation should be a significant determinant of individual compensation.
Pay incentives can stimulate interest in training and reinforce the development of new skills.
Training & Development
Higher skill levels should lead to higher levels of pay.
Inadequate or inequitable compensation systems create employee dissatisfaction, union organizing, & labor grievances.
Pay rates and benefits may be negotiated with employee groups or a labor union.
What are the objectives of a compensation system?
What happens if all of these objectives are not considered simultaneously?
Strategic Objectives of Compensation
The Determinants of Pay in Three Labor Markets
Determinants of Pay:
Three Wage Decisions:
The development of a sound wage and salary system requires three basic decisions. Each decision answers a critical question regarding an organization’s compensation program:
What would be the consequences of a wage-level decision that pays wages that are significantly higher than the market rate?
Establishing the Wage Level:
A sound wage-level policy is expected to achieve three objectives:
Factors Influencing the Wage Level:
The most significant factors influencing wage levels are:
The major tool for making wage-level decisions is the wage survey. These surveys collect information about the compensation and benefits of other employees in similar industries or in the same geographical region.
There are three primary kinds of wage surveys:
What four conditions must be met for do-it-yourself wage surveys to be useful?
What are the major limitations of information gained from wage surveys?
The basic purpose of job evaluation is to eliminate pay inequities and create a wage structure that identifies appropriate pay ranges for different jobs.
What are the different methods of job evaluation?
The simplest method of developing a wage structure is to have the job-evaluation committee rank the jobs from highest to lowest in value.
What are the advantages and disadvantages of the ranking method?
The classification process includes:
What are the advantages and disadvantages of the classification/grading method?
The point method consists of the following steps:
Why is the point method the most frequently used job evaluation?
Illustration of a Wage Curve Using the Point Method of Job Evaluation
Wage curve passes through the midpoint of each pay grade
Point Assignments for Four Compensable Factors
In developing a wage curve, why is it so important for the key jobs to be equitably paid jobs?
Illustration of a Wage Curve Based on 15 Key Jobs
Factor Comparison Method:
The factor-comparison method consists of the following steps:
Factor Comparison Method:
The Factor Comparison Method Using Student Jobs in a University Library
Guide Chart-Profile Method:
The Guide Chart-Profile Method (Hay Method) uses three compensable factors:
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.
Job Pricing and Pay
Illustration of Pay Grades Constructed Along the Wage Curve
Red circle rate
Maximum for labor grade 2
Minimum limit line
Starting wage for labor grade 2
Illustration of Two Pay Ranges
What are compa-ratios and how can they be used?
What are red circle rates? What alternative methods does a company have for handling red circle rates?
Adjusting the Wage Curve:
Two methods are used to adjust the wage curve.
What are the consequences of adjusting the wage curve?
Individual Pay Rate Determination:
Pay decisions are controlled by two basic processes.
Economic Factors Affecting Compensation:
The labor market is primarily influenced by five demographic forces:
How can demographic trends in the labor market impact wages?
How does an increase or decrease in unemployment rates influence a company's compensation system?
Money and Motivation Theories:
Money is a significant factor in almost every theory of motivation.
How is money viewed in the following theories?
According to Expectancy Theory, what should a supervisor do to motivate an employee?
Efforts to Reduce Inequity:
Inequity can exist when people are either overpaid or underpaid. Both conditions or inequity motivate individuals to establish a more equitable exchange.
What methods do individuals use to reduce inequity?
Merit pay consists of periodically evaluating the performance of all employees and giving commensurate pay increases.
Merit-Increase Guidelines: Fixed Increase or Discretionary Increase
What conditions are necessary for these individual incentive plans to operate effectively: piecework, merit pay increase, commission sales, and the standard hour plan?
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
Number of units produced
Under a piece-rate incentive system workers are paid a fixed amount for each item produced.
Two types of piece-rate plans are:
A Comparison of Straight Piecework and F.W. Taylor’s Differential Piece-Rate Plan
The Standard Hour Plan:
Workers are paid an hourly wage, but the hour is measured in units produced rather than in minutes. If workers perform the standard amount each hour, they receive the hourly wage, but if they produce above standard, they receive proportionately more money.
What is "restriction of output," and why does it occur?
What can be done to avoid it?
Units per hour
56 Group norm
Two and one-half weeks later
Illustration of Group Norms Restricting Productivity: Individual Productivity of a New Employee
Skill and Knowledge Based Pay:
Skill x Performance Pay Matrix Hourly Rates of Pay
In addition to their base pay, employees often receive additional compensation for factors that make work more difficult or unpleasant.
The wage differentials are considered an important and essential part of making compensation fair.
What conditions make a group incentive system superior to an individual incentive system?
What are the advantages and disadvantages of "cash" profit-sharing plans and "deferred" profit-sharing plans?
Gainsharing is a company-wide incentive program similar to profit-sharing, but the bonuses are based on improved productivity rather than a percent of the profit.
Employee Stock Ownership Plans:
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.
Strategic Alignment of Base Pay and Incentive Pay:
In designing a compensation system, companies need to make a strategic decision regarding the best balance between base pay and incentive pay.
What factors should be considered in balancing base pay and incentive pay?
Fine-Tuning of Base Pay and Incentive Pay for Three Jobs
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?
The compensation of executives is much larger than that of other employees. It also tends to be determined by a different set of factors and includes both monetary and non-monetary rewards.
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.
What rules govern stock options?
What are the implications of reporting executive stock options as an expense?
Expatriate Pay and Allowances:
When managers of multinational companies are assigned to work abroad, they normally draw additional compensation in the form of special expatriate allowances.
What are these special allowances?
Employers are required to provide three benefits that are intended to protect employees’ incomes.
What are the three benefits required by law?
Social Security Benefits:
Four basic types of insurance benefits are provided by the Social Security Act:
There are two types of qualified benefit plans:
What are the differences between these two plans?
Individual Savings Plans:
To encourage individuals to provide their own pensions, Congress has provided attractive tax benefits for a variety of deferred compensation plans.
Deferred accounts that are approved by the IRS, called qualified plans, enjoy special tax considerations.
The most popular savings plans include:
Pension Protection Act (2006):
Health and Accident Insurance:
Pay for Time Not Worked:
Recognition and Achievement Awards:
Health Care Benefits
Managed Health Care:
Managed health care refers to variety of strategies to reduce costs. Efforts to control health and accident insurance have produced a wide variety of insurance plans that can best be understood by placing them along a continuum of cost control verses choice.
What are the advantages of an HMO?
Consumer-directed Health Care:
Programs that have been approved by Congress and qualify for special tax treatment, include:
What are the advantages and disadvantages of flexible benefits?
Employee Benefits Philosophy:
Benefit programs are based primarily on three philosophies:
1.Sharing the risks of accidents and illness.
2.Forced savings for retirement or bad times.
3.Sharing the costs of special services.
Domestic Partner Benefits:
Many companies have created domestic partner benefits that allow employees to include domestic partners in their health insurance plans. If these benefits are provided for non-family members, such as domestic partners, the value of these benefits is considered imputed income and taxed as ordinary income.
Cost Benefit Analysis and Cost Management:
What methods are used for measuring and analyzing the costs of employee benefit plans?
Employee Retirement Income & Security Act of 1974:
Under ERISA, welfare benefit plans include any plan, fund, or program maintained by an employer for the purpose of providing any of the following:
Communication Benefit Programs:
Employee welfare benefit plans must be in writing, and the plan document must:
1.Establish the funding mechanism for the plan.
2.Set forth procedures for making payments and providing benefits.
3.Indicate who is responsible for administering the plan.
4.Provide for amendments to the plan.
Summary Plan Document:
Davis-Bacon Act of 1931 (Prevailing Wage Law):
This act covers work on the construction or repair of federal buildings for which the contract involves more than $2000. It 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.
Copeland Act and Anti-Kickback Law:
Walsh-Healey Act of 1936 (Public Contracts Act):
Extended the Davis-Bacon Act to non-construction federal contractors.
Fair Labor Standards Act of 1938 (Wage and 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?
Overtime provisions of the FLSA requires that covered employees receive one-and-one-half times the regular rate of pay for all hours worked in excess of 40 during a given week.
If employees receives a straight hourly wage, overtime calculations are quite simple. The calculations are much more complex when overtime involves bonus payments, time off in return for overtime work, and work done on a salary or piece-rate basis.
Direct and Indirect Effects
of a Minimum Wage Increase
New Wage Curve
Former Wage Curve
Increase in the
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.
When the minimum wage rate is increased, there are direct and indirect effects on the wage structure. What are these effects?
The FLSA requires employers to keep records of wages, hours, and other related items, including:
Equal Pay Act, 1963:
The Equal Pay Act prohibits employers from paying members of one sex less than members of the opposite sex for performing equal work.
Permissible Wage Differences:
The Equal Pay Act provides four exceptions to the employer’s obligations to pay male and female employees the same wages:
What is the comparable worth controversy?
What has been the position of the courts in dealing with this issue?
Pregnancy Discrimination in Employment Act, 1978:
Family and Medical Leave Act:
National Defense Authorization Act:
In 2008, the National Defense Authorization Act extended the 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.
This unpaid leave of 26 weeks during a 12 month period is available for an eligible employee who is the spouse, son, daughter, parent, or next of kin to provide care for the service member. Spouses who work for the same employer can use no more than 26 weeks combined for this leave.
Health Insurance Portability and Accountability Act (HIPAA), 1996:
Small Business Job Protection Act (SBJPA), 1996:
The Small Business Job Protection Act raised the minimum wage and made significant changes to pension plans.
What are the major provisions of SBJPA?
Wage Garnishment, 1968:
The Federal Wage Garnishment 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.
Employee Retirement Income Security Act (ERISA), 1974:
What is meant by vesting, portability, fiduciary, contributory, and noncontributory as they are used to describe pensions?
Reports Required by ERISA:
Qualified Domestic Relations Order (QDRO):
Consolidated Omnibus Budget Reconciliation Act (COBRA):
COBRA was designed to protect people who leave an employer from losing their benefit coverage by requiring employers of 20 or more employees to extend health insurance group benefits to terminated employees, employees with reduced hours, and to the employees’ spouse and dependent children.
Highly Compensated Employees:
A highly compensated employee is someone who:
IRS 20-Factor Test:
Strategy & Program
Three variables combine to determine a firm’s labor costs:
1.The number of employees.
2.The average cash compensation
3.The average benefit cost
Managing labor costs effectively requires a careful review of all three variables. The formula for combining these variables is:
Labor Costs =
(Average Cash Compensation + Average Benefit Cost)
What are the implications of the trend toward hiring more contingent workers?
How will the growth in the contingent workforce influence compensation and benefits practices?
Assessment of Methods and Processes:
Assessment of a total compensation system involves comparing the outcomes against the following six criteria:
Questionnaire Measuring Attitudes Toward an Incentive Commission Program
Compensation and Benefits for Expatriates:
What considerations must be given in compensating expatriates managers?