3 questions 2 pages double spaced each -Human Resources
BluSkyy757
Nelson_TotalRewardsItsMoreThanJustaPaycheck_PPT_FINAL1.PPTXTotal Rewards: It’s More Than Just a Paycheck!
Audra H. Nelson, M.S. 2010
1
Learning Objectives
By the end of this learning module, students will be able to:
Distinguish between total rewards and total compensation, and identify compensation and non-compensation elements of total rewards.
Effectively communicate a total rewards system to current and prospective employees.
Identify the implications of using salary surveys to ensure externally equitable and fiscally responsible compensation systems.
Define job evaluation and its use to develop internally equitable compensation systems.
Recognize U.S. laws that relate to compensation and benefits systems.
SHRM© 2010
2
Slide 2 (2 minutes)
Read the learning objectives listed on the slide to the class.
2
Total Rewards
A system of rewards.
Not just compensation and benefits.
Includes anything and everything employees value and the employer is willing and able to offer.
Includes compensation and non-compensation elements.
Different value levels.
SHRM© 2010
3
(Henderson, 2006; WorldatWork, 2008)
Slide 3 (2 minutes)
Total rewards is a system of rewards that goes beyond compensation and benefits and includes anything and everything the employee values and the employer is willing and able to offer employees.
A total rewards system is comprised of compensation and non-compensation elements used to attract and retain workers and reinforce desired behaviors.
The extent to which individuals realize and value these components can vary significantly among individuals, as well as over time and across business and industry.
(Henderson, 2006; WorldatWork, 2008)
3
Distribution of Compensation and Benefits
SHRM© 2010
4
U.S. Bureau of Labor Statistics (Dec. 2009)
Slide 4 (2 minutes)
According to a March 2010 U.S. Bureau of Labor Statistics study, employers in private industry spent an average of $27.42 per hour on employee total compensation in December 2009. Direct compensation comprised 70.8 percent of the total, while benefits made up 29.2 percent of the total.
State and local governments spent more than that ($39.60 per hour), with direct compensation making up 65.9 percent and benefits making up 34.1 percent of the total.
Source: U.S. Bureau of Labor Statistics. (March 10, 2010). Employer costs for employee compensation. Economic News Release. Retrieved June 4, 2010 from http://data.bls.gov/cgi-bin/print.pl/news.release/ecec.nr0.htm.
4
State and Local Government
State & Local Government Compensation Benefits 26.1 13.5
Compensation Elements of Total Rewards
Monetary Payments
Base wages, salary:
Hourly, weekly or monthly pay that employees receive in exchange for work.
Differentials for shift and/or special skills (also known as premium pay (e.g., bi-lingual or multi-lingual skills).
SHRM© 2010
5
(Henderson, 2006; WorldatWork, 2008)
Slide 5 (6 minutes)
Many employees measure compensation in terms of the money they earn in a regular pay check and/or money that is reflected in a monthly, quarterly or annual bonus. While these are key components of total compensation, an organization’s benefits package comprises a significant portion of total compensation, which is often unrealized and underestimated by employees and prospective employees.
Base wages/salary is the basic cash compensation that an employer pays for the work performed.
The term wage is reserved for employees paid on an hourly basis.
The term salary is reserved for exempt (i.e., exempt from overtime under the Fair Labor Standards Act) employees paid on a weekly, bi-weekly, monthly or annual basis, not based on the number of hours worked. It is worth noting that nonexempt employees could be paid on a salary basis; payment on a salary basis is one variable that determines FLSA exemption status. More discussion on exempt versus nonexempt status to follow.
Differentials, or premium pay, are monetary amounts usually applied to base pay for working non-traditional hours (i.e., shift differentials) or utilizing bi-lingual language skills, for example.
Shift differentials may be paid to employees for their entire shift, all or a portion of which may fall within what are considered non-traditional hours (i.e., hours outside of 8:00 a.m.– 5:00 p.m., Monday through Friday), or it may be paid for only the portion of the shift that falls outside of traditional hours. There is no government regulation that requires organizations to pay differentials of any kind, but many employers offer differentials to recruit and retain employees in non-traditional shifts.
Please note that there are other forms of differentials (like on-call pay, holiday pay and hazard pay).
(Henderson, 2006; WorldatWork, 2008)
5
Compensation Elements of Total Rewards
Monetary Payments (continued)
Variable pay is pay that varies based on performance.
Piece-rate plans: Payment based on units produced.
Differential piece-rate plans.
Commission: Rewards based on volume.
Typically reserved for sales personnel.
“Draw.”
SHRM© 2010
6
(Henderson, 2006; WorldatWork, 2008)
Slide 6 (6 minutes)
Variable pay is pay that is directly related to performance and may vary over time based on performance. It is referred to as variable pay because the amount varies with performance of the individual, group or team, and/or organization, depending on whether the plan is an individual-based plan, a team-based plan or an organization-based plan. These are usually one-time payments made on a monthly, quarterly or annual basis and should not be confused with merit pay increases, which are also performance-based but are permanently attached to an employee’s base pay.
Examples of Variable Pay
Piece-rate plans: The employee is paid a certain amount of money for each unit produced. Some resources refer to this as a form of base pay.
Differential piece-rate plan: One rate is paid for all units produced up to the standard or target and then either a higher rate is paid for all units produced if the employee produces more than the standard or a higher rate is paid only for those units produced above the standard. For example, an employer will pay $3.00 each for the first 50 units of an item produced. If the employee exceeds 50 units, the employee will be paid $3.50 for all units produced OR $4 for each unit produced in excess of 50.
Commission plans: A cash reward is given, usually based on sales volume (e.g., 2 percent of the price of car for each car sold). Some pay structures work strictly off of commissions, and no money is paid if no sales are made. Some pay structures allow the employee to take a monthly draw--a small amount of money from anticipated future sales--to pay basic living expenses. The draw is taken from would-be commissions in the future.
(Henderson, 2006; WorldatWork, 2008)
6
Compensation Elements of Total Rewards
Monetary Payments (continued)
Variable pay is pay that varies based on performance.
Bonus: One-time reward for good performance.
Stock options: Options to buy company stock at a pre-determined price.
Profit sharing: Opportunity to share in the organization’s profits.
SHRM© 2010
7
(Henderson, 2006; WorldatWork, 2008)
Slide 7 (5 minutes)
A bonus is a one-time reward for good performance. It may be in the form of a cash or non-cash reward such as a trip or gift certificate.
Stock options allow employees to buy company stock at a predetermined price. If the price of the stock rises, employees can exercise their options to buy at the fixed, predetermined price and immediately see some earnings.
If price of stock goes down, it wouldn’t make sense for employees to exercise their options. To illustrate, let’s say today’s stock price of a particular company is $25 per share. Employees are given 100 stock options at today’s price, and the options are exercisable in two years. If the stock price is $40 in two years, employees can exercise their options (buy a $40 per share stock at $25 per share) and realize a $15 per share gain. Stock options are typically a part of executive compensation and usually make up a larger portion of the executive compensation package than they do for the general employee population. Stock options for the general employee population may also be viewed as a benefit rather than a monetary payment.
Variable pay may also be based on team performance and/or organization performance rather than individual performance.
Profit sharing provides employees with an opportunity to share in the organization’s profits. Some organizations actually provide employees with cash payments. Some employers make a deposit into employees’ 401(k) accounts.
(Henderson, 2006; WorldatWork, 2008)
7
Compensation Elements of Total Rewards
Benefits
Rewards based on organization membership and sometimes position held.
Legally Required Benefits
Social Security: Federally administered insurance and retirement program.
Unemployment compensation: Provides income to employees who have lost their jobs.
Workers’ compensation: Protects employees who are injured on the job.
SHRM© 2010
8
(Byars & Rue, 2004)
Slide 8 (7 minutes)
Benefits are rewards that employees receive for being a member of the organization and, in some cases, for the position they hold in the organization. For example, some executives may receive benefits that the rest of the employee population does not; exempt employees may receive benefits that nonexempt employees may not; and full-time employees may receive benefits that part-time employees do not receive. Benefits are not typically tied to performance.
Some benefits are legally required by the federal government:
Social Security is a federally administered insurance system; both employers and employees pay into the system. For employees, the amount is usually withdrawn from their paychecks. If you are self-employed, you pay both the employer and employee portions. Social Security is available to supplement retirement income and to provide income in the event of disability.
Unemployment compensation provides income to workers who have lost their jobs. Generally, the maximum time you can claim unemployment is for 26 weeks. In most states, this is an employer-paid tax that is based on the number of claims paid to former employees of the organization (the more claims paid to employees who previously worked for the employer, the higher the employer’s unemployment insurance tax).
Workers’ compensation aids employees who are injured on the job. It covers medical expenses and loss of income due to work-related injuries.
(Byars & Rue, 2004)
8
Compensation Elements of Total Rewards
Other Commonly Offered Employee Benefits
Pay for time not worked (e.g., holidays, vacation).
Disability income continuation (provides income to employees in the event of illness or disability).
Retirement savings programs (provides income continuation following retirement).
SHRM© 2010
9
(Henderson, 2006; WorldatWork, 2008)
Slide 9 (5 minutes)
Other Commonly Offered Employee Benefits
Pay for time not worked includes holidays, vacation and other paid time off. Some organizations offer one “bucket” of paid time off and refer to that bucket as “paid time off.” Other organizations offer holiday pay, floating holiday pay (the employee works the actual holiday but can “bank” the holiday and take the paid day off at some other time) and vacation pay. They all amount to pay for time not worked.
Disability income continuation provides employees continued income in the event of illness or disability. These benefits include Social Security, workers’ compensation, sick leave, and short-term and long-term disability.
Retirement savings programs are employer-sponsored programs that provide income continuation after retirement and include savings plans, deferred income programs and pension plans. Let’s talk about a couple of common retirement savings programs:
401(k) accounts are defined contribution plans in which employees can defer up to $16,500 (in 2010) of their salary on a pre-tax basis to save for retirement. Most companies match the contribution at some level (for example, some employers will match 50 percent up to a 6 percent contribution, so if you defer 6 percent of your income, the employer matches 3 percent).
403(b) accounts are similar to the 401(k) but reserved for non-profit organizations.
Vesting. Some organizations that match employee contributions into a 401(k) will require them to be employed for a period of time before those matched contributions actually become theirs. This is called vesting. If the employee leaves the organization before the vesting period is complete, the employee forfeits the matched funds.
(Henderson, 2006; WorldatWork, 2008)
9
Compensation Elements of Total Rewards
Other Commonly Offered Employee Benefits
Spouse/family income continuation (e.g., life insurance).
Health and liability protection (e.g., medical, dental, prescription drug insurance coverage).
Flexible benefits plan or cafeteria plan.
Other perks.
SHRM© 2010
10
(Henderson, 2006; WorldatWork, 2008)
Slide 10 (9 minutes)
Spouse/family income continuation includes life insurance and accidental death and dismemberment insurance (AD&D). An important distinction between life insurance and AD&D is that AD&D pays only in the event that the employee’s death is due to an accident as opposed to an illness. AD&D also pays in the event of a loss of body part such as a finger, arm or leg.
Health and liability protection includes medical, dental, vision, prescription drug, flexible spending accounts and/or long-term care insurance, just name a few. Let’s briefly distinguish among a couple common types of medical insurance:
Health Maintenance Organizations (HMO) contract with a specific medical provider to provide all basic medical care needs for its employees for a fixed price. This kind of plan can be cost-efficient but takes the choice of providers away from employees.
Preferred Provider Organizations (PPO) negotiate discounted prices with a number of providers, and if employees use those providers, they get a discount. Employees can also use providers outside of the network but not at a discounted price.
Flexible benefits plans or cafeteria plans allows employees to choose from a number of different benefit options to fit their needs and forego benefits that they don’t need or want.
Recall that we defined total rewards as anything that employees value and the employer is willing and able to offer. There are a variety of other perks offered by organizations that employees more or less value. Let’s list and discuss a few. (Ask students to begin listing some after you have provided a few examples.)
Example of Perks Employers May Offer
Child care services
Company credit card
Subsidized food services
Club memberships (professional, social, fitness)
Free or discounted company services or products (e.g., employee discounts, free checks or discounted mortgage closing fees if the employees works for a bank)
Car allowance
Sporting or art events tickets
(Henderson, 2006; WorldatWork, 2008)
10
Non-compensation Elements of Total Rewards
Job Satisfaction
Enjoyment experienced as a result of performing the work itself.
Autonomy
Employee discretion to do their work the way they see fit.
SHRM© 2010
11
(Henderson, 2006; Mathis & Jackson, 2006; WorldatWork, 2008)
Slide 11 (7 minutes)
Remind students again that total rewards can include anything employees value and the employer is willing and able to provide.
Classroom Discussion
This discussion could be conducted in small groups first and reported out to the whole class, or discussed as a class only. It could also be assigned as a short paper/assignment outside of class. Ask students what rewards they value. Are they the same rewards they valued last month, last year or five years ago? Do they anticipate that the rewards they value will change over time? Based on what types of factors?
Non-compensation elements are difficult to quantify and may be more or less valued by individuals than compensation elements. Moreover, many employers fail to help employees realize the value of non-compensation elements when there may be opportunities to leverage these elements to affect behavior, such as job performance and retention. Making an effort to inform employees about the non-compensation elements that an organization offers may be more effective at improving job performance and retention than compensation elements. Identifying and discussing these elements is the focus of the other aspect of total rewards.
Job satisfaction is also a non-compensation element. It is the satisfaction or enjoyment derived from work itself. Job satisfaction is largely affected by job design. Many elements affect job satisfaction: the effect the job has on other people; the extent of individual freedom and discretion employees have in their jobs; the extent to which employees can do their jobs the way they see fit (autonomy); and the amount of information employees receive about how well or how poorly they have performed (feedback).
Autonomy is the amount of control and discretion in how the work is performed.
(Henderson, 2006; Mathis & Jackson, 2006; WorldatWork, 2008)
11
Non-compensation Elements of Total Rewards
Meaningful Work
Is the work important to the employee or other people?
Flexible Schedules and Work Arrangements
Focus is on work/life balance.
Growth Opportunities
Includes professional and intellectual growth, emotional maturity.
SHRM© 2010
12
(Henderson, 2006; WorldatWork, 2008)
Slide 12 (5 minutes)
Meaningful work is the extent to which the job and the organization are important to the employee and/or other people. Many people value opportunities to have an effect on other people and change lives in a positive way. For example, a person may feel that working for an organization that is in business to transform health care might be more meaningful and valuable than working in an alcoholic beverage distribution center.
Flexible schedules and work arrangements allows employees to balance their personal and professional lives by permitting employees to work when it suites them. For example, a morning person may appreciate the discretion to work from 5:00 a.m. to 1:00 p.m. rather than a traditional 9:00 a.m. to 5:00 p.m. schedule. Another example might include an employee working from home for one or more days a week.
Growth opportunities include the chance for professional growth (increased responsibility, pay and title), intellectual growth (training, skill enhancement, increased knowledge and experience exposure) and emotional maturity.
(Henderson, 2006; WorldatWork, 2008)
12
Non-compensation Elements of Total Rewards
Relationships with Other People
Social network.
Adequate Resources
Opportunities for training, access to technology, etc.
Quality of Leadership
The skills and knowledge of leaders, knowledge sharing, feedback.
SHRM© 2010
13
(Henderson, 2006; WorldatWork, 2008)
Slide 13 (4 minutes)
Relationships with other people: Employees are increasingly looking to the workplace to develop a social network, which makes sense since employees often spend more time at work than anywhere else during the week. Having strong relationships with co-workers, clients and customers can facilitate a powerful bond between employers and employees.
Adequate resources: Employers should do everything possible to help employees complete work assignments successfully. This includes training, technology, time, financial resources, and human and other resources that allow employees to be successful.
Quality of leadership: Managers must not only be skilled and knowledgeable to perform their jobs, they must also have skill and interest in coaching and counseling, giving praise for a job well done and providing constructive feedback that leads to improved job performance. Managers who share their knowledge to develop their direct reports are valuable to the organization and those direct reports.
(Henderson, 2006; WorldatWork, 2008)
13
Non-compensation Elements of Total Rewards
Work Environment (Safety and Comfort)
Recognition and Awards
Other
SHRM© 2010
14
(Henderson, 2006; WorldatWork, 2008)
Slide 14 (5 minutes)
Work environment: A safe, risk-free work environment is important. Employers should strive to create a work environment that avoids extreme temperatures, noxious fumes and noise, minimize or eliminate contact with hazardous materials, and provide ergonomically correct and comfortable work stations.
Recognition: Recognizing employees for good work can be formal through awards programs (e.g., employee of the month, sales person of the year) or informal with handwritten or verbal feedback.
Other: Ask students to list other non-compensation elements of total rewards. The list can be endless. Students may mention casual dress, organizational culture (formal or informal), beer at organization events, on-site fitness facilities and company reputation in the community (prestige).
(Henderson, 2006; WorldatWork, 2008)
14
Recognizing and Realizing Value in Rewards
Depends on individual differences.
Goal is to influence human behavior; attraction to the organization, retention and performance.
How do we know what people value? Ask them!
How will employees and prospective employees know what elements of total rewards the organization offers? Tell them!
SHRM© 2010
15
(Henderson, 2006; WorldatWork, 2008)
Slide 15 (5 minutes)
Individuals are motivated by different things. Age, gender, marital status, number of children and tenure in an organization may influence our preferences for certain rewards.
The goal of the organization’s reward system is to influence human behavior. When we think about an organization’s reward systems, we must ask ourselves these questions:
1. How do we get good employees to join the organization?
How do we retain good employees?
How do we get employees to perform well?
We know that compensation is just one of many rewards that influence behavior. Managers, HR professionals and even employees sometimes fail to recognize this important point. Employers should identify and communicate to employees the compensation and non-compensation elements of the total rewards the organization has to offer.
We need to understand what rewards are valued by current and future employees. The best way to do this is to ask them. If we provide rewards that employees don’t value, it will not motivate them to join the organization, stay with the organization or perform well.
(Henderson, 2006; WorldatWork, 2008)
15
Communication of Rewards Systems
Communicating to Prospective Vs. Existing Employees
Methods:
Print materials.
Electronic communications (e-mails, employee communications on electronic company message boards such as an intranet site, library of rewards system, information on an HR page of the intranet, employee self-service options, company web site, etc.).
SHRM© 2010
16
Slide 16 (8 minutes)
A competitive and desirable-to-most total rewards system will not go very far if components of the system go unrealized by employees and prospective employees. This makes communication of this system just as important as the system itself.
The major differences between communicating to prospective employees vs. existing employees may include the following:
With prospective employees, an organization must ensure that the information is available when and where individuals seek information about employment with the organization. This may include the organization’s web site; job advertisements; handouts, poster boards and knowledgeable recruiters at job fairs; other Internet venues like YouTube, LinkedIn, Facebook and Twitter; and at the job interview through knowledgeable and articulate interviewers and handouts.
With existing employees, information must be communicated when the employee initially joins the organization; annually during open enrollment periods when employees can make new benefits elections; when introducing a new benefits program; and throughout the year to remind employees of the total rewards system and to answer questions as they arise.
Communication methods:
Print materials can include summary information on a single page or double-sided page, comprehensive information in a booklet format or an itemized, individualized statement of total rewards granted throughout the year and the monetary value of each reward (including employer costs associated with benefits) granted to the employees (total rewards or total compensation statement).
Electronic communications may include e-mails and/or electronic message boards on the organization’s intranet site to notify employees of new additions or changes to total rewards systems.
Employees should be able to access a plethora of resources on total rewards on the company intranet site. Using employee self-service tools, employees can access their elected benefits information, paycheck information and total compensation information.
The organization’s web site can be used to communicate information about the organization’s total rewards system to new and/or prospective employees. Some organizations may wish to keep some details of total rewards systems confidential and may not publicize them on the Internet (e.g., benefits premiums and the distribution amounts between employer and employee).
16
Communication of Rewards Systems
Methods
Poster board (possibly used at a job fair).
Job advertisements (print, Internet, radio).
Verbal communications (at job fairs, during interviews, new-hire orientation, staff meetings, one-on-one meetings between supervisor and direct report).
Other Internet venues (YouTube, Facebook).
Other?
SHRM© 2010
17
Slide 17 (5 minutes)
Poster boards and job advertisements can challenge employers to communicate as much information as possible succinctly due to limited space.
Verbal communication may be the best way to communicate the non-compensation elements of total rewards systems. This can happen during the interview process, in team meetings, in one-on-one meetings between supervisor and subordinate, new-hire orientation, etc.
Finally, as organizations try to reach a younger generation of applicants, more organizations take advantage of Internet venues like YouTube, Facebook and Twitter, to name a few.
Optional task: Ask students to identify a YouTube video, Facebook or Twitter profile specifically designed to communicate employee benefits and discuss with the class as a whole or in small groups.
Solicit other ideas from students.
17
Communicating the Non-compensation Elements of Total Rewards
Non-compensation elements may be difficult to quantify.
Report employee satisfaction survey results (e.g., 75% of employees are satisfied or very satisfied with their job; employees are most satisfied with quality of leadership and the opportunities to build relationships with other people).
Report numbers of employees who earn promotions during the year (e.g., 20% of the employee population received a promotion in 2009).
Report dollars spent on investment in new technology during a recent year (e.g., $1.5 million spent on new laptops for employees).
Other ways to report non-compensation elements?
SHRM© 2010
18
Slide 18 (9 minutes)
While it is just as essential to communicate the non-compensation elements of total rewards as it is to discuss the compensation elements, they may not be communicated in the same way because many non-compensation elements are difficult to quantify. However, there are creative ways to communicate and report non-compensation elements of total rewards.
Read slide.
Solicit other ideas from students. Students may mention:
Reporting awards the organization has received (e.g., Forbes 8th best company to work for in 2005).
Publishing employee awards programs and the criteria to earn them.
Reporting customer or client testimonies of superior service that changed their lives.
Introduce the total rewards communications project. See the Instructor’s Manual for details and student handouts.
18
Roles and Responsibilities
| Human Resources | Management | Top Management |
| Design* | Recommend pay adjustment amount** | Compensation philosophy |
| Administration | Setting compensation** | Lead, lag or match the market |
| Fairness | Evaluating performance for compensation purposes | Distribution of total compensation** |
| Budgeted salary and benefits dollars |
SHRM© 2010
19
(Byars & Rue, 2004; Mathis & Jackson, 2006)
*With guidance from top management
** With guidance from HR
Slide 19 (10 minutes)
Distribution of Responsibility for Compensation and Benefits Program
Human Resources:
Develops and administers the compensation system.
Performs job evaluations to determine the value of the jobs to the organization and conducts and/or participates in salary surveys and analyzes market data.
Based on job evaluation results and market analysis, develops wage/salary structures and policies and communicates and enforces policies to ensure fairness and consistency.
Takes guidance from top management’s decisions about compensation philosophy (lead, lag or match the market), the distribution of total compensation (i.e., the composition of base vs. variable compensation across all levels of jobs), and the amount of dollars available for salaries and benefits programs when designing the compensation structure.
Managers:
Attempt to match performance to rewards if compensation philosophy is based on pay for performance.
Recommend pay rates and increases based on guidelines from HR (see slide 25 for an example of guidelines for managers to follow when recommending compensation adjustments).
Evaluate performance for compensation purposes.
Top Management/Executives:
Many organizations have compensation philosophies that provide frameworks for what the compensation program is supposed to do for the organization. This compensation philosophy is usually created by top management and provides guidance for compensation analysts, HR and managers. It is essential for top management and HR to work closely to make responsible compensation design decisions.
Top management must decide, based on the organization’s compensation philosophy, whether it wants to lead, lag or match the market for wages and salaries. Top management must also decide the distribution of total compensation dollars for each position in the organization (i.e., what percentage of total compensation is base pay and what percentage is variable pay and benefits). Top management (including finance executives) may also determine the minimum and maximum pay rates based on the organization’s ability and willingness to pay and make fiscally responsible decisions based on budgetary concerns.
Top management will rely on HR to provide data and consultation regarding these elements based on market research and fundamental HR principles, such as human motivation theory as it applies to the different types of workers, industries, generations, etc. Ultimately, HR must work closely with top management and management must work closely with HR to ensure the success of the organization’s compensation and benefits plans. All parties must work together to create a compensation system that balances employee motivation and fiscal responsibility. Underpaying employees may lead to reduced performance, motivation and morale, but overpaying them may lead to organization performance issues and negative impact on the bottom line.
Exercise
(This exercise can be a classroom discussion, a small group discussion or a short writing assignment.)
Which competitive pay policy (lead, lag or match the market) would you recommend to an employer and why? What circumstances affected your recommendation?
19
How Do Organizations Determine What to Pay Employees?
Internal compensation philosophy.
Internal job worth.
Market competitiveness.
Market conditions.
Internal budget.
SHRM© 2010
20
(Henderson, 2006)
Slide 20 (2 minutes)
Many organizations have compensation philosophies that provide frameworks for what that compensation program is supposed to do for the organization. This compensation philosophy is usually created by top management and provides guidance for compensation analysts, HR and managers.
An organization must carefully consider each item on this slide to successfully design, administer and manage an effective compensation program. Let’s discuss these items in detail.
(Henderson, 2006)
20
Wage and Salary Surveys (Market Research)
Wage and salary surveys are surveys of pay practices of selected organizations, possibly within a geographic area and/or a specific industry.
Concerned with external equity.
Can conduct your own survey or purchase survey data.
SHRM© 2010
21
(Henderson, 2006)
Slide 21 (4 minutes)
Wage and Salary Surveys
A survey of selected organizations within a geographic area or specific industry that includes total compensation information in summary format can provide a benchmark against which an organization can compare to ensure external equity (what employees in other organizations are being paid for performing similar jobs). Surveys can also be used to identify workplace trends to help employers make wise pay-related decisions to balance competitiveness with fiscal responsibility.
Surveys can be purchased, or organizations can conduct their own. Unless there is a survey expert available to conduct the survey and effectively analyze survey results, it may be more beneficial for an organization to purchase salary survey data. Many survey administrators require the employer to participate in the survey (i.e., contribute its own data to the survey) or offer a significant discount to the organization if it chooses to participate in the survey.
(Henderson, 2006)
21
A Word of Caution About Salary Surveys
Job matching.
Misunderstandings and limited information.
Relevant data.
Integrating market data with job evaluation.
Hidden agendas.
Don’t typically encompass total rewards.
Costly.
(Henderson, 2006)
SHRM© 2010
22
Slide 22 (10 minutes)
Job matches are critical yet difficult to do correctly. Many employers poorly define jobs, and because it is the compensation analyst or manager making match determinations, jobs can get mismatched to survey jobs. Compensation analysts should involve managers to some extent in making the job matches, particularly if job descriptions are either unavailable or outdated. Some job matches are made based on title without consideration of job duties, which also corrupts the usefulness of the data.
Some pay data collected through surveys isn’t as useful or accurate as you would hope. There is a lot of room for misunderstanding the kinds of pay data requested. For example, if the survey requests minimum and maximum pay information for each job, do you give the minimum and maximums of the pay ranges or the minimums and maximums actually paid to current employees or past employees? If the pay range minimum and maximum are collected, what if the organization pays people outside of the pay ranges? What if the survey asks for average pay rates? Will the compensation analyst provide average amounts paid for all incumbents, or will he or she provide midpoints of the salary range? Will their data include base pay only, or will it include overtime, shift differentials, etc.? Even if you are specific about the types of data you are requesting, it doesn’t mean that is what you will get.
It is not only important to gather data from other organizations in the labor market, it is also important to gather data from competitors, regardless of whether they are in the same labor market.
It can be difficult to integrate market data with internal job evaluation data or other pay policy guidelines specific to an organization. Integrating this data can be as much of an art as it is a science.
Data can be “cooked” to confirm evidence to support hidden agendas or biases. For example, data can be cooked and used to support arguments for pay increases that may not be necessary.
Pay surveys typically include information only on pay and maybe some other benefits. However, often they do not include information on total compensation or total rewards. In some organizations, the pay might be below average, but the benefits or company culture, such as employee relationships, employee-management relationships, expected hours worked each week – 40 vs. 65, is worth the below-average pay or, if it’s the other way around, inflated pay.
Some surveys can be costly. The good surveys typically are not free.
In sum, the accuracy and usefulness of the data can be enhanced by using multiple measures (e.g., multiple surveys) of what is going on in the market place. Use the data received from surveys as a guideline only.
(Henderson, 2006)
22
Job Evaluation
A process to determine the value of a job in relation to other jobs within an organization.
Concerned with internal equity.
Used to develop pay grades and ranges.
Involves the identification and use of compensable factors (factors that are important to the organization and used to differentiate the value of each job to the organization).
Examples of compensable factors include skill, responsibility, effort, managerial responsibility and working conditions.
SHRM© 2010
23
(Henderson, 2006)
Slide 23 (8 minutes)
Some employers rely solely on market pricing, while others prefer to use multiple measures to make wise pay decisions for their organizations. Given some of the already identified concerns with salary surveys, the fact that market data may not be available for every job in the organization and that pay practices vary so widely across organizations (i.e., every organization is different and has different elements of total rewards to offer), job evaluation can be a very valuable tool.
Job evaluation is the process to determine the value of each job in relation to other jobs in the same organization and helps maintain internal equity (what an employee is being paid for doing a given job compared to what other employees in the same organization are being paid to do their jobs). Job evaluation gives some order to the structure or hierarchy of jobs in an organization to ensure consistent and ethical treatment of employees, appropriate pay rates, establish career path job progressions and to compliance with EEO and employment law (e.g., Equal Pay Act).
Job evaluation begins with the identification of compensable factors or factors that an organization deems important and allows them to differentiate the value each job has to the organization. Some examples of compensable factors include skill, responsibility (scope and/or managerial), effort and working conditions. Jobs are then rated on each compensable factor, so it is important that the factors be quantifiable and easy to describe and document. HR must work closely with top management to identify the organization’s compensable factors, which must be aligned with the organization’s strategy, mission and core values.
The usual result of a thorough job evaluation is pay grades, which are classifications of jobs that are similar in value to each other.
(Henderson, 2006)
23
Terminology
| Term | Definition |
| Job evaluation | A process to determine the value of each job in relation to other jobs within an organization. |
| Job analysis | A systemic way to gather information about what people do in their jobs and what is needed to be successful in the job. |
| Job description | A written report of what a worker actually does, how and where a worker does it, and why. |
| Job specification | A written report of the knowledge, skills, abilities and other characteristics (KSAOs) needed to successfully perform the job. |
| Performance evaluation | An assessment of how well an employee performs the job relative to a set of standards or expectations. |
SHRM© 2010
24
Slide 24 (2 minutes)
It is easy to get confused with all the terminology used when discussing compensation and general HR principles. This slide will help students distinguish terminology and keep everyone on the same page for the rest of the module.
24
Pay Ranges
Wage and salary surveys/market research + job evaluation = pay ranges.
Pay ranges are a range of permissible pay for a job or grade of jobs with a minimum, a midpoint and a maximum.
SHRM© 2010
25
(Henderson, 2006)
Slide 25 (5 minutes)
Information from wage and salary surveys combined with information from your job evaluation will yield pay ranges for each pay grade. A pay range is a range of permissible pay with a minimum, a midpoint and a maximum.
The minimum of the range is the lowest amount an employer offers and pays for a specific job or group of jobs.
The midpoint can be referred to as job worth. This is the amount that someone who is fully competent and an average performer in the job should be paid.
The maximum of the range is the maximum amount of money an employer is willing to pay for a specific job. Typically, higher performers or people who have been with the job for some time are paid between the midpoint and the maximum of the range.
Although an organization may develop and use pay ranges, the extent to which an organization strictly adheres to them may vary. Some employers establish and adjust pay for employees based on individual circumstances that may not fit within the identified pay ranges. For example, if a candidate states he requires $35,000-$40,000 to accept a job but the pay range is between $40,000-$50,000, the employer may opt to offer the candidate $35,000. If the candidate accepts the offer for $35,000, there is nothing legally wrong with the agreement. However, there may be unintended consequences, such as lowered employee morale or reduced motivation that the employer may face. Of course, if the employer has a common practice of offering the low end of the candidates’ specified range (whether it falls below or within the pay range) to women and offering the higher end of the specified range to men, there may be legal consequences.
(Henderson, 2006)
25
Compensation Philosophy and Management
Seniority-based.
Cost of living/across the board.
Performance-based.
performance = pay (increases).
No link between pay and seniority.
Requires good performance measurement/appraisal systems.
SHRM© 2010
26
(Henderson, 2006)
Slide 26 (5 minutes)
An employer may have a seniority-based compensation philosophy, while another adopts a general cost-of-living, across-the-board type of philosophy where everyone gets the same amount of pay increase no matter how long they have been employed or how well they perform. Still others have a pay-for-performance philosophy.
What are some advantages and disadvantages of each? Which would you prefer?
Some organizations think they have a pay-for-performance philosophy, but pay may actually be based on things other than performance, such as individual bias, family status, effort and face time. Many organizations have moved to a pay-for-performance philosophy because employees had or have an entitlement mentality and think that organizations owe their employees. They foget that pay is earned rather than owed.
The goal of a pay-for-performance program is to provide monetary rewards that increase the liklihood that desired behaviors and results will recur or repeat themselves.
The Pay-for-Performance Link
An effective pay-for-performance philosophy requires accurate and comprehensive measures of performance, which is sometimes very difficult to do. Surveys show that employees and managers have little confidence that just because the organization’s compensation philosophy is one of pay for performance that it actually happens that way. However, when pay is actually tied to performance, we do see higher levels of performance (Henderson, 2006).
(Henderson, 2006)
26
Compensation Philosophy and Management
Example Merit Increase Matrix
When Based on Performance
SHRM© 2010
27
| Performance Rating | Poor | Needs Improvement | Satisfactory | Very Good | Outstanding |
| Merit Increase | 0% | 0% | 4% | 5% | 7% |
Slide 27 (3 minutes)
Pay and incentives are based on performance differences among employees. Employees who perform well get larger pay increases. Those who do not perform satisfactorily receive little or no pay increase. No pay raises are given for length of service.
27
Federal Law and Compensation Systems
Fair Labor Standards Act (FLSA):
Federal minimum wage.
Overtime.
Exempt vs. nonexempt.
Equal Pay Act:
Title VII of the Civil Rights Act of 1964 also applies to pay.
SHRM© 2010
28
(Henderson, 2006)
Slide 28 (9 minutes)
This slide is not intended to be a comprehensive discussion of compensation and the law. This is merely a brief discussion of a few of the laws that affect compensation and benefits systems. Organizations must be aware of these and a host of others laws when designing and administering compensation and benefits systems. The U.S. Department of Labor (www.dol.gov) and the Internal Revenue Service (www.irs.gov) are two sources of information, along with the Henderson (2006) reference cited in this learning module. Ultimately, this discussion is included in this module to help students realize that law plays a role in the design and administration of compensation and benefits programs. Provide students with the suggested reading list found in the Instructor’s Manual with corresponding Internet links to laws discussed in this presentation, if desired.
The Fair Labor Standards Act (FLSA) is the federal wage and hour law that regulates the employment of children between the ages of 14 and 18, establishes the minimum wage (as of 2010: $7.25), and requires organizations to pay overtime (OT) at 1.5 times regular pay for hours worked in excess of 40 per week.
If an employee has a nonexempt status, this means that the job is not exempt from the FLSA and that OT must be paid for hours worked in excess of 40 in one week. If an employee has an exempt status, this means that the job is exempt from the FLSA and that OT is not paid for hours worked in excess of 40.
Exempt or nonexempt status is determined by the extent to which a job meets certain criteria written in the FLSA. Students may access the exemption test criteria at www.dol.gov. Status is not determined by the employee but is determined by the functions of the job itself.
The Equal Pay Act prohibits sex-based discrimination in pay rates of men and women who work in the same or similar job. Any pay differences must be due to seniority, performance, or quality or quantity of production.
While the Equal Pay Act is tied to the FLSA, Title VII of the 1964 Civil Rights Act also applies to pay and prohibits employers from making employment decisions--including pay decisions--based on protected class status.
(Henderson, 2006)
28
Federal Law and Compensation Systems
Employee Retirement Income Security Act (ERISA):
Applies to pension/retirement benefits plans.
Consolidated Omnibus Budget Reconciliation Act (COBRA):
Health care insurance continuation.
Health Insurance Portability and Accountability Act (HIPAA).
SHRM© 2010
29
(Henderson, 2006)
Slide 29 (9 minutes)
The Employee Retirement Income Security Act (ERISA) was enacted to place a fiduciary responsibility on employers and their pension/retirement benefits plans to ensure that employees receive the benefits as outlined in their retirement benefits programs. This provides plan parameters including lump-sum distributions, reporting and disclosures, employee participation and coverage, and others to which employers must adhere.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) was enacted to allow employees who terminate their employment to continue health insurance coverage for a maximum period of time after leaving their employer.
The Health Insurance Portability and Accountability Act (HIPAA) was passed for a number of reasons, but as it pertains to employment and health insurance coverage, it improves the portability and continuity of health insurance coverage. It limits what can be considered a pre-existing condition (a medical condition for which treatment may not be covered for a period of time or wait period) and if and how long the exclusion can exist, especially if the individual had previous health care coverage. It prohibits employers from denying coverage or benefits or charging more for coverage for employees with medical conditions and guarantees renewal of health care coverage for employers.
Always be aware that there may be state and/or local laws that affect pay and benefits, and those laws may supersede federal law when the state law favors the employee.
(Henderson, 2006)
29
Federal Law and Compensation Systems
The Patient Protection and Affordable Care Act of 2010
Signed into law March 23, 2010, by President Obama, the Act is the most significant change to health care law since the 1965 creation of Medicare and Medicaid.
The Act does not require employers to provide health care coverage to employees, but it does provide incentives and penalties to encourage it.
The Act will take eight years to fully be implemented and many of the provisions have yet to be fleshed out through regulatory guidance.
SHRM© 2010
30
(SHRM, 2010)
Slide 30 (2 minutes)
This landmark legislation, signed into law in March 2010, reforms the health care system by expanding the availability of health insurance, regulating health insurance coverage, and restructuring health care delivery, including how it is paid for.
The Act does not require employers to offer health care coverage to employees, but it does include penalties and incentives to do so. These penalties and incentives will be discussed in more detail in an upcoming slide.
Because of the sweeping nature of the Act, we will focus our attention on how it will affect employers.
30
Federal Law and Compensation Systems
The Patient Protection and Affordable Care Act of 2010
Employers who had health care plans in effect on the date of the law’s enactment are considered “grandfathered” and their employer options differ from plans established after enactment.
Starting in 2010, all health care plans must offer:
Coverage for young adults.
No cap on lifetime benefits.
No limit on pre-existing conditions.
Automatic coverage.
(Kushner, 2010)
SHRM© 2010
31
Slide 31 (5 minutes)
Although the law was more than 2,000 pages long, it was still written in broad terms, and much of the detail has yet to be ironed out. This happens through the promulgation of rules and regulations, a process that is just beginning. For example, what does “grandfathered” really mean? If an employer whose health care plan was grandfathered in at the time of the law’s enactment makes health care policy changes after the law went into effect, is the employer still considered grandfathered in? This is an important question that will be answered during the promulgation of the regulations.
There are some changes that will affect employers effective in 2010. Effective in late 2010, all health care plans that offer dependent coverage for adult children must offer it until that adult child is 26 years of age. The law does not require all health care plans to offer dependent coverage. The decision to provide that coverage will be up to the employer.
Currently, many employers offer policies that impose a $1 million or $5 million lifetime limit on coverage. The Act eliminates caps on “essential health benefits” as defined by the U.S. Department of Health and Human Services.
Pre-existing conditions, often not covered by policies, will be eliminated for plans years beginning on or after Sept. 23, 2010, for plan participants under the age of 19. Starting in 2014, there can be no exclusions for pre-existing conditions for anyone, regardless of age.
Beginning in 2014, employers with 200 or more employees will be required to automatically enroll new employees in their plans. New employees may opt out.
31
Federal Law and Compensation Systems
The Patient Protection and Affordable Care Act of 2010
State-created health insurance exchanges (SHOPs).
Employer penalties.
Employer incentives.
(Kushner, 2010)
SHRM© 2010
32
Slide 32 (7 minutes)
The Act allows states to create health insurance exchanges, also known as small business health option plans, or SHOPs, to facilitate health care coverage, initially for small business owners (by 2014), but eventually for all employers (by 2017). If states decide not to create such a plan, the federal government will do so for residents of that state.
Employer Penalties
The law does not require employers to offer health care plans, but it does impose penalties under certain circumstances for employers who don’t:
Employers with 50 or more employees that do not offer health care coverage to their employees will be fined $2,000 per full-times employee per year if any employee in the organization receives a premium tax credit from the federal government for use in a state health insurance exchange. When counting full-time employees, the first 30 will be subtracted.
Employers with 50 or more employees that do offer health care coverage but have at least one employee getting the tax credit will be fined $3,000 for each employee receiving the credit or $2,000 for each full-time employee, whichever fine is smaller.
Employers with less than 50 employees will not face penalties for not offering health care coverage.
Employer Incentives
The law is not all punitive toward employers, however. It does offer incentives to encourage employers to offer health insurance coverage to employees.
Employers with 25 or fewer full-time employees and an average annual wage of $50,000 or less can receive a subsidy starting in 2010 of up to 35 percent of the cost of coverage if the organization pays at least half of the premium cost. The subsidy increases to 50 percent for an additional two years starting in 2014.
Qualified health benefits will receive an employer tax deduction, and there are no payroll taxes on qualified health benefits plans.
32
References
Byars, L.L., & Rue, L.W. (2004). Human resource management, 7th edition. New York: The McGraw-Hill Companies, Inc.
Henderson, R.I. (2006). Compensation management in a knowledge-based world, 10th edition. New Jersey: Pearson Education, Inc.
Mathis, R.L., & Jackson, J.H. (2006). Human resource management, 11th edition. Ohio: South-Western.
U.S. Bureau of Labor Statistics (March 10, 2010). Employer Costs for Employee Compensation. Economic News Release.
WorldatWork (2008). Total rewards model.
SHRM© 2010
33
33
