John Carlo O.

Magsino HRMGT-1101

POINTERS TO REVIEW

MODULE 4:

COMPENSATION AND BENEFITS

 A compensation package is an important part of the overall strategic HRM plan,

since much of the company budget is for employee compensation.

 A compensation package can include salary, bonuses, health-care plans, and a

variety of other types of compensation.

 The goals of compensation are to attract people to work for your organization
and to retain people who are already working in the organization.

 Compensation is also used to motivate employees to work at their peak

performance and improve morale.

 Employees who are fairly compensated tend to provide better customer service,
which can result in organizational growth and development.

 Before beginning work on a pay system, some general questions need to be

answered. Questions such as what is a fair wage from the employee’s
perspective and how much can be paid but still retain financial health are
important starting points.

 After some pay questions are answered, development of a pay philosophy must
be developed. For example, an organization may decide to pay lower salaries but
offer more benefits.

 Once these tasks are done, the HR manager can then build a pay system that
works for the size and industry of the organization.

 Besides salary, one of the biggest expenses for compensation is medical

benefits. These can include health benefits, vision, dental, and disability benefits.
 Social Security and unemployment insurance are both required by federal law.
Both are paid as a percentage of income by the employee and employer.

 Depending on the state, workers’ compensation might be a requirement. A

percentage is paid on behalf of the employee in case he or she is hurt on the job.

 A mandatory benefit, COBRA was enacted to allow employees to continue their

health insurance coverage, even if they leave their job.

 There are three main types of health-care plans. A fee-based plan allows the
insured to see any doctor and submit reimbursement after a visit. An HMO plan
restricts employees to certain doctors and facilities and may require a copayment
and/or deductibles. A PPO plan is similar to the HMO but allows for more
flexibility in which providers the employee can see.

 Pension funds were once popular, but as people tend to change jobs more,
401(k) plans are becoming more popular, since they can move with the
employee.

 Profit sharing is a benefit in which employees receive a percentage of profit the

organization earns. Stock ownership plans are plans in which employees can
purchase stock or are granted stock and become an owner in the organization.

 Team rewards are also a popular way to motivate employees. These can be in
the form of compensation if a group or the company meets certain target goals.

 Paid time off, or PTO, can come in the form of holidays, vacation time, and sick
leave. Usually, employees earn more days as they stay with the company.

 Communication with employees is key to a successful benefits strategy.

 Another option for job evaluation is called the Hay profile method. This
proprietary job evaluation method focuses on three factors called know-how,
problem solving, and accountability. Within these factors are specific statements
such as “procedural proficiency.”

 Another pay model is the management fit model. In this model, each manager
makes a decision about who should be paid what when that person is hired.
 In addition to the pay level models we just looked at, other considerations might
include the following:

1. Skill-based pay. With a skill-based pay system, salary levels are based on an
employee’s skills, as opposed to job title. This method is implemented
similarly to the pay grade model, but rather than job title, a set of skills is
assigned a particular pay grade.

2. Competency-based pay. Rather than looking at specific skills, the

competency-based approach looks at the employee’s traits or characteristics
as opposed to a specific skills set. This model focuses more on what the
employee can become as opposed to the skills he or she already has.

3. Broad banding. Broad banding is similar to a pay grade system, except all
jobs in a particular category are assigned a specific pay category. For
example, everyone working in customer service, or all administrative
assistants (regardless of department), are paid within the same general band.
McDonald’s uses this compensation philosophy in their corporate offices,
stating that it allows for flexibility in terms of pay, movement, and growth of
employees.

4. Variable pay system. This type of system provides employees with a pay
basis but then links the attainment of certain goals or achievements directly to
their pay. For example, a salesperson may receive a certain base pay but
earn more if he or she meets the sales quota.

 The equity theory is concerned with the relational satisfaction employees get
from pay and inputs they provide to the organization. It says that people will
evaluate their own compensation by comparing their compensation to others’
compensation and their inputs to others’ inputs.
 The expectancy theory is another key theory in relation to pay. The expectancy
theory says that employees will put in as much work as they expect to receive.
 The reinforcement theory, developed by Edward L. Thorndike,[3] says that if high
performance is followed by some reward, that desired behavior will likely occur in
 the future. Likewise, if high performance isn’t followed by a reward, it is less likely
the high performance will occur in the future.
 If your organization also operates overseas, a consideration is how domestic
workers will be paid in comparison to the global market. One strategy is to
develop a centralized compensation system, which would be one pay system for
all employees, regardless of where they live.
 Organizations should develop market pay surveys and review their wages
constantly to ensure the organization is within expected ranges for the industry.
 Types of Pay
1. Salary. Fixed compensation calculated on a weekly, biweekly, or monthly
basis. No extra pay for overtime work.
2. Hourly Wage. Employees are paid on the basis of number of hours worked.
3. Piecework System. Employees are paid based on the number of items that
are produced.
 Types of Incentive Plans
1. Commission Plans. An employee may or may not receive a salary but will be
paid extra (e.g., a percentage for every sale made).
2. Bonus Plans. Extra pay for meeting or beating some goal previously
determined. Bonus plans can consist of monetary compensation, but also
other forms such as time off or gift certificates.
3. Profit-Sharing Plans. Annual bonuses paid to employees based on the
amount of profit the organization earned.
4. Stock Options. When an employee is given the right to purchase company
stock at a particular rate in time. Please note that a stock “option” is different
from the actual giving of stock, since the option infers the employee will buy
the stock at a set rate, obviously, usually cheaper than the going rate.
 Other Types of Compensation
1. Fringe Benefits. This can include a variety of options. Sick leave, paid
vacation time, health club memberships, daycare services.
2. Health Benefits. Most organizations provide health and dental care benefits
for employees. In addition, disability and life insurance benefits are offered.
 3. 401(k) Plans. Some organizations provide a retirement plan for employees.
The company would work with a financial organization to set up the plan so
employees can save money, and often, companies will “match” a percentage
of what the employee contributes to the plan.
 The EEOC covers discrimination in the workplace, including pay discrimination
based on race, color, religion, sex, and national origin. The Equal Pay Act of
1963 makes it illegal to pay different wages to men and women if they perform
equal work in the same workplace.
 More recent legislation on pay includes the Lilly Ledbetter Fair Pay Act of 2009,
the first law signed by President Obama. This bill amends the Civil Rights Act
stating that the 180-day statute of limitations for filing an equal pay lawsuit
regarding pay discrimination resets with each discriminatory paycheck. The bill
stemmed from a lawsuit against Goodyear Tire and Rubber Company by Lilly
Ledbetter, who claimed that her nineteen-year career at the company consisted
of unfair pay, compared to male workers in the organization.
 The Fair Labor Standards Act, or FLSA, was established in 1938 and set a
minimum wage for jobs, overtime laws, and child labor laws. FLSA divides
workers into exempt and nonexempt status, and jobs under exempt status do not
fall under the FLSA guidelines. An exempt employee is usually paid a salary and
includes executive, professional, outside sales, and administrative positions. A
nonexempt employee is usually an hourly employee.
 Child labor also falls under FLSA. The goal of these laws is to protect the
education of children, prohibit the employment of children in dangerous jobs, and
limit the number of working hours of children during the school year and other
times of the year.
 The Federal Employees Compensation Act (FECA) provides federal employees
injured in the performance of their jobs compensation benefits, such as disability.
Please note that this is elective for private companies but required of federal
agencies.