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HRCP Unit 4: Compensenation and Benefits PHRi 04 Compensation, Benefits…
HRCP Unit 4: Compensenation and Benefits
PHRi 04 Compensation, Benefits, and Work Experience
Topic 1: Total Rewards: Financial and Non-financial
4.1.2 Ethical Considerations in Compensation
(What is just and fair)
Compensation Maxim:
EEs should be compensated primarily according to the requirements of the jobs they perform and how well they perform them, and secondarily, by labor market conditions (supply and demand) and the org's ability to pay
.
Compensation is erratic
Wage vs. Salaries:
Companies that pay monthly salaries instead of hourly wages report better results. They try to simplify the payroll system. Changing from an hourly wage to a salary system generally does not improve productivity
Pay Secrecy vs. Openness:
Between both there are various degrees of openness and secrecy. Transparency can be achieved by: 1. make the wage process known 2. reveal pay grades and salary ranges 3. explain bonuses and other rewards
4.1.3 Determinants of Pay
Factors need to be considered as a whole
The major factors influencing pay can be divided into 4 categories:
External Factors
(Market, Unions, Geographical Pay Differences, Regulations, Social expectations)
Organizational Factors
(Industry location, profitability, ability to pay, size, capital or labor intensive, org philosophies, value of the job)
Job Factors
(Skill, responsibility, Effort, Working Conditions)
Individual Factors
(Performance, productivity, Experience, Seniority, potential, personal preferences)
4.1.4 Three Wage Decisions
The development of a wage and salary system requires 3 basic decisions:
Wage-level decision:
concerns the overall level of an organization.
How much $ do members of one org, receive relative to people performing similar work in other organizations?
Wage-structure decision:
concerns the pay awarded to different jobs within an organization.
How much $ is paid for one job relative to other jobs within the same company?
Individual wage decision:
concerns individual incentives and merit pay.
How much $ does an EE receive to the $ received by other EEs who perform similar work?
These 3 wage decisions illustrate the kinds of wage comparisons that EEs make
People are willing to work in exchange for the incentives/rewards they receive from working.
An EE exchange occurs when there is a balance between incentive and contributions
4.1.1 Strategic Objectives of compensation
Compensation administration is a strategic HR function that has a significant impact on other HR Functions. HR functions are influenced by compensation and viceversa
The 3 major components are: base pay, incentives, and benefits
All employers have similar compensation objectives: attract, retain, and motivate EEs
All pay decisions should satisfy these 6 objectives:
Topic 2: The Wage-level Decision
4.2.1 Establishing the Wage Level
A wage-level policy is expected to achieve three objectives:
1.Attract an adequate supply of labor
2.Keep present EEs : :smiley: with $
3.Avoid costly turnover
Wage-level changes have a small effect con org effectiveness
Attracting and keeping EEs depends on nonwage factors. The consequences of wage-level changes are basically undetermined
4.2.2 Factors Influencing the Wage-level Decision
Policies and preferences of Top Mgmt:
top mgmt can arbitrarily choose to pay above/below the market level
Organizational size:
large orgs pay higher wages. Mgr accountability on monitoring wages
Unionization:
bargaining with unions leads to higher wages
Productivity:
wage levels are influenced by profitability
4.2.3 Compensation Surveys
The major tool for making wage-level decisions is the compensation survey
Both EEs and Mgrs are inclined to accept such wage level as acceptable
The three primary kinds of wage surveys are:
Government Surveys:
conducted by government agencies on blue-white collar jobs
Private Industry Surveys:
done by professional organizations
Company-Sponsored Surveys:
conducted by a firm, or group of cooperating firms. In large orgs, a full-time staff person (or task force is responsible). Four criteria must be met
1.Reciprocity
2.Anonymity
3.Low cost
4.Timeliness
4.2.4 Using Compensation Survey Data
Mean (average):
mathematical average
Unweighted average:
mean (average) of salaries reported
Weighted average:
averaging all of the individual salaries included in the survey (salary x incumbents)
Median:
middle number in the data set
Aged survey:
data in the survey is adjusted with the
Aging factor
(multiplying the age of the survey by the movement percentage rate - e.g. 4% x 9/12)
The wage-level decision concerns pay adequacy (how much a company pays relative to the companies with similar jobs
The company can match, lead, or lag behind the market rate
Topic 3: Job Evaluation Methods
Job evaluation:
the systematic approach of determining the relative worth or value of each job
The
purpose
of Job Evaluation is to eliminate pay inequities and create an appropriate wage structure with proper pay ranges
This is done by identifying factors that define "worth" vs. job requirements
Wage-structure decision:
determining how much each job should be paid relative to to other jobs (based on job demands, not performance). The goal is to provide equal pay for jobs of equal worth
Wage surveys alone are not adequate due to unique job demands
4.3.1 Ranking Method
Consists on ranking jobs from highest to lowest value in a hierarchy, and assigning monetary values (based on 3 or 4 factors)
It is useful to arrange jobs into clusters when there are large number of jobs
4.3.2 Classification/Grading Method
Consists of establishing a predetermined number of grades or job classes
The classification process specifies a number of grades beforehand, and broad descriptions then are written of the types of jobs to be place in each of the grades
A good classification system is difficult to develop and requires extensive knowledge about the jobs, relative to others
4.3.3 Point Method
The most popular one
The method consists of analyzing the content of jobs from written JDs, and the allocating points for specific factors. The points assigned determines a range pay
Consist on 6 steps:
1.Identify key jobs
(
benchmark jobs
not the most important but the ones stable and well-defined)
2.Identify job factors used to determine pay levels
(compensable factors associated with the different jobs that justify paying one job more than another)
3.Weight the factors according to their contribution to the overall worth of the job
(most weighted factors: responsibility, knowledge, education, experience, complexity of duties, supervisory responsibility)
4.Divide each job factor into degrees that range from high to low and assign points to each degree
(degrees need to be described clearly)
5.Reach a consensus about degree assignments
(consensus should be reached rather than voting or averaging)
6.Develop a wage curve using key jobs
(wage curve is generally a straight line - linear curve)
4.3.4 Factor Comparaison Method
Similar to the point method but more complex (not popular)
The method consists of the next steps:
1.Identify key (benchmark) jobs
2.Identify job factors
3.Rank jobs
4.Assign monetary amounts to each job on each factor
5.Compare unique jobs with key jobs
4.3.5 Guide Chart-Profile Method (Hay Method)
This method uses three
compensable factors
(factors associated with the different jobs that justify paying one job more than another)
The factors are:
Know-how
,
Problem Solving
,
Accountability
:no_entry: :no_entry:
Topic 4: Job Pricing and Pay Rate Administration
4.4.1 Pay Grdes and Pay Ranges
In a wage structure jobs are grouped into
pay grades
(labor grade or job class), and a
pay range
is associated to each pay grade
A
pay range
has a range spread (10-20% above/below mid-point). The
pay range
can be narrow or wide spread
Comp-ratio:
useful number for analyzing how people are paid within each
pay range
(person wage/mid-point x 100)
In some compensation systems individual pay levels are based on
step increases
based on performance and LoS
4.4.2 Red-Circle Job Rates
Jobs that are either over/under paid. And these present special problems
Approaches to this are: reduce the wages, reduce wages in small increments, wait for inflation (or other costs) to increase the wage curve, and last redesign the job
4.4.3 Adjustments for Economic Conditions
Two Methods:
Provide an across-the-board increase:
adding a fixed sum of $ to every job in the hierarchy. This is tied to the Consumer Price Index (CPI), which measures the rate of inflation or Cost-of-living adjustment (COLA) triggered by CPI
Percentage increase:
adjusting pay levels by a fixed % amount
Decreasing-rate-increase:
adjust the wage curve in which higher-level jobs are increased by smaller amounts (typically minimum-wage legislation or collective-bargaining pressures)
Wage compression:
combination of decreasing-rate and fixed-rate increases
Economic declines
most common responses: hiring freeze, defer pay increases, furlough workers, ExCo to take unpaid leaves
4.4.4 Individual Pay Rate Determination
The third major decision is
Individual wage decision
. This concerns the relative pay of individuals who perform similar jobs in the same company
Performance
Experience
Seniority
(LoS)
Potential
Salary Compression and Salary Inversion
(new hires with high salaries)
4.4.5 Reflecting Geographic influences in Pay Structures
Wage and salary structures need to be adjusted according to the cost of living in each area
Companies that fail to adjust their salaries for these geographic differences will be overpaying employees in rural locations
4.4.6 Expatriate Allowances
These allowances can add up to x2/3 times the EEs base salary and can become quite complicated due to tax considerations
Expat-lite assignments
: when allowances are significantly reduced
4.4.7 Establishing Administrative Controls
Control through the wage structure:
guidelines and mechanisms must be enforced
Controls through budgeting:
help to ensure future expenditures are coordinated and controlled (top-down and bottom-up methods)
After jobs have been arranged in a hierarchy of job worth, pay need to be assigned with them
Job pricing:
placing a dollar value on the worth of a job. It involves
pay ranges
and
pay grades
Pay ranges:
range of pay associated with each pay grade, which indicates how much individual incentive is associated with the job
Pay grades:
a cluster of jobs along the hierarchy of job worth that are all paid the same rate of pay
Topic 5: Economic Factors Affecting Compensation
4.5.1 Inflation
Must be revised annually at minimum, in some cases monthly or weekly
4.5.2 Interest rates
When interests go up, the cost of capital increases and business activity goes down, and so employment
4.5.3 Industry Competition
Occurs in both private and public sector
4.5.4 Foreign Competition
Companies have been forced to close because of their inability to compete with foreign competitors
4.5.5 Economic Growth
Productivity improvements have a major impact on economic prosperity
4.5.6 Demographic Trends
Compensation is influenced by the supply of labor. Excess of supply depresses wages, and labor shortages tend to increase wages
The labor market is influenced by 5 demographic forces: birthrates, participation rates, immigration, education , and unemployment
Topic 6: Incentive Compensation Systems
4.6.1 Money and Motivation Theories
Abraham Maslow's Hierarchy of Needs Theory
The most popular need theory, with 5 universal needs in a hierarchy of importance
Prepotency: Higher-level needs are not important (and manifested) until lower-level needs are satisfied
David McClelland's Learner Needs Theory
Examined needs for Achievement, Affiliation, and Power
A lot of attention on the need for achievement (nAch)
Very important for entrepreneurial success, and learned at an early age
Frederick Herzberg's Motivator-hygiene Theory
Motivator factors (content) are separate from hygiene factors (context)
Money is an hygiene factor and should not be used to motivate workers
Self-determination Theory
Examines the effects of extrinsic rewards on intrinsic satisfaction
The idea is that when people are paid to do something, they feel a loss of personal control
Intrinsic motivation was destroyed by all external factors
Expectancy Theory
People decide what to do by subjectively estimating the probability of being able to perform an activity and whether that activity is rewarding
In short maximize pleasure, minimize pain
It explains the relationship between effort, performance, and rewards (outcomes). And it depends on:
1.Expectancy
(perceived relationship between effort and performance)
2.Instrumentality
(perceived relationship between performance and outcomes)
3.Valence
(value of outcomes)
:no_entry: :no_entry:
People are motivated to exert effort if by doing so, they can perform well and attain desired outcomes
Expectancy Theory is based on perceptions
Equity Theory
A theory of job satisfaction suggesting that people compare their inputs/outputs with the inputs/outputs of others
Attitude towards pay is determined by how much they receive, what they do to earn it, and whether they feel is fair compared to others
Values are determined by people's perceptions, rather than an objective value
Goal Setting Theory
Individuals perform significantly better when they are attempting to achieve a specific goal
3 types of goals: Participative, Assigned, Do-your-best
Motivation and Financial Incentives (Reinforcement theory)
Money is a generalized secondary reinforcer
Predicts that the individual will perform the task as long as the $ is considered and adequate reward
Predicts performance will improve as financial rewards become larger and tied to performance
4.6.2 Individual Incentives
Merit Pay
Wage level based upon performance levels (in addition to cost-of-living increases or YoS)
In order to avoid long-term consequences of increasing the base pay, companies use lump-sum merit increases (one-time rewards for performance)
Another method for calculating merit increase % is the comp-ratio approach (according to where they are in the pay range), preserving the integrity of the pay range
Sales Comissions
The EE receives a fixed % of the sales
Straight Commission
(no wage)
Bonus Commission
(+ wage based on sales quota)
Salary plus commission
(+salary)
Tiered commission
(tied to tiered sales volumes)
Variable commission
(based on different types of sales)
Bonuses
Do not increase base pay levels and provide greater discretion
Signing bonus
Performance bonus
Project bonus
Referral bonus
Retention bonus
Year-end or holiday bonus
Price-rate Incentives
Amount of $ an EE receives for performing a particular unit of work
Straight piecework:
individual incentive plan that provides a fixed rate pay for each item produced
Differential piece-rate plan:
incentive plan that provides a differentiated rate for low/mid/high standard producers. Recommended by Frederick W. Taylor :no_entry: :no_entry:
The Standard Hour Plan:
workers are paid an hourly wage, but hour is measured in units produced rather than in minutes. If they produce above standard, they receive more
The Hasley Premium Plan:
Workers receive the premium for time saved
4.6.3 Skill and Knowledge Base Pay
Also called pay-for-knowledge, reward EEs for their ability to perform an array of related tasks rather than actual work performed
EEs receive pay increases as they acquire additional skills
Different models have been used in the design of these programs:
stair-step model
(hierarchical),
building blocks model
(any other),
job-point accrual model
(by points)
Skill-based pay and and pay-for-knowledge programs also can be tied to performance
4.6.4 Differential Pay
Additional compensation for factors that make work more difficult or unpleasant
Overtime
Shift Pay
Hazard Pay
On-call Pay
Call-back Pay
Geo differentials
Weekend and Holiday Pay
4.6.5 Group and Team Incentives
Team incentives can be patterned after individual incentives
Anything that can be paid as a group incentive can be paid as a group incentive (and distributed equally)
Group incentives create greater cooperation among coworkers than individual incentives, reducing direct supervision
Group incentives are most useful when jobs are
interdependent
Group incentives are paid to indirect labor departments (supporting groups)
4.6.6 Organization-wide Programs: Profit sharing and Gainsharing
Profit Sharing
Allows EEs to share in the profits (cash plan or deferred) of a company based on profitability and an allocation formula (how $ is divided among participants)
Allocation are usually based on level of responsibility, merit, base pay, or YoS
This reduces conflict between managers and production workers
Gainsharing
Bonuses are based on improved productivity rather than % of the profit
Gainsharing is paid monthly/quarterly as opposed to profit-sharing (annually)
The most popular plans are:
Scanlon Plans:
EEs share labor-cost savings, productivity increases, and suggestions
Rucker Plans:
similar to Scanlon but based on "value added"
Improshare Plans:
tied directly to measures of productivity.
Im
proved
Pro
ductivity through
Shar
ing)
4.6.7 Strategic Alignment of Base Pay and Incentive Pay
What % of an EE"s pay should be base pay and/or incentive?
Two compensation objectives must be balanced:
security
and
motivation
Stable bureaucratic companies need a different compensation program compared to a flexible one
Three compensation objectives are
security
,
equity,
and
motivation
Base pay and incentives must be balanced in order to maximize pay objectives
Issues to be considered:
Ability to measure individual performance accurately, objectively and conveniently
Extent to which workers can control the rate of production
Degree of independence and cooperation
The size of the group
The organization's ability to produce a profit with timely and accurate measures of performance
Motivation comes from intrinsic and extrinsic rewards
Topic 7: Executive Compensation
ExCo compensation is much larger than that of other EEs, including monetary and nonmonetary rewards (car, parking etc.)
4.7.1 Salaries
Executive compensation is influenced by revenue, profitability, responsibility and setting their own salary
Sales is the best predictor, and the larger the company, the bigger the revenue
Salaries are closely related to revenue, not profitability
Just Noticeable Difference (JDN):
Amount of money required to make a significant difference in the perception of an incentive. For an executive, a large sum is required
4.7.2 Executive bonus plans
The basic philosphy behind bonuses is reward for performance
Bonus size depends, salary level, salary grade, or organizational level ($ or %)
There are both short and long-term bonuses
4.7.3 Stock Options
Viewed as an inexpensive benefit
The basic premise of most is that executives are given the option of buying a specified number of shares at a fixed price
For high-salaried executives, this can double their income
Companies can often deduct the value of the options gains for tax purpsoes
4.7.4 Nonfinantial Rewards
Known as perquisites (perks)
Top-level executives receive more perks than middle-level executives
4.7.5 Director Pay
Many executives receive additional compensation for serving on a board of directors for their own (or outside) corporation
Most outside directors receive an annual retariner fee, plus a separate fee for each board meeting or committee they attend
They can also opt for perks, stocks or even liability insurance coverage
Topic 8: Employee Benefit Programs
4.8.1 Pensions
Pension:
income individuals receive during retirement, as a deferred payment for past services
Defined benefit (DB) pension plan:
company-provided plan gives an income to retirees based on a formula (yrs of service and avg annual income for last 5 years)
Defined contribution (DC) pension plan:
individual pension fund created for each EE into which company invests a specified amount of $ each year until the EE retires
Cash balance plan:
repalce a defined benefit pension plan and allow EEs to decide how their funds will be invested (and is porable)
4.8.2 Health and Accident Insurance
Medical insurance:
medical services and hospitalization coverage
Dental care:
dental and orthodontic
Dependent care:
on-site childcare facilities, childcare allowances, day-care information, and flexible scheduling
4.8.3 Income Replacement
Life insurance and income-continuation plans help alleviate such illnesss/accident difficulties by sharing the cost of risks
Severance pay:
for terminations
Disability
Long-term disability (LTD)
help with incapacitating accident/illness
Sick Leave:
help getting regular salary when unable to work due to illness. Sometimes can be accumulated
Personal time:
can be used for illness or vacation
Long-term-care (LTC) insurance:
for people unable to care for themselves due to age or disability
Life Insurance
The two major forms of insurance convering death are life insurance and accidental death and dismemberment
Group term life insurance:
help for beneficiary
Accidental death and dismemberment
: special form of insurance for accidents resulting in death, loss of limbs or eyesight
4.8.4 Employee Services
Also called voluntary benefits, include a broad range of benefits
The costs to the employer are typically limited to administrative costs
Employee Assistance Program
(EAP)
Legal Assistance
Auto and Property Insurance
Retirement Counseling
Transfer and Relocation Assistance
(Relo expenses, sometimes lump-sum)
Tuition Reimbursement Benefit
4.8.5 Pay for Time Not Worked
Paid vacations and paid holidays create the impression that EEs are being paid for not working
Paid holidays
(full, partial, or time-off work)
Paid vacations
(fixed or based on LoS)
Paid Personal Leave
Union Activities
Reporting time
(getting paid for showing up and not working)
Sabbatical Leaves
(can be used for social work or studies)
Paid Caregiver Leave
Paid Parental Leave
Paid Funeral Leave
4.8.6 Recognition and Achievement Awards
Companies use a variety of nonfinancial incentives
Award Programs:
can be motivating if part of an overall program that includes a history of meaningful presentations
Suggestion Systems:
formal systems for encouraging idea sharing (efficiency or profitability)
EE recognition software:
most are cloud-based and many include mobile apps
Topic 9: Managing Employee Benefit Programs
4.9.1 EE Benefits Philosophy, Planning and Strategy
Are based on 3 philosophies:
1.Sharing the risks of accidents and illness
2.Forced savings for retirement or bad times
3.Sharing costs of special services
In essence, benefit programs provide a dignified way for EEs to receive a relatively secure and constant level of income in spite of accident/illness or time away from work
Benefit programs require EEs to adopt an attitude of sharing and giving
Benefit programs force people to provide for themselves by requiring them to save for retirement
4.9.2 EE Benefit Preference Surveys
Most surveys find that benefits and pay are the most highly ranked factors for EE satisfaction regardless of age
The most important benefits are healthcare and medical benefits, followed by flex hours, retirement benefits, paid time off (depending on age)
4.9.3 Cost-Benefit Analysis and Cost Management
There are four methods for analyzing the costs of EE benefit plans
Annual cost method:
reports the total annual cost for each benefit
Cost per employee per year:
divides the total annual cost of each benefit by the # of EEs
Percent of payroll:
calculates the costs of EE benefits by expressing the cost as a % of the total payroll costs
Cents-per-hour:
divides the total annual cost per EE by the # of hours worked per year
Benefit Plan Audits:
companies should audit plans regularly (eligibility and claims audits)
Coordination of Benefits:
problems occur with overlapping coverages
Utilization Review:
examines how often each benefit is used by EEs and the costs of providing each benefit program
4.9.4 Communicating Benefit Programs
A variety of communication strategies can be used (portals, agent enrollment sessions, newsletters, lunch-and-learn sessions etc.)
Benefits websites should be mobile-optimized and available 24/7
The benefits' descriptions need to be written in language the EE can understand and included as part of the NEO
Total Reward Statement:
a personalized summary of an organization"s financial commitment for each of its EEs
Topic 10: Evaluating Strategy & Program Effectiveness
4.10.1 Budgeting
It is through budgeting that compensation cost-benefit objectives are achieved
Pay budgeting involves forecasting the compensation costs associated with employing HR for the next budget year
The two approaches are:
Bottom-up:
individual pay rates for the next plan year are forecasted and summed to create a total budget. This is consistent with "zero-based budgeting"
Top-down:
total pay budget for a unit is centrally determined and then allocated to each unit and individual. HR provides merit increase grids (pay increase for each performance levels). There's also a strategy called planned pay-level rise (centralized in top mgmt)
Cost Management
Three variables are involved: number of EEs, average cash compensation, average benefit cost
Formula: Labor Costs = Employment x (Average Cash Compensation + Average Benefit Cost)
Controlling Employment:
head count control (cost reduction strategy with + and -)
Controlling Cash Compensation:
labor cost control through contingent workers or variable pay (instead of fixed pay)
Controlling benefits cost:
various strategies in place with flexible benefit plans
4.10.2 Assessment of Methods and Processes
Compensation impact analysis:
comparing outcomes of the firm against 6 criteria (legal, adequate, motivating, equitable, secure, cost-benefit effective)
Whether a pay system is adequate, motivating, equitable, and secure is based on subjective factors
Obtaining measures for these criteria require index generation (and comparing them with comp-ratios)
EE attitudes are an important source of information and can be done via a questionnaire
Topic 11: Compensation Laws and Regulations
4.11.1 Compensation Laws and Regulations
Contries have laws that regulate the compensation and benefits of EEs based on the next aspects:
Minimum wage
Overtime
Equal pay for equal work
Paid leave
Worker's compensation
Unemployment compensation
Pensions
Benefits
Taxation
