Managing Employee Benefits

CHAPTER 13

14e

Human Resource

Management

Robert L. Mathis | John H. Jackson | Sean R. Valentine

© 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

© 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Learning Objectives

Define a benefit and identify four strategic benefits considerations

Analyze the differences between employee benefits in the U.S. compared to those in other countries

Distinguish between mandated and voluntary benefits and list three examples of each

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Learning Objectives

Discuss the trend in retirement plans and compare defined benefit and defined contribution plans

Explain the importance of managing the costs of health benefits and identify some methods of doing so

Describe the growth of financial, family-oriented, and time-off benefits and their importance to many employees

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Benefits

Indirect reward given to an employee or group of employees for organizational membership

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Benefits

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Employer Provided Benefits

Absorb social costs for health care and retirement

Average over 30% to 40% of total payroll costs

Figure 13.1 - Employer Compensation and Benefits Costs Per Hour

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Benefits and HR Strategy

Benefits approach adopted as part of total rewards depends on many factors

Size of the organization

Workforce competition

Organizational life cycle

Employee demographics

Corporate strategic approach

Employees’ life stages

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Benefits as a Competitive Advantage

Benefits are offered to:

Aid recruiting and retention

Improve organizational performance

Meet legal requirements

Reinforce the company philosophy of social and corporate citizenship

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8

Benefits as a Competitive Advantage

Benefits can influence employees’ decisions about:

Which employer to work for

Looking for another job

Retirement age

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Tax-Favored Status of Benefits

Most benefits are not taxed as income to employees

Except for paid time off

Gross-up: To increase the net amount of what the employee receives to include the taxes owed on the amount

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Global Benefits

Benefits differ across the globe

Total hourly compensation

Retirement and health insurance plans

Amount of paid leave and vacation time

Paid time off for childbirth and medical disability

Paid sick leave policies

In many countries, employers and employees are taxed heavily to pay into government funds

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Global Benefits

Multinational companies must determine how to compensate both host-country nationals and expatriates

So that all employees will feel that they are being treated fairly

Decisions about compensation impacts global attraction and retention of employees for international employers

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Public-Sector Benefits

Public sector workers

Enjoy more benefits than those in the private sector

Belong to labor unions at a much higher rate than nongovernment workers

Their union contracts include:

Free health care

Traditional defined benefit pension plans

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Benefits Management Components

Benefits design

Benefits administration

Technology administration

Benefits measurement

Cost control efforts

Communication to employees

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Figure 13.4 - Benefit Design Decisions

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Flexible Benefits Plan

Allows employees to select the benefits they prefer from groups of benefits established by the employer

Challenges faced when providing choices

Employees may choose an inappropriate benefits package

Younger employees may decide not to participate in the retirement plan

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Flexible Benefits Plan

Adverse selection: Only higher-risk employees select and use certain benefits

Higher administrative costs for the organization

Part time employees:

Are most likely to receive paid time off and retirement benefits

Are least likely to receive health and life insurance benefits

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Domestic Partner Benefits

In states where gay marriage is legal:

Companies must treat same-sex partners in the same manner as traditional married couples

Same-sex domestic partners are:

Entitled to coverage on company medical insurance plans

To be recognized under retirement plans as a surviving spouse

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Domestic Partner Benefits

Offering same-sex domestic partner benefits shows that organization:

Is compassionate, progressive, and respectful of all employees

Can be a competitive advantage in the search for talent

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Older Workers Benefit Needs

Benefits attractive to older workers

Modified work schedules

Part-time benefits

Simplified seasonal travel and wellness programs

Annual financial planning counseling

Phased retirement programs - Allow employees to:

Work part time

Withdraw some retirement funds at the same time

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Benefits Administration and Technology

Open enrollment: Time when employees can change their participation level in various benefit plans and switch between benefit options

Outsourcing benefits administration

Many organizations must make coordinated efforts to administer benefits programs

Third-party administrators (TPA): Vendor that provides administrative services to an organization

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Benefits Administration and Technology

Technology and employee self-service

Internet and computer-based systems are being used to:

Communicate benefits information

Conduct employee benefits surveys

Facilitate benefits administration

Decrease expenses

Increase positive communication

Effectively connect people across many HR functions

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Benefits Administration and Technology

Self-service: Technology that allows employees to:

Change their benefits choices

Track their benefits balances

Submit questions to HR staff members and external benefits providers

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Figure 13.6 - Frequently Used Benefits Metrics

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Benefits Cost Control

Reducing or dropping benefits

Cost sharing with employees

Sponsoring wellness programs

Fostering employee health education

Changing prescription drug programs

Consolidating of benefits packages

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Benefits Communication

Employers create a clear communication strategy using:

Benefits website

Social media

Information to be communicated:

Value of the plans offered

Reasons changes have to be made

Fundamental costs of the plan

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Benefits Communication

Benefits statement - Personal statement of benefits that translates benefits into dollar amounts

Give the employee a snapshot of the total compensation they receive

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Types of Benefits

Cafeteria benefit plan: Employees are given a budget and can purchase the bundle of benefits most important to them:

From the menu of options offered by the employer

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Figure 13.7 - Types of Benefits

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Figure 13.8 - How the Typical Benefits Dollar is Spent

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Legally Required Benefits

Social Security Act of 1935

Provides old age, survivor’s, disability, and retirement benefits

Federal payroll tax (6.2%) on both the employer and the employee

Medicare taxes are 2.9%

Benefit payments are based on an employee’s lifetime earnings

Administered by the social security administration

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Workers’ Compensation

Security benefits provided to persons who are injured on the job

Concepts that balance the rights of employers and employees under workers’ compensation:

No-fault insurance: Injured workers receive benefits even if the accident was their fault

Exclusive remedy: Workers’ compensation benefits are the only benefits injured workers may receive to compensate for a work-related injury

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Figure 13.10 - The Three Legged Stool of Retirement Income

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Retirement Plan Concepts

Vesting: Right of employees to receive certain benefits from their pension plans

No pension rights accrue if they have not been employed long enough to be vested

Portability: A pension plan feature that allows employees to move their pension benefits from one employer to another

Once workers are vested they can transfer their fund balances to other retirement plans

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Retirement Plan

Retirement program established and funded by the employer and employees

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Types of Retirement Plans

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Figure 13.11 - Comparison of Defined Benefit and Defined Contribution Retirement Plans

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Common Defined Contribution Plans

Profit-sharing plans

Employee stock ownership plans (ESOPs)

401(k) plans: Agreement in which a percentage of an employee’s pay is withheld and invested in a tax-deferred account

Auto-enrollment: Employee contributions to a 401(k) plan are started automatically when an employee is eligible to join the plan

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Legal Requirements of Retirement Benefits

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Figure 13.12 - Key Provisions of the Affordable Care Act

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Controlling Health Care Benefit Costs

Increasing deductibles and copayments

Instituting high-deductible plans

Increasing employee contributions

Using managed care

Limiting family coverage; excluding spouses

Switching to consumer-driven health plans

Increasing wellness efforts

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Increasing Employee Contributions

Types of programs that attempt to reduce health care costs paid by employers

Managed care: Approaches that monitor and reduce medical costs through restrictions and market system alternatives

Spousal exclusions - Limit access to a company’s health plan when employee’s spouse works for another company that offers health insurance

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Consumer-Driven Health Plans

Provides employer financial contributions to employees to help cover their health-related expenses

Gives employees ownership of their health care dollars

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Overview of COBRA Provisions

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Figure 13.13 - Timeline of COBRA Notification Requirements

Source: Adapted from https://www.goigoe.com/Employers/COBRATimelines.aspx

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Health Insurance Portability and Accountability Act (HIPAA) of 1996

Allows employees to switch their health insurance when they change employers

Regardless of pre-existing health conditions

Requires employers to:

Provide privacy notices to employees

Not disclose of health information without authorization

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Figure 13.14 - Common Types of Financial Benefits

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Insurance Benefits

Common Types of Insurance Benefits

Life insurance

Typical level of coverage is one and one-half or two times an employee’s annual salary

Disability insurance

Provide continuing income protection for employees who become disabled and are unable to work

Long-term care insurance

Allow employees to purchase insurance to cover costs for long-term health care in a nursing home, an assisted-living facility, or at home

Legal insurance

Employees (or employers) pay a flat fee for a fixed number of hours of legal assistance each month

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Family Medical Leave Act (FMLA)

Coverage

Employers with 50 or more employees who live within 75 miles of the workplace

Employees who have worked at least 12 months and 1,250 hours in the previous year

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Family Medical Leave Act (FMLA)

FMLA leave provisions

Maximum of 12 weeks of unpaid, job-protected leave during any 12-month period for the following situations:

Childbirth and new born care within one year of birth

Adoption or foster care placement of a child

Caring for a spouse, child, or parent with a serious health condition

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Family Medical Leave Act (FMLA)

Serious health condition of the employee: Health condition requiring in-patient, hospital, hospice, or residential medical care or continuing physician care

Military family members who must handle the affairs for military members called to active duty

26 weeks leave to care for a military service member injured while on active duty

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Family Medical Leave Act (FMLA)

Impact of the FMLA

Significant percentage of employees have taken family and medical leave

Employers have to cover the workload for employees on family leave

Placed significant demands on HR professionals to ensure compliance with FMLA provisions

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Figure 13.15 - Guidelines Regarding FMLA Administration

Source: http://www.dol.gov/whd/fmla

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Family-Care Benefits

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Paid Time-Off and Other Benefits

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Running head: MARKETING PLAN 1

MARKETING PLAN 5

Marketing Plan

Kelly Moore

Strayer University

BUS 599 Strategic Management

Dr. Etta Steed

May 5, 2016

Marketing Plan

Jay's Beverage Company deals with a couple different types of organic soda. It is imperative for the originators to craft a name that potential clients can easily identify themselves with and keeping a part of their family origin intact. The company is focused on continuously operate in the competitive industry and stay in line with best corporate practices while using the best quality and taste for favorable customer satisfaction. Jay's, in line with its mission, will strive to facilitate an organic environment in manufacturing or products safe for human consumption.

Target Market

Jay's Beverage Company would like their soda to appeal to everyone. Specifically though, Jay's will target those who are health conscious, but still enjoy something sweet and refreshing. Ideally Jay's will target families with young and children. Parents today are no so inclined to give their children soda anymore. Jay's would like to appeal that the beverages they offer are organic and natural and safer for consumption compared to those of major soda corporations.

In the non-alcoholic beverage industry there are many consumers. Analysis will be necessary to determine who would be more likely to consume the product. The company will target all ages and races.

As far as demographic goes, Jay's will target those of middle to upper-class. Jay's products will be priced higher than Coke or Pepsi because of the natural and organic ingredients that will be used to make the soda. This of course does not mean that the beverages cannot or will not be consumed by those of the lower-class.

Market Competition

The non-alcoholic beverage industry is already widely competitive. Not only will Jay's be up against the already well established major soda brands such as Coca Cola and Pepsi, they will be competing against other natural and organic beverages. This makes the beverage market very competitive and new business find it difficult to craft strategies that can deal with these two companies. Market competition is stiffer when there are already strongly established businesses. Jay's will to push for shelf space in retail markets.

Coming up with an organic soda is among the most effective marketing strategies. With Coke and Pepsi leading the industry, it makes it difficult for new product to find space therefore Jay's will need use creative strategies. Compared to the alcoholic beverage industry, the non-alcoholic beverage industry has a larger consumer base. Differentiating the product by introducing it as an organic and natural beverage will create an impression in the market that this is a completely new product that is also much healthier for consumption. Developing a satisfying product will enable the company to attract and retain customers which in turn will steadily increase the market share of the company in the new and competitive market.

Company's Message

Jay's message to let the consumers know they are new to the market and plans to use the strategies they have put in place. By analyzing the market, Jay's has recognized the needs and wants of the consumers. Jay's will ensure their consumers of the benefits of drinking their beverage's compared to those already in the market. Jay's focus is on their consumers wants and needs and delivering the best available product their able to produce.

Marketing Vehicles

One marketing vehicle that Jay's will use is social media. It is so easy to spread advertisements through social media. Consumers are able to share their thoughts with their friends and contacts through social media as well. The company is able to share their message, promotions, and encourage others to share it as well. Social media is an inexpensive and powerful marketing tool that helps build trust and authority that can ultimately grow the business (Clark, n.d.)

Variable Pay and Executive Compensation

Chapter 12

14e

Human Resource

Management

Robert L. Mathis | John H. Jackson | Sean R. Valentine

© 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

© 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Learning Objectives

Define variable pay and identify three elements of successful pay-for-performance plans

Discuss three types of individual incentives

Identify key concerns that must be addressed when designing group/team variable pay plans

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Learning Objectives

Specify why profit sharing and employee stock ownership are common organizational incentive plans

Explain three ways that sales employees are typically compensated

Indicate the components of executive compensation and discuss criticisms of executive compensation levels

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Variable: Incentives for Performance

Variable pay - Compensation tied to performance

Individual

Group/ team

Organizational

Beneficial for both employees and employer

Employers - More output per employee

Employee - More pay

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4

Why Use Variable Pay?

Variable Pay Assumptions

Some people perform better and are more productive than others

Better performing employees should receive more compensation

Some jobs contribute more to organizational success than others

Total compensation should be tied directly to performance and results

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5

Figure12.1 - A Variety of Possible Incentives

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Developing Successful Pay-for-Performance Plans

Reasons for Pay-for-Performance Plans

Enhance results and reward employees financially

Link strategic goals and employee performance

Reward and recognize employee performance

Promote achievement of HR objectives

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7

Combating Variable Pay Complexity

Develop clear, understandable plans that are continually communicated

Use realistic performance measures

Keep plans current and linked to organizational objectives

Link results to payouts that recognize differences

Identify variable pay incentives separately from base pay

Successful Incentive Plans

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8

Figure12.2 - Factors for Successful Variable Pay Plans

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Combating Variable Pay Complexity

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Figure12.3 - Categories of Variable Pay

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Individual Incentives

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Individual Incentives

Piece-rate systems

Straight piece-rate system

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

Differential piece-rate system

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

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Individual Incentives

Bonus

One-time payment that does not become part of the employee’s base pay

Massive kinked bonuses

Very large all or nothing bonus

Spot bonuses

Can be awarded at any time

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Individual Incentives

Nonmonetary incentives

Performance awards

Incentive rewards for performance

Recognition awards

Recognizes individual employees for their work

Service awards

Recognize service

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Individual Incentives

Commissions

Percentage of the money taken in on sales

Usually given in addition to a salary to an agent or sales person

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Figure12.4 - Purposes of Nonmonetary Incentives

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17

Figure12.5 - Possible Reasons for Using Group/Team Variable Pay

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Design of Group/Team Incentive Plans

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Group/Team Incentives

Distributing rewards

Same-size reward for each member

Different-size reward for each member

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Group/Team Incentives

Challenges with group/team incentives

Rewards distributed in equal amounts to all members may be perceived as unfair

Free riders - Member of the group who contributes little

Team size - Individual efforts of employees have little effect on the total performance of the group in large groups

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Figure12.6 - Conditions for Successful Group/Team Incentives

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Types of Group/Team Incentives

Group/team results

Group production

Cost savings

Quality improvement

Gainsharing: Sharing with employees of greater-than-expected gains in productivity through increased discretionary efforts

Improshare

Scanlon plan

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Organizational Incentives

Primary Objectives

Increase productivity and organizational performance

Attract or retain employees

Improve product/service quality

Enhance employee morale

Drawbacks

Disclosure of financial information

Variability of profits from year to year

Profit results not strongly tied to employee efforts

Profit Sharing

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24

Figure12.7 - Framework Choices for a Profit-Sharing Plan

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Employee Stock Plans

Stock option plan

Employees can buy fixed number of shares of company stock

At a specified price for a limited period of time

Employee stock ownership plan (ESOP)

Gives employees significant stock ownership in the organization they work

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Advantages and Disadvantages of ESOP

Advantages

Favorable tax treatment for ESOP earnings

Employees motivated by their ownership stake in the firm

Disadvantages

Retirement benefit tied to the firm’s future performance

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Figure12.8 - Metric Options for Variable Pay Plans

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Types of Sales Compensation Plans

Salary-only

All compensation is paid as a base wage with no incentives

Straight commission

Compensation is computed as a percentage of sales in units or dollars

Draw system makes advance payments against future commissions to the salesperson

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29

Types of Sales Compensation Plans

Salary-plus-commission or bonuses

Compensation is part salary for income stability and part commission for incentive

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30

Types of Commission

Straight commission system - Percentage of the value of the sales is given to the sales person

Advantage - Requires the sales representative to sell in order to earn

Disadvantage - Offers no security for the sales staff

Draw: Amount advanced against, and repaid from, future commissions earned

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31

Types of Commission

Salary-plus-commission or bonuses

Compensation is part salary for income stability and part commission for incentive

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Figure12.9 - Sales Metric Possibilities

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Executive Compensation

Handled differently than other employees’ pay

Usually more than business unit heads with similar responsibilities

Is a measure of the power that a CEO brings to the organizational relationship

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Executive Compensation

Controversy

Should include an element of risk for the executive

Based more on peer group practices than on a rational executive compensation strategy

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35

Figure 12–10 Difficult CEO Responsibilities

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Changes in the Context of Executive Compensation

Say on Pay

Publically listed companies must allow share holders to vote on executive compensation

Clawbacks

Allows a company to recover any incentive based pay that was paid out during the prior 3 years if it would not have been paid under restated financial statements

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Figure12.11 - Components of Executive Compensation Packages

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Executive Compensation Considerations and Concerns

Would another company hire this person as an executive?

How does the executive’s compensation compare with that for executives in similar companies?

What would an investor pay for the level of performance of the executive?

Is the executive’s pay consistent with pay for other employees within the company?

Reasonableness of Executive Compensation

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39

Figure12.12 - Common Executive Compensation Criticisms

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Executive Compensation and Boards of Directors

In most organizations the board of directors is the major policy-setting entity

Must approve executive compensation packages

Compensation committee : Subgroup of the board of directors that is composed of directors who are not officers of the firm

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Total Rewards and Compensation

CHAPTER 11

14e

Human Resource

Management

Robert L. Mathis | John H. Jackson | Sean R. Valentine

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© 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Learning Objectives

Identify the three general components of total rewards and give examples of each

Explain the major laws governing employee compensation

Outline strategic compensation decisions

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Learning Objectives

Describe the challenges of managing global compensation systems

Illustrate the steps in developing a base pay system

Describe how individual pay rates are set

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Nature Of Total Rewards and Compensation

Total rewards: Monetary and non-monetary rewards provided to attract, motivate, and retain employees

Strategic decisions that guide the design of compensation practices:

Legal compliance with all applicable laws and regulations

Cost-effectiveness for the organization

Internal and external equity for employees

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Nature Of Total Rewards and Compensation

Optimal mix of compensation components

Performance enhancement for the organization

Performance recognition and talent management for employees

Enhanced recruitment, involvement, and retention of employees

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Figure 11.1 - Total Rewards Components

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Figure 11.2 - Elements of Total Rewards

Source: Adapted from WorldatWork (http://www.worldatwork.org).

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Components of Compensation

Components Description
Tangible rewards Elements of compensation that can be quantitatively measured and compared between organizations
Intangible rewards Elements of compensation that cannot be as easily measured or calculated
Base pay Basic compensation that an employee receives, usually as a wage or salary
Wages Payments calculated directly from the amount of time worked by employees
Salary Consistent payments made each period regardless of the number of hours worked
Variable pay Compensation linked directly to individual, team, or organizational performance
Benefit Indirect reward given to an employee or group of employees as part of membership in the organization

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Legal Constraints On Pay Systems

Fair Labor Standards Act (FLSA) - Primary federal law affecting compensation which is enforced by the Wage and Hour Division of the U.S. Department of Labor

Provisions focus on the areas covering:

Minimum wage

Limits on the use of child labor

Overtime provisions (exempt and nonexempt statuses)

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9

Areas Under FSLA

Minimum wage - Set by FLSA to be paid to a broad spectrum of covered employees

Congressional action is the only way to change it

Child labor provisions - FLSA set the minimum age for employment with unlimited hours at 16 years

For hazardous occupations, the minimum is 18 years of age

Individuals 14 to 15 years old may work outside school hours with certain limitations

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Areas Under FSLA

Exempt and nonexempt statuses

Exempt employees: Employees who are not paid overtime

Nonexempt employees: Employees who must be paid overtime

Overtime - FLSA established overtime pay requirements at one and one-half times the regular pay rate for all hours worked over 40 in a week

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Figure 11.3 - Determining Exempt Status under the FLSA

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Common Overtime Issues

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Acts and Legislation Affecting Compensation

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14

Additional Laws Affecting Compensation

Prevailing wage: An hourly wage determined by a formula that considers the rate paid for a job by majority of the employers in the appropriate geographic area

Garnishment: A court order that directs an employer to set aside a portion of an employee’s wages to pay a debt owed to a creditor

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15

Independent Contractor Regulations

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Figure 11.5 - Continuum of Compensation Philosophies

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Strategic Compensation Decisions

Communicating pay philosophy - Helps employees recognize:

Value of the total reward package

How their job performance might affect their compensation

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Strategic Compensation Decisions

Compensation responsibilities

HR specialists develop and administer the organizational compensation system

They ensure pay practices comply with all legal requirements

Line managers evaluate employee performance and participate in pay decisions

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Payroll Administration

Assure compliance with compensation laws

To maintain positive employee relations

Payroll staff report to:

HR function

Accounting function

Liability for legal compliance remains with the company

Even if the payroll process is outsourced

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Figure 11.6 - HR Metrics for Compensation

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Motivation Theories and Compensation

Expectancy theory: Employees’ motivation is based on the probability that:

Their efforts will lead to an expected level of performance that is linked to a valued reward

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Figure 11.7 - Expectancy Theory

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Motivation Theories and Compensation

Equity theory: Individuals judge fairness in compensation by comparing their inputs and outcomes against the inputs and outcomes of referent others

Referent others - Workers that the individual uses as a reference point to make these comparisons

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Figure11.8 - Equity Theory

Source: Adams, 1965.*

*Adapted from John Stacey Adams, J. S. (1965). “Inequity in social exchange.” Advances in Experimental Social Psychology. Volume 62, 1965, 335–343.

© 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Compensation Fairness and Equity

Compensation Fairness and Equity

External equity

Internal equity Procedural Justice Distributive Justice

Pay secrecy vs. openness

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Figure 11.9 - Compensation Quartile Strategies

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Market Competitive Compensation

Used when the employer is experiencing financial difficulties and when an abundance of workers is available

Lag-the-Market Strategy

Aggressive approach that enables a company to attract and retain sufficient workers with the required capabilities and be more selective when hiring

Lead-the-Market Strategy

Attempts to balance employer cost pressures and the need to attract and retain employees by providing compensation levels that meet the market for the employer’s jobs

Match-the-Market Strategy

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Selecting a Quartile

Deciding which quartile position to target for pay structures is a function of many considerations:

Financial resources available

Competitiveness pressures

Market availability of employees with different capabilities

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Selecting a Quartile

Decisions about compensation mix and competitive position are related

Should be addressed as part of a comprehensive total rewards strategy

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Competency-Based Pay

Rewards individuals for the capabilities they demonstrate and acquire

In knowledge-based pay (KBP) or skill-based pay (SBP) systems employees:

Start at a base level of pay

Receive increases as they learn to do other jobs

Gain additional skills and knowledge

Become more valuable to the employer

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Compensation System Design Issues

Team

How to develop compensation programs that support the team concept

Individual

How to compensate individuals whose performance may be a result of team efforts and achievements

Individual versus Team Rewards

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Figure 11.11- Staffing Categories for International Assignees at Multinational Enterprise (MNE)

Source: Adapted from McPhail, Fisher, Harvey, & Moeller, 2012 and Isidor, Schwens, & Kabst, 2011.

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Compensating Expatriates

Maintain an expatriate’s standard of living in the home country

Home-Country-Based Approach

Compensate the expatriate at the same level as workers from the host country

Host-Country-Based Approach

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Figure 11.12 - Compensation Administration Process

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Valuing Jobs with Job Evaluation Methods

Job evaluation: Formal, systematic means used to identify the relative worth of jobs within an organization

Compensable factor: Job value commonly present throughout a group of jobs within an organization

Derived from job analysis

Reflect the nature of different types of work performed in the organization

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Job Evaluation Methods

Job Evaluation Methods

Point factor Method

Ranking method

Classification method

Factor-comparison method

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Market Pricing

Use of market pay data to identify the relative value of jobs based on what other employers pay for similar jobs

Identifying relevant market pay data for jobs that are good matches with the employer’s:

Jobs

Geographic considerations

Company strategies and philosophies about desired market competitiveness levels

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Job Evaluation Methods

Advantages

Disadvantages

Ties organizational pay levels to the external job market, without internal job evaluation distortion

Communicates to employees that the compensation system is market linked

Relies on market survey data

Specific job may differ from a matching job in the survey

Market data’s scope is a concern

Tying pay levels to market data can lead to wide fluctuations

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Pay Surveys

Collection of data on compensation rates for workers performing similar jobs in other organizations

Benchmark jobs: Jobs found in many organizations that can be used for the purposes of comparison

Internet-based pay surveys

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Using Pay Surveys

Survey Data Relevance and Validity

Participants

Broad-based

Timeliness

Job matches

Details provided

Methodology

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Pay Surveys and Legal Issues

Conditions to be met by organizations to participate in surveys:

Must be administered by a third party

Data must be more than three months old

Minimum of five employers must participate in the survey

No single employer’s data may be worth more than 25 percent of the total

All data must be aggregated and stripped of any identifying information

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Pay Grades

Groupings of individual jobs having approximately the same job worth

Market line: Graph line that shows the relationship between job value as determined by:

Job evaluation points

Pay survey rates

Market banding: Grouping jobs into pay grades based on similar market survey amounts

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43

Pay Ranges

Each pay grade pay level can be determined by making the market line the midpoint line of the new pay structure

Broadbanding: Practice of using fewer pay grades with much broader pay ranges than in traditional compensation systems

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44

Figure 11.13 - Market Pay Line and Job Evaluation Points

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Individual Pay

Red-circled employees: Current jobholder who is paid above the range set for the job

Green-circled employees: Incumbent who is paid below the range set for the job

Pay compression: Situation in which pay differences among individuals with different levels of experience and performance in the organization becomes small

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Approaches to Provide Employees With Performance-based Increases

Targeting high performers - Focuses on providing the top-performing employees with higher pay raises

Pay adjustment matrix - Reflects an employee’s upward movement in a firm

Factors considered:

Employee’s level of performance as rated in an appraisal

Employee’s position in the pay range

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Standardized Pay Adjustments

Standardized Pay Increases

Seniority

Cost-of-Living Adjustments (COLA)

Across-the-Board Increases

Lump-Sum Increases (LSI)

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Figure 11.16 - Pay Adjustment Matrix

Source: Adapted from Payscale’s 2012 Compensation Best Practices report.

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Compensation Challenges

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