Unit 4:Total Rewards
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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

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Unit 4 total rewards

Unit 4:Total Rewards

Unit 4 total rewards

Total Rewards:

Financial & Non Financial

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Inducements: Rewards for Work

Financial Compensation

Non-financial Compensation

Direct Pay



Job Content

Interesting duties







Merit Pay




Group Incentives

Gain Sharing

Profit Sharing

Executive Incentives


Health Care

Accident Insurance

Pay for Time Not Worked

Workers’ Compensation

Social Security


Employee Services

Job Environment

Comfortable Working


Friendly Co-workers

Considerate Supervision

Status and Position

Fair Company Policies

Compatible Work Schedule

  • Inducements:

  • People are willing to work for the inducements or rewards they receive from working.

  • An employment exchange occurs when there is a balance between the inducements offered by the organization and the contributions made by the employees.

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Strategic Relationships Between Compensation and HR Functions

Compensation System

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

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.

Employee Relations

Pay rates and benefits may be negotiated with employee groups or a labor union.

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Discussion Question:

What are the objectives of a compensation system?

What happens if all of these objectives are not considered simultaneously?

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Cost/benefit effective







  • Objectives of Compensation:

    • All pay decisions should satisfy six objectives and each of these objectives is important in developing a sound compensation system.

Strategic Objectives of Compensation

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  • Compensation within Different Labor Markets:

    • Three meaningful labor markets include: (1) blue-collar and non-supervisory white-collar workers, (2) professional employees, and (3) supervisors and executives.

The Determinants of Pay in Three Labor Markets

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Determinants of Pay:

  • Many factors besides the job market influence pay levels, and these factors need to be considered as a whole.

  • What are the major factors that influence pay?

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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:

  • Wage-level decision

  • Wage-structure decision

  • Individual wage decision

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The Wage-level


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Discussion Question:

What would be the consequences of a wage-level decision that pays wages that are significantly higher than the market rate?

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Establishing the Wage Level:

A sound wage-level policy is expected to achieve three objectives:

  • To attract an adequate supply of labor.

  • To keep present employees reasonably satisfied with their compensation.

  • To avoid costly turnover.

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Factors Influencing the Wage Level:

The most significant factors influencing wage levels are:

  • Organizational Size

  • Unionization

  • Productivity (Ability to Pay)

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Wage Surveys:

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:

  • Government surveys

  • Private industry surveys

  • Company-sponsored surveys

    What four conditions must be met for do-it-yourself wage surveys to be useful?

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Discussion Question:

What are the major limitations of information gained from wage surveys?

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Job Evaluation


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Job Evaluation:

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?

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Ranking Method:

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?

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Classification/Grading Method:

The classification process includes:

  • Specifying a number of grades and writing broad descriptions of the types of jobs in each of the grades.

  • Each job description is compared with the descriptions for the grades.

  • The job grades range from high to low, and each grade has a verbal description and examples of the kinds of jobs that fit into it.

    What are the advantages and disadvantages of the classification/grading method?

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Point Method:

The point method consists of the following steps:

  • Identify key jobs.

  • Identify job factors used to determine pay levels.

  • Weight the factors according to their contribution to the overall worth of the job.

  • Divide each job into degrees that range from high to low and assign points to each degree.

  • Reach a consensus about degree assignments.

  • Develop a wage curve using key jobs.

    Why is the point method the most frequently used job evaluation?

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  • Wage Curve:

    • The number of points assigned to each job determines a range of pay for that job.

Illustration of a Wage Curve Using the Point Method of Job Evaluation

Wage curve passes through the midpoint of each pay grade


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  • Point Assignments:

    • The weights assigned to the factors will reflect the values of management and society. The most heavily weighted factors tend to be responsibility, knowledge, education, experience, complexity of duties, and supervisory responsibilities.

Point Assignments for Four Compensable Factors

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Discussion Question:

In developing a wage curve, why is it so important for the key jobs to be equitably paid jobs?

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Pay $



  • Wage Curve:

    • The total points for each job are calculated by summing the points assigned for each factor. Once the total points and the average pay of the key jobs have been determined, the data can be plotted on a graph.

Illustration of a Wage Curve Based on 15 Key Jobs

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Factor Comparison Method:

The factor-comparison method consists of the following steps:

  • Identify key (benchmark) jobs

  • Identify job factors

  • Rank jobs

  • Assign monetary amounts to each job on each factor

  • Compare unique jobs with key jobs

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Factor Comparison Method:

The Factor Comparison Method Using Student Jobs in a University Library

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Guide Chart-Profile Method:

The Guide Chart-Profile Method (Hay Method) uses three compensable factors:


2.Problem solving


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.

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Job Pricing and Pay

Rate Administration

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  • When a wage structure is developed, jobs are grouped into pay grades according to the points associated with them, and a range of pay is assigned to each pay grade.

Illustration of Pay Grades Constructed Along the Wage Curve


Red circle rate

Hourly wage

Trend line

Maximum for labor grade 2

Minimum limit line

Starting wage for labor grade 2

Pay range

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Illustration of Two Pay Ranges





  • Most pay grades have pay ranges that are ten to 20 percent above and below the midpoint of each grade, called the range spread.

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Discussion Question:

What are compa-ratios and how can they be used?

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Discussion Question:

What are red circle rates? What alternative methods does a company have for handling red circle rates?

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Adjusting the Wage Curve:

Two methods are used to adjust the wage curve.

  • fixed-rate- increase

  • percentage increase

    What are the consequences of adjusting the wage curve?

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Individual Pay Rate Determination:

  • The individual wage decision concerns the relative pay of individuals who perform similar jobs in the same company.

  • The individual wage decision influences feelings of job satisfaction and pay equity.

    • Performance: Performance differences are clearly the most reasonable and well-accepted justification for paying differential amounts.

    • Experience: A common justification for giving some employees more money is that they have more experience.

    • Seniority: Pay differentials based on seniority or length of service are found in many compensation systems.

    • Potential: Occasionally, organizations pay higher than average wages to individuals who demonstrate outstanding potential.

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Pay Decisions:

Pay decisions are controlled by two basic processes.

  • The design of the wage structure

  • The formal budgeting process

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Economic Factors



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Economic Factors Affecting Compensation:

  • Inflation

  • Interest rates

  • Industry competition

  • Foreign competition

  • Economic growth

  • Demographic trends

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Demographic Trends:

The labor market is primarily influenced by five demographic forces:

  • birthrates

  • participation rates

  • immigration

  • education

  • unemployment

    How can demographic trends in the labor market impact wages?

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Discussion Question:

How does an increase or decrease in unemployment rates influence a company's compensation system?

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Incentive Compensation


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Money and Motivation Theories:

Money is a significant factor in almost every theory of motivation.

How is money viewed in the following theories?

  • Need Theory

  • Self-determination Theory

  • Expectancy Theory

  • Equity Theory

  • Goal Setting Theory

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Discussion Question:

According to Expectancy Theory, what should a supervisor do to motivate an employee?

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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?

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Merit pay consists of periodically evaluating the performance of all employees and giving commensurate pay increases.

Merit-Increase Guidelines: Fixed Increase or Discretionary Increase

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Discussion Question:

What conditions are necessary for these individual incentive plans to operate effectively: piecework, merit pay increase, commission sales, and the standard hour plan?

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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

Piece-Rate Incentives:

Under a piece-rate incentive system workers are paid a fixed amount for each item produced.

Two types of piece-rate plans are:

  • Straight piecework

  • Differential piece-rate

A Comparison of Straight Piecework and F.W. Taylor’s Differential Piece-Rate Plan

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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.

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Discussion Question:

What is "restriction of output," and why does it occur?

What can be done to avoid it?

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Units per hour

60 Standard

56 Group norm

Starting date

Two and one-half weeks later

Restricting Productivity:

Illustration of Group Norms Restricting Productivity: Individual Productivity of a New Employee

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Skill and Knowledge Based Pay:

  • Skill and knowledge based pay programs reward employees for their ability to perform an array of related tasks or skills rather than for the actual work performed.

  • Skilled based pay and pay for knowledge programs must be designed to fit the requirements of the job and the company’s overall compensation program.

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  • Ties to Performance:

    • Skilled based pay and pay for knowledge programs can also be tied to performance.

Skill x Performance Pay Matrix Hourly Rates of Pay

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Differential 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.

  • overtime

  • shift pay

  • hazard pay

  • on-call pay

  • call-back pay

  • geographic differentials

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Discussion Question:

What conditions make a group incentive system superior to an individual incentive system?

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Discussion Question:

What are the advantages and disadvantages of "cash" profit-sharing plans and "deferred" profit-sharing plans?

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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.

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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.

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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?

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  • Balancing Base & Incentive Pay:

    • The fine tuning process consists of adjusting base pay, individual incentives, group incentives, & profit sharing to provide a feeling of security, equity, & motivation.

Fine-Tuning of Base Pay and Incentive Pay for Three Jobs

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Discussion Question:

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?

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Executive Compensation:

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.

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Stock Options:

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?

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Discussion Question:

What are the implications of reporting executive stock options as an expense?

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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?

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Employee Benefit


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Required Benefits:

Employers are required to provide three benefits that are intended to protect employees’ incomes.

What are the three benefits required by law?

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Social Security Benefits:

Four basic types of insurance benefits are provided by the Social Security Act:

  • Old age or disability benefits

  • Benefits for dependents of retired, disabled, or deceased workers

  • Lump-sum death benefits

  • Medicare

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Pension Plans:

There are two types of qualified benefit plans:

  • Defined Benefit Pension Plan

  • Defined Contribution Pension Plan

    What are the differences between these two plans?

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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:

  • 401 (k) Plans

  • 403 (b) Plan

  • IRAs

  • SEPs

  • Keogh (H.R. 10)


  • Roth IRAs

  • DB/k

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Pension Protection Act (2006):

  • Allows employers to automatically enroll employees in a 401(k) plan.

  • Requires employers to send timely notices to employees regarding their right to elect different investments. Notice must be provided at least 30 days before the participants are eligible to elect new investments for contributions automatically invested in employer stock.

  • Created a new type of retirement benefit that combines elements of traditional defined benefit plans with 401(k) plans. This new plan, called the DB/k, is available only to employers with fewer than 500 employees starting in 2010.

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Health and Accident Insurance:

  • Health and accident insurance is not a required benefit.

  • If employers choose to provide these benefits, there are many laws and regulations they must follow.

  • If employers choose to provide mental health benefits, the Mental Health Parity Act of 1996 prohibits them from being more restrictive with annual and lifetime spending for mental health care than for medical and surgical care.

  • The Addiction Equity Act passed in 2008 expands the coverage requirements to include substance use disorders along with other mental illnesses.

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Income Replacement:

  • Accidents and illnesses that result in death are the most serious personal losses, but a permanent disability can also create a serious financial strain.

  • Life insurance and income-continuation plans help to alleviate such difficulties by sharing both the risks and the cost of accidents and illnesses.

  • Additional disability and death benefits are provided by Social Security and Medicare.

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Pay for Time Not Worked:

  • Paid holidays

  • Paid vacations

  • Paid personal leave

  • Union activities

  • Reporting time

  • Sabbatical leaves

  • Paid funeral leave

  • Jury duty

  • Military Leave

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Recognition and Achievement Awards:

  • Recognition awards can be highly motivating if they are part of an overall recognition program that includes a history of meaningful presentations. Organizations use a variety of recognition programs to influence the attitudes and behaviors of employees.

  • The kinds of rewards companies use to recognize good behavior include:

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Health Care Benefits

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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.

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Discussion Question:

What are the advantages of an HMO?

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Consumer-directed Health Care:

Programs that have been approved by Congress and qualify for special tax treatment, include:

  • Flexible Benefit Plans

  • Flexible Spending Arrangements (FSA)

  • Health Savings Accounts (HSA)

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Discussion Question:

What are the advantages and disadvantages of flexible benefits?

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Managing Employee

Benefit Programs

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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.

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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.

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Cost Benefit Analysis and Cost Management:

What methods are used for measuring and analyzing the costs of employee benefit plans?

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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:

  • Medical, surgical, or hospital care.

  • Reimbursement in the event of accidents, disability, or death.

  • Vacation and sick leave benefits.

  • Unemployment benefits, such as severance pay.

  • Apprenticeship or training programs.

  • Day care.

  • Scholarship funds.

  • Prepaid legal services.

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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.

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Summary Plan Document:

  • Employers are required to have a Summary Plan Document (DPS) that describes each welfare benefit offered by the employer.

  • The SPD typically contains the following information:

    • The plan’s eligibility requirements.

    • A summary of the benefits provided.

    • The procedures for claiming benefits and appealing claim denials.

    • Circumstances that could result in a loss of benefits.

    • Participant’s rights under ERISA.

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Compensation Laws

and Regulations

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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.

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Copeland Act and Anti-Kickback Law:

  • The Copeland Act was passed during the Great Depression to prohibit the unfair treatment of employees who needed jobs so desperately that employers could take advantage of them. The Anti-Kickback Law was passed as an amendment to the Copeland Act.

  • What are the provisions of the Copeland Act and the Anti-Kickback Law?

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Walsh-Healey Act of 1936 (Public Contracts Act):

Extended the Davis-Bacon Act to non-construction federal contractors.

  • Sets basic labor standards and minimum-wage rates for all work done under a federal contract exceeding $10,000. The minimum-wage standards are established by the secretary of labor rather than local prevailing rates.

  • The act requires that overtime be paid at the rate of one-and-one-half times the base rate for work exceeding 40 hours per week.

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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?

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Overtime Provisions:

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.

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Direct and Indirect Effects

of a Minimum Wage Increase

New Wage Curve

Former Wage Curve

Increase in the

Minimum Wage

Indirect Effect

Direct Effect

Minimum Wages:

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?

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Record Keeping:

The FLSA requires employers to keep records of wages, hours, and other related items, including:

  • Personal information, including name, address, occupation, gender, and date of birth (if under age 19).

  • Hour and day when workweek begins.

  • Total hours worked each workday and each workweek.

  • Total daily or weekly straight-time earnings.

  • Regular hourly pay rate for any week when overtime is worked.

  • Total overtime pay for the workweek.

  • Deductions from or additions to wages.

  • Total wages paid each pay period.

  • Date of payment and pay period covered.

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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.

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Permissible Wage Differences:

The Equal Pay Act provides four exceptions to the employer’s obligations to pay male and female employees the same wages:

  • A bona fide seniority system, where wages or salaries are based on length of service.

  • A merit pay system where pay is determined by legitimate performance measures.

  • A system that measures earnings by quantity or quality of production.

  • A differential based on any factor other than gender, such as differentials between regular and temporary employees or geographic differences.

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Discussion Question:

What is the comparable worth controversy?

What has been the position of the courts in dealing with this issue?

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Pregnancy Discrimination in Employment Act, 1978:

  • This act is an amendment of Title VII of the Civil Rights Act, and it defines discrimination because of sex to include “pregnancy, childbirth, or related medical conditions.”

  • Women who are affected by pregnancy, childbirth, or related medical conditions, such as medical complications, abortions, and miscarriages, must be treated the same for all employment-related purposes, including benefits and leave.

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Family and Medical Leave Act:

  • FMLA entitles eligible employees to take up to 12 weeks of unpaid leave each year for specified family and medical reasons.

  • Employees are allowed to take unpaid FMLA leave when:

    • A new child is born to the employee.

    • A new child is placed with the employee for adoption or foster care.

    • The employee is needed to care for a seriously ill spouse, child, or parent (not a parent-in-law).

    • The employee has a serious health condition.

    • The spouse, son, daughter, or parent of a person on or about to be on active military duty for any “qualifying exigency.”

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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.

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Health Insurance Portability and Accountability Act (HIPAA), 1996:

  • HIPAA provides greater portability in health care coverage and limits the exclusions for preexisting conditions and places other restrictions on an insurance carrier’s ability to exclude a worker form insurance coverage.

  • What are the major provisions of HIPAA?

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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?

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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.

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Employee Retirement Income Security Act (ERISA), 1974:

  • ERISA was designed to ensure that employees covered under private pension plans and employee welfare benefit plans would receive the benefits promised.

  • If an employer chooses to have a pension plan, the employer must comply with the following requirements:

    • Eligibility requirements

    • Vesting requirements

    • Portability practices

    • Funding requirements

    • Fiduciary responsibilities

    • Reporting and disclosure requirements

    • Compliance testing

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Discussion Question:

What is meant by vesting, portability, fiduciary, contributory, and noncontributory as they are used to describe pensions?

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Reports Required by ERISA:

  • Communications required for all employees

    • Summary plan description

    • Announcements of material modifications

    • Summary annual report

  • Information available to employees for examination

    • Plan document

    • Annual report

  • Information to be furnished to employees on request

    • Annual report

    • Plan document

    • Vesting statement

  • Information to Secretary of Labor

    • Summary plan description

    • Plan modifications

    • Financial statements, an actuarial report, and an insured plan report

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Qualified Domestic Relations Order (QDRO):

  • A court order that instructs a plan administrator how to pay a divorced spouse or a child or other dependent all or a portion of a pension plan benefit.

  • May be used to divide the pension plan as a marital asset, or to pay alimony or child support.

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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.

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IRS Regulations:

  • IRS regulations require employers to withhold regular amounts from an employee’s pay and submit these funds on a scheduled basis to the IRS.

  • These withholdings include federal, state, and local income taxes and the employee’s share of Social Security tax.

  • Employers are also required to pay workers’ compensation taxes and unemployment taxes based on a percent of the employees’ wages plus the employer’s matching Social Security tax.

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Highly Compensated Employees:

A highly compensated employee is someone who:

  • Owned more than five percent of the capital or profits in the employer’s business at any time during the year or the preceding year, or

  • For the preceding year, received compensation of more than $100,000 and was in the top 20 percent of the business’ employees when ranked by compensation.

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IRS 20-Factor Test:

  • The Internal Revenue Service uses the following common law factors, called the IRS 20-Factor Test, to determine whether a worker is an independent contractor or a regular employee:

  • 1.Instructions

  • 2.Training

  • 3.Integration

  • 4.Personal Services

  • 5.Assistants

  • 6.Length of Relationship

  • 7.Work Hours

  • 8.Amount of Work

  • 9.Location

  • 10.Sequence of Work

  • 11.Reports

  • 12.Payment

  • 13.Expenses

  • 14.Tools

  • 15.Investment

  • 16.Profit

  • 17.Multiple jobs

  • 18.Availability

  • 19.Termination

  • 20.Liability

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Strategy & Program


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  • The formal budgeting process is a vital part of the pay system. Budgeting helps to ensure that future financial expenditures are coordinated and controlled.

  • Two basic approaches to generating compensation budgets are:

    • Bottom-up Approach–Requires supervisors to forecast the pay increases they will recommend for each of their subordinates during the coming plan year.

    • Top-down Approach–Estimating the pay increase budget for an entire organization and then allocating an amount to each manager or supervisor.

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Cost management:

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)

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Discussion Question:

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?

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Assessment of Methods and Processes:

Assessment of a total compensation system involves comparing the outcomes against the following six criteria:






6.Cost-benefit effective

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  • Measuring Attitudes:

    • Employee attitudes are an important source of evaluative information regarding a company’s compensation system. Feelings of equity and fairness and an acceptance of the compensation system among employees are vital for pay effectiveness.

Questionnaire Measuring Attitudes Toward an Incentive Commission Program

No Opinion




Strongly agree

Strongly disagree

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International HR

Compensation Issues

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Compensation and Benefits for Expatriates:

What considerations must be given in compensating expatriates managers?

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