Compensation and Benefits • Reasons for different pay for a specific job

Compensation: Set of rewards that organizations – Maturity curve: Annual increases

provide to individuals for their willingness to – Differences in performance
perform tasks within the organization
Rates in the market
Benefits: Items of value beyond their wages,
salaries, and other forms of direct financial – Above-market rates can minimize
turnover
compensation that employees receive from the
– Below-market rates for lower labor costs
organization
– At market rates
– Rewards
– Incentives Determinants of Compensation Strategy
• Overall organizational strategy
Basic Purposes of Compensation • Ability to pay
• To provide appropriate and equitable rewards to • Ability to attract and retain employees
employees
• Ability to bargain with unions
• To help employees focus on activities that the
organization considers important Determining What to Pay: Job Evaluation

• To increase employee efforts along desired lines • Determines the relative value of a job to the
organization to compensate adequately and
• To motivate individuals by creating a perception appropriately those who perform the job
that their efforts and contributions are recognized
and rewarded Methods

Internal equity: Comparisons made by – Classification system: Attempts to

employees to other employees within the same group sets of jobs together into clusters,
organization often called grades
– Point system: Requires managers to
External equity: Comparisons made by quantify the value of various elements of
employees to others employed by different specific jobs in objective terms
organizations performing similar jobs – Point manual: Carefully and specifically
– Pay surveys: Surveys of compensation defines the degrees of points from first to
paid to employees by other employers in fifth
a particular geographic area, industry, or – Factor comparison method: Assesses
jobs on a factor by factor basis using a
occupational group
factor comparison scale as a benchmark
Wages: Hourly compensation paid to operating
employees. Time acts as the basis for determining Pay for knowledge: Involves compensating
wages employees for learning specific information
Skill based pay: Rewards employees for
Salary: Income paid to an individual on the basis
of performance, not on the basis of time acquiring new skills
Wage and Salary Administration - Ongoing
process of managing a wage and salary structure
Strategic Options for Compensation
• Basis of pay: Functions, skills, knowledge
 • Workers’ Compensation: Insurance that
covers individuals who suffer a job related illness
Issues related to compensation or accident
– Pay secrecy: Extent to which the
– Employers pay the cost of this insurance
compensation of any individual in an
organization is secret
– Pay compression: Occurs when Mandated health care
individuals with substantially different
– Patient Protection and Affordable Care
levels of experience or performance
Act, 2010, was introduced to:
abilities are paid relatively equally
– Increase the quality and affordability of
– Pay inversion: New employees are paid
more than experienced employees health care insurance
because of changes in the external market – Lower the number of uninsured
employees
– Reduce the cost of insurance for all
Nature of Benefits Programs involved
• Most organizations provide their employees
with an array of benefits Nonmandated Benefits
• Cost of benefits programs • Private pension plans: Provide income to
employees at their retirement
– Organizations spend huge amounts on
benefits – Types: Defined benefit plans and defined
– Employees are asked to bear costs of contribution plans
benefits
• Paid time off
• Purposes of benefits programs
• Wellness programs
– To attract better qualified people
• Life cycle benefits
– To increase job satisfaction and
subsequent turnover • Employee assistance plans and perquisites
• Cafeteria style benefits plans: Employees can
Mandated Benefits choose the benefits they want
• Unemployment insurance: Provides a basic
subsistence payment to employees who are
between jobs Contemporary Issues in Compensation and
Benefits
– Created in the United States as part of the
Social Security Act of 1935
• Social Security: Designed to provide limited Executive Compensation - Most senior
income to retired individuals executives receive their compensation in two
forms
– Officially called the Old Age Survivors
and Disability Insurance Program – Base salary
– Many people have come to view it as – Some form of incentive pay, such as
their primary source of retirement bonuses and stock-option plans
income – Higher in the United States than in other
countries
 – In many firms, there is little or no
relationship between its performance and
the compensation paid to senior
executives
Legal Issues in Compensation and Benefits
• Fair Labor Standards Act
– Includes provisions for the minimum
wage, overtime, and child labor
– Comp time: Time off that is offered to
nonexempt workers in exchange for
working more than 40 hours with no
overtime pay
• Employee Retirement Income Security Act
(ERISA) of 1974
– Passed to protect employees who
contributed to their pensions but were
unable to collect those benefits later
– Provides protection for the funding
underlying the pension plan
• Benefit plans cannot disproportionately favor
employees with higher income levels
• The Pension Benefit Guaranty Corporation
– Oversees how pension plans are funded
and supports underfunded plans by
seizing corporate assets
• Many firms extend benefits to same sex partners
Evaluating Compensation and Benefit
Programs - Organizations that do not offer
competitive pay and benefit packages:
– Find it difficult to attract employees
– Face high rates of voluntary turnover
• Efficiency of benefit programs depends on
effective communication with employees
– Employees underestimate the cost of
their benefits when they are not fully
informed about their benefits