human resources management _ section 6-compensation and employee benefits

Nature of Compensation  Compensation is the total amount of the employee by an employer in return for work performed as required.. Nature of Compensation  Compensation is based on…

Learning Objectives

After you have studied this section, you should be

able to:

– Understand the nature of compensation

– Describe three considerations affecting perceptions of pay fairness

– Define job evaluation and its role in C&B

– Outline the process of building a wage and salary

administration system

– Define variable pay

– Identify different uses of individual vs team plans in

terms of rewards and incentives

Nature of Compensation

 Compensation is the total amount of the

employee by an employer in return for work

performed as required

 Types of Rewards

– Intrinsic

• Intangible, psychological and social effects of compensation

• Ex Challenging tasks, autonomy, & non-monetary benefits

A System of Rewards

Nature of Compensation

 Compensation is based on…

– market research about the worth of similar jobs in the marketplace,

– employee contributions and accomplishments,

– the availability of employees with like skills in the

marketplace,

– the desire of the employer to attract and retain a

particular employee for the value they are perceived to add to the employment relationship, and

– the profitability of the company or the funds available

in a non-profit or public sector setting, and thus, the

ability of an employer to pay market-rate compensation

Compensation Systems

Compensation System:

– Legal compliance with all

appropriate laws and

regulations

– Cost effectiveness for the

organization

– Internal, external, and

individual equity for

employees

– Performance enhancement for

the organization

Components of A Compensation Program

Figure 12–1

Direct Compensation

Compensation Type

employee receives, usually as a wage or salary

worked

regardless of the number of hours worked in the period

organizational performance

group of employees as a part of

Typical Division of HR Responsibilities:

Compensation

Figure 12–2

Continuum of Compensation Philosophies

Compensation Approaches

Figure 12–4

Decisions About Compensation Levels

Compensation Strategies

workers

need to attract and retain employees

Taking advantage of the abundant supply of potential employees in a loose labor market

Competency-Individual vs Team Rewards

Distribute variable rewards at the team level

Make system simple and understandable

Using Team-Based Reward Systems

Use skill-based pay for the base

Use variable pay based on business entity performance

Maintain a high degree of employee involvement

Perceptions of Pay Fairness

does (inputs) and what the person receives (outcomes)

Procedural Justice The perceived fairness of the process and

procedures use to make decisions about employees

Distributive Justice The perceived fairness in the distribution of

outcomes

organization allows regarding its pay system

External Equity The perception that the organization provides

employees with compensation that comparable

to the compensation of employees with similar jobs in other organizations

Equity Considerations in Compensation

Compensation

Administration

Process

Figure 12–10

Job Evaluation

worth of jobs within an organization

 Knowledge, skills, & abilities (KSAs) needed to perform the job

 Difficulty of the job

Methods of Job Evaluation

Factor

Comparison

Point Method

Job Evaluation Methods

Integrated &

Computerized Job Evaluations

http://www.hr-guide.com/compensation.htm

Job Evaluation Point Chart

Pay Structures

– The line on a graph showing the relationship

between the job value, as determined by job

evaluation points, and pay survey rates

– Hourly and salaried

– Office, plant, technical, professional, managerial

– Clerical, information technology, professional,

supervisory, management, and executive

Establishing

Pay Structures

Pay Structures (cont’d)

– A grouping of individual jobs having approximately the same job worth

– The practice of using fewer pay grades having

broader pay ranges that in traditional systems

– Benefits

• Encourages horizontal movement of employees

• Is consistent with trend towards flatter organizations

• Creates a more flexible organization

• Encourages competency development

• Emphasizes career development

Example of

Pay Grades

and Pay

Ranges

Pay Rate Issues

– Red-Circled Employees

• An incumbent (current jobholder) who is paid above

the range set for the job

– Green-Circled Employees

• An incumbent who is paid below the range set for the

job

– A situation in which pay differences among

individuals with different levels of experience and performance in the organization becomes small

Issues Involving Pay Increases

– A curve that depicts the relationship between

experience and pay rates

– Assumption is that as experience increases,

proficiency and performance increase

Issues Involving Pay Increases

– A percentage increase in wages that allows

employees to maintain the same real wages in a

period of economic inflation

– Adjustments are tied to changes in an economic

measure (e.g., the Consumer Price Index)

– A one-time payment of all or part of a yearly pay

increase

– Lump-sum payments do not increase base wages

Variable Pay: Incentives for Performance

Some jobs contribute more to the

organization than others

Time spent is the primary measure of employee contribution

Some people perform better than

others

Length of service is the primary differentiating factor among people

Employees who perform better

should receive more

compensation

Contributions are recognized through different amounts of base pay

A portion of some employees’

total compensation should be

contingent on performance

Apportioning rewards based on individual performance is

considered to be divisive

Types of Variable Pay Plans

Figure 13–1

Factors Affecting Variable Pay Plans

Does the plan fit the organization?

Are the right behaviors encouraged by the plan?

Is the plan being administered properly?

Variable Pay

Plan Success

Desired

Individual Incentive Pay

Plans

Bonuses and Special Incentive Programs

Piece-Rate Systems

– Wages are determined by multiplying the number of pieces produced by the piece rate for one unit

– Employees are paid one piece-rate for units produced

up to a standard output and a higher piece-rate wage for units produced over the standard

Sources of Bonuses

Figure 13–3

Source: Kathryn F Clark, “Incentives Increase But Competitive Base Salary Key in Talent Race,” Human Resource Executive, June 2, 2000, 30 Used with permission

Different Bases for Sales Incentives, In Order of Use

Group/Team-Based Variable Pay

Determining Individual Rewards

Timing of Team Incentives

Deciding the Allocation of Rewards

Distributing Team Incentives

Why Organizations Establish Team Pay Plans

Conditions for Successful Team Incentives

Figure 13–6

Gainsharing

– The sharing with employees of

greater-than-expected gains in productivity

– Alternatives for rewards distribution:

• A flat amount for all employees

• Same percentage of base salary for all employees

• Percentage of the gains by category of employees

• A percentage based on individual performance against

measures

• Recruit or retain employees

• Improve product/service quality

• Improve employee morale

– Drawbacks

• Disclosure of financial information

• Variability of profits from year to year

• Profit results not strongly tied to employee efforts

Profit-Sharing Plan Framework Choices

Employee Stock Ownership Plans (ESOPs)

– A plan whereby employees gain stock ownership in the organization for which they work

– Favorable tax treatment for ESOP earnings

– Employees motivated by ownership in the firm

– Retirement benefit is tied to the firm’s performance – Management tool to fend off hostile takeover

attempts

Common Executive Prequisites (Perks)

– Benefits absorb social costs for health care and

retirement

– Benefits influence employee decisions about

employers (e.g., recruitment and retirement)

– Benefits are increasingly seen as entitlements

– Benefit costs are about 40% of total payroll costs

Types of Benefits

– Payments are determined by the employee’s level

within the organization and years of employment

– Other benefits (e.g., outplacement and continued

health insurance) may be offered in lieu of cash

severance payments

Services During Severance

Other Benefits

Benefits

Relocation Expenses

Life, Disability, Legal Insurances

Educational Assistance

Social and Recreational

– Medical and Sick Leave – Paid Time-Off (PTO) Plans – Military Leave

– Election Leave – Jury-duty Leave – Funeral Leave

Flexible Benefits

– A plan (flex or cafeteria) that allows employees to select the benefits they prefer from groups of

benefits established by the employer

– An account that allows employees to contribute

pre-tax dollars to buy additional benefits (e.g., life insurance)

– Inappropriate benefits package choices

– Adverse selection and use of specific benefits by

higher-risk employees