Module 4: Compensation
and Benefits
19% PHR
13% SPHR
Any student use of these slides is subject to the same License Agreement
that governs the student’s use of the SHRM Learning System materials.
© SHRM
4-1
Types of Compensation
Compensation and benefits are two of the most visible
elements of a total rewards system.
Types of Compensation
Direct
compensation
Pay systems
© SHRM
+
Indirect
compensation
Benefit and recognition
programs
4-2
Compensation Legislation
Davis-Bacon
Act
• Requires prevailing wages/benefits
on federal construction projects
Copeland “AntiKickback” Act
• Precludes federal contractors from
inducing employees to give up any
part of compensation
Walsh-Healey
Act
Service
Contract Act
© SHRM
• Extends prevailing wages to
federal suppliers
• Stipulates overtime pay
• Requires prevailing wages/benefits
on all federal contracts
4-3
Fair Labor Standards Act
(Wage and Hour Law)
• Applies to organizations with employees who
engage in interstate commerce, produce goods
for interstate commerce, or handle, sell, or work
on goods/materials that have been moved
in/produced for interstate commerce.
• Applies to employers with at least $500,000 in
annual dollar volume of business.
• Under FLSA, an employer has no ongoing
obligations to independent contractors.
© SHRM
4-4
Which of the following factors would
indicate independent contractor status?
A. Opportunity for profit and loss
B. Regular oral and written reports presented to a
manager
C. Right to end the relationship with the
organization at any time without incurring
liability
D. Services provided to a single organization
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4-5
IRS Independent Contractor Test
Behavioral
control
Financial
control
Type of
relationship
© SHRM
4-6
Exempt and Nonexempt Employees
Type of
Employee
Exempt
Importance:
Excluded from minimum wage and
overtime pay requirements of the law.
Nonexempt Are not excluded from minimum wage
requirements and are entitled to
overtime.
Overtime is guaranteed to employees
who are paid less than $23,660 per
year or $455 per week.
© SHRM
4-7
FLSA Exemptions
Minimum salary
An exempt
employee must
meet three
requirements.
Paid on a salary basis
without improper
deductions
Exempt duties
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4-8
Primary Duty Issue
A primary duty is the main or most important
duty and is an important part of exemption.
No particular percentage of exempt duties is
required under the FLSA.
The lower the total percentage, the greater
the legal risk if challenged.
© SHRM
4-9
Executive Exemption
An employee must:
© SHRM
Have a primary duty
of managing an
organization,
department, or
subdivision.
Direct the work of at
least two full-time
employees or their
equivalent.
Have the authority of
the employer to hire
and fire.
Affect promotion
decisions.
4-10
Administrative Exemption
 Requires performance of office or
nonmanual work directly related to the
management or general business
operations of the employer or the
employer’s customers.
 Includes the exercise of discretion and
independent judgment related to “matters
of significance.”
© SHRM
4-11
Professional Exemptions
Learned
professionals
• Requires advanced knowledge in a field of science or learning
that is acquired by prolonged instruction.
• Work is intellectual in nature and requires exercise of
discretion and judgment.
• Must meet minimum salary requirements.
• Perform work that requires invention, imagination, originality,
or talent.
Creative
professionals • Perform in a recognized field of creative or artistic endeavor.
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4-12
Highly Compensated Exemption
A highly compensated employee must:
 Be paid total annual compensation of
$100,000 or more that includes at least
$455 per week paid on a salary or fee
basis.
 Perform one of the duties of an exempt
executive, administrative, or professional
employee.
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4-13
Computer Employees
 Must meet the salary minimum with a
salary of $455 per week or $27.63 per
hour.
 Employee’s pay cannot be subject to
deductions inconsistent with the salary
basis requirement.
 Primary duties must fall into one of four
categories.
© SHRM
4-14
Outside Sales
An employee must:
 Have a primary duty involving making sales
or obtaining orders and contracts.
 Be customarily and regularly engaged away
from the employer’s place of business.
Outside sales employees are not subject
to the minimum salary requirements of
other exemptions.
© SHRM
4-15
Improper Deductions
Employers that make improper
deductions will lose the exemption if
they did not intend to pay on a salary
basis.
Example:
An exempt employee is normally not subject to
deductions for illness in less than full-day
increments. (An FMLA exception may occur.)
© SHRM
4-16
Safe Harbor
A “safe harbor” exists if:
 The employer has a clearly
communicated policy prohibiting improper
pay deductions.
 Employees are reimbursed for any
improper deductions.
 The organization makes a good-faith
effort to comply in the future.
© SHRM
4-17
FLSA Basic Overtime Provisions
Sets rate of overtime pay (1.5 times regular
pay after 40 hours worked).
Requires overtime on time worked, not time
compensated.
Sets workweek as any fixed, recurring period
of 168 consecutive hours (7 days 24 hours).
© SHRM
4-18
An employer pays an employee a $40 attendance bonus for working a
full 40-hour workweek. If the worker works 45 hours during that week,
what will the employee’s gross paycheck be if her hourly rate is $10?
A.
B.
C.
D.
$495.00
$509.50
$515.00
$517.25
© SHRM
4-19
Compensatory Time
• Overtime usually must be paid
in cash.
• Public-sector employers may
grant compensatory time off.
• Public employees can
accumulate “comp” time.
Presently, compensatory time is not allowed for
private-sector nonexempt employees.
© SHRM
4-20
FLSA Child Labor Provisions
Restrict hours and conditions of employment for minors.
Age
FLSA Regulations
Under
age 14
 Prohibited from most nonfarm work
 May be employed by parents
 Certain jobs permitted (e.g., actors, newspaper
carriers)
Ages
14-15
 During school hours: 3 hours/day, 18
hours/week
 During school vacations: 8 hours/day, 40
hours/week
 Work hours restricted
Ages
16-17
 Prohibited from hazardous jobs
 No other restrictions
© SHRM
4-21
Minimum Wage Provisions
Fair Minimum Wage Act of 2007
Raised minimum
wage to $7.25 per
hour in three
phases
© SHRM
Provides $2.13 per
hour cash wage if
claiming a tip credit
4-22
Portal-to-Portal Act
• Amends FLSA and defines general rules for
hours worked.
• Provides guidelines on:
–
–
–
–
–
–
© SHRM
On-call/standby time.
Preparatory/concluding activities.
Waiting time.
Meals and breaks.
Travel time.
Training time.
4-23
Travel Pay
Total Paid
Hours
Day
Activity
Friday
Travels to conference and
works en route
5
Saturday
Works at conference
12
Sunday
Travels from conference
and does not work en route
4
Paid time
7
8
AM
9
10
11
12
1
2
3
4
5
6
7
PM
Normal Work Hours
Unpaid time
© SHRM
Time
4-24
Equal Pay Act (EPA)
Mandates equal pay for equal work.
© SHRM
Skills
Effort
Responsibility
Working
Conditions
4-25
Which of the following is true under the
Equal Pay Act?
A. Seniority systems cannot result in pay disparity.
B. Companies should provide all employees with
the same working conditions.
C. Employees doing equal work should receive
the same pay.
D. Jobs filled primarily by women should have the
same salary as similar jobs filled by men.
© SHRM
4-26
Work Opportunity Tax Credit (WOTC)
Federal tax credit to encourage employers to
hire targeted groups of job seekers.
Administered by the DOL’s Employment and
Training Administration (ETA) and the IRS.
Includes individuals from 12 categories.
© SHRM
4-27
Additional Compensation Legislation
Lilly Ledbetter
Fair Pay Act
• States that the statute of
limitations on pay discrimination
lawsuits resets as each allegedly
discriminatory paycheck is issued
Dodd-Frank Wall
Street Reform
and Consumer
Protection Act
• States required communications
related to executive compensation
at publicly traded companies
IRS Intermediate
Sanctions
• Provides guidelines regarding the
determination of reasonable
compensation for executives of
nonprofit organizations
© SHRM
4-28
Objectives of a Compensation and
Benefits System
Compatible with mission and strategy
Compatible with organizational culture
Appropriate for the workforce
Externally and internally equitable
Effective for recruiting and retention
© SHRM
4-29
External Equity
• Compares an organization to other
organizations that share its industry,
occupation, or location.
• Organizations may decide to:
Lag
© SHRM
Match
Lead
4-30
Internal Equity
Meets employees’ needs for a fair wage and
adequate benefits.
Recognizes employees’ contributions to the
organization.
Rewards equal work with equal pay.
Does not discriminate against protected classes.
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4-31
Job Evaluation
• Determines the relative worth of each job by
establishing a hierarchy.
• Follows job analysis, which focuses on job
descriptions and specifications.
© SHRM
4-32
Job Evaluation Methods
Job-to-job
comparison
Job-topredeterminedstandard
comparison
© SHRM
Nonquantitative
Methods
Quantitative
Methods
Job
ranking
Factor
comparison
method
Job
classification
Point-factor
method
4-33
Nonquantitative (Whole-Job)
Evaluation
• Establishes a relative order of jobs.
• Does not assign numeric values.
Job
ranking
Paired
comparison
Job-to-job
comparison
© SHRM
Job
classification
Job-to-predeterminedstandard comparison
4-34
Quantitative Evaluation
• Uses a scaling system to evaluate the value of
one job is as compared to another.
• Provides a score.
Point-factor
method
Less complex,
commonly used
© SHRM
Factor comparison
method
Most complex, used
infrequently
4-35
Point-Factor Method
• Each job receives a total point value, and relative worth
can be compared.
• Examples: Guide Chart-Profile (Hay Plan) and the U.S.
government Factor Evaluation System (FES).
• Points often determine pay grade assignment.
Job A
220
May 4, 2011
© SHRM
300
Job B
400
500
Job C
600
Points
Job D
700
800
Job E
900
1,100
Nov 2, 2011
4-36
Market-Based Evaluation
Not a true job evaluation system; can be used to
develop a job-worth hierarchy.
Prices jobs in the
labor market(s)
in which an
organization
competes.
© SHRM
Uses prevailing
rates as the relative
“worth” of the jobs.
4-37
Pay Surveys
Internal custom
survey outsourced
to a consulting firm
External survey
outsourced to a
consulting firm
External survey
conducted by a
consulting firm
Internal
External
Full control of the
survey (e.g.,
design,
administration)
Ability to:
 Participate in
survey
 Provide some input
to survey design
Example:
Local HR association
contracts with a
compensation firm
© SHRM
External
published
survey data
 Limited participation,
if any (e.g., may
submit salary data)
 No control/no input to
survey design
Examples:
 Mercer
 Towers Watson
 No participation
 No control/no input to
survey design
 Widely available
 May need to purchase
survey data
Examples:
 DOL surveys
 BLS surveys
 SHRM surveys
4-38
Data Analysis
• Salary data may need to be aged,
leveled, and/or factored for geography.
– Aging uses movement in market rates to
adjust outdated salary data.
– Leveling adjusts salaries when surveyed jobs
are similar but not identical to jobs in the
organization.
– Since wage rates will vary by location, the
organization should factor for geography any
national salary survey data.
© SHRM
4-39
Sorting Salary Data
Frequency distributions and tables sort salary
data.
• Frequency distribution
− Lists the grouped
data, from lowest to
highest.
• Frequency table
− Shows the number of
incumbents who
receive a particular
salary.
© SHRM
Mean
Salary
Number of
Incumbents
$55,000
$60,000
$65,000
$70,000
$75,000
2
1
2
5
1
4-40
Salary Data: Measures of Central
Tendency
Unweighted average gives
equal weight to every salary.
Weighted average considers
the number of people who
receive each salary.
Median is the middle
number in the range.
Mode is the most frequently
occurring wage.
Annual
Salary
# of
Incumbents
Total
Salary
$55,000
$60,000
$65,000
$70,000
$75,000
2
1
2
5
1
$110,000
60,000
130,000
350,000
75,000
Totals
11
$725,000
Unweighted Average = $65,000
Weighted Average = $65,909
© SHRM
4-41
Quartiles and Percentiles
• Show how groups relate to each other.
• Show if an organization leads, lags, or
matches the job market.
0%
1st quartile
$55,000
Entry wage
© SHRM
2nd quartile
$60,000
50%
3rd quartile
$65,000
Midpoint
4th quartile
$70,000
100%
$75,000
Maximum wage
4-42
Creating a Pay Structure
Establish pay grades.
• Group jobs that have the same relative internal or
external worth.
• Pay the same rate or within the same pay range.
Set pay ranges.
• Set upper/lower bounds of possible compensation for
individuals whose jobs fall in a pay grade.
• Market data from surveys used to determine a midpoint.
© SHRM
4-43
Compa-Ratios
• Divide the pay rate of an employee by the
midpoint of the range.
• Given a range of $16 to $20 an hour, a
midpoint of $18, and a salary of $16 an hour,
the compa-ratio is:
$16 ÷ $18 = .89 or 89%.
• Compa-ratios below 1.00 mean wages are
below the midpoint; compa-ratios greater than
1.00 mean wages exceed the midpoint.
© SHRM
4-44
An employee earns $9 an hour, and the
pay range is $8 to $12. What is the
compa-ratio?
A. 66%
B. 80%
C. 90%
D. 111%
© SHRM
4-45
Broadbanding
• Combines several salary grades or job
classifications.
Management
$50,000
$105,000
110%
Technical
$22,000
Supervisory
209%
$68,000
Service Experts
$17,000
© SHRM
124%
$38,000
4-46
Broadbanding Advantages and
Disadvantages
Advantages
• Provides wider ranges.
• Reduces the number of
job grades.
• Supports de-layering.
• Provides more autonomy
to line managers.
• Enhances employee
mobility.
© SHRM
Disadvantages
• Reduces the value of
ranges.
• Affords less control.
• Creates overly broad
ranges.
• Difficult to maintain
perception of equity.
• Reduces the opportunity
for promotion.
• Can lead to divergence
from the market.
4-47
Functions and Systems
Completing paychecks
Record keeping and retention
Payroll systems
© SHRM
4-48
Base-Pay Systems
Develop a pay
determination
system that helps
attract, motivate,
and retain
employees.
© SHRM
Most employees
receive base pay
in the form of an
hourly wage or
salary.
4-49
Single- or Flat-Rate System
• Employees receive the same rate of pay,
regardless of performance or seniority.
• Typically used for elected jobs in the
public sector or union hourly positions.
• Generally corresponds to target market
survey data for the job.
• There may be a training wage in a flatrate job.
© SHRM
4-50
Time-Based Step-Rate System
• Rate is based on
longevity.
• Pay increases occur on a
predetermined schedule.
– Automatic step-rate
– Step-rate with variabilitybased performance
– Combination step-rate
and performance
5
4
3
2
1
© SHRM
4-51
Performance-Based/Merit Pay
System
• Individual performance is the basis for
pay.
• Increases are tied to performance and job
mastery.
• Employers must be able to defend
performance appraisal methods and
differences in salary increases.
© SHRM
4-52
Productivity-Based System
Pay is determined by employee’s output.
• Straight piece-rate
− Base wage rate plus additional compensation for
output
• Differential piece-rate
− One piece rate up to the standard and a higher rate
after the standard is exceeded
• Works best in assembly and manufacturing
situations.
© SHRM
4-53
Person-Based System
• Employee’s characteristics determine pay.
• Superior knowledge or skill mastery is
rewarded.
– Knowledge-based (scientists whose pay is based on
knowledge in a field or domain)
– Skill-based (machine operators cross-trained on a
variety of production equipment)
– Competency-based (professionals who excel at
defined competencies)
© SHRM
4-54
A window manufacturer guarantees its
installers a base wage plus an extra $25
for each job completed to specifications.
The employer is using a
A. merit pay system.
B. productivity-based system.
C. competency-based system.
D. flat-rate system.
© SHRM
4-55
Pay Variations
Red-circle rates
• Rates above the range
maximum
Green-circle
rates
• Rates below the range
maximum
Pay
compression
• Small differences in pay
regardless of experience,
skills, level, or seniority
© SHRM
4-56
Pay Adjustments
© SHRM
Pay
adjustment
matrix
COLAs
General
pay
increase
Seniority
Lump-sum
increases
Marketbased
increases
4-57
Time-Based Differential Pay
Based on when an employee works.
Except for overtime, FLSA does not require
differential pay.
Examples:
• Shift pay
• Emergency-shift pay
• Premium pay
• Hazard pay
© SHRM
• On-call or call-back pay
• Reporting pay
• Travel pay
4-58
Geographic Differential Pay
Geographic Differential Pay
• Differentials for labor
costs
• Differentials to attract
workers to certain
locations
• Differentials for foreign
pay
© SHRM
4-59
Incentive Pay
• Paying for performance beyond
expectations.
• Motivates employees to perform at higher
levels.
• May be a factor when determining overtime
pay.
Research tax ramifications before
implementing any incentive pay plan.
© SHRM
4-60
Individual Incentive Plans
• Improve individual performance.
• Kept separate from base pay.
Cash
awards
Provide extra
cash
compensation
based on
performance
Examples: lump
sum awards,
piece rates,
commissions
© SHRM
Noncash
award
programs
Merit awards
used to
recognize
performance,
special
contributions,
length of service
Examples: gifts,
awards, trips,
prizes
4-61
Group Incentive Plans
• Gainsharing
– Organization shares a portion of the gains
realized from group effort.
• Scanlon, Rucker, and Improshare
• Group performance
– Group is rewarded for meeting or exceeding
performance standards.
• Typically, each person receives the same amount
as a percentage of pay or flat dollar award.
© SHRM
4-62
Organization-Wide Incentive Pay
Plans
Profit-sharing
plans
• Allow employees to
share in profits.
• Include cash and
deferred profit
sharing.
© SHRM
Performancesharing plans
• Use predetermined
criteria and standards
to measure results.
• Create a fund for
incentive awards.
• Can be based on
factors such as
customer satisfaction
and quality.
4-63
Stock-Based Plans
• Encourage employees to share in the success
of the organization.
• Stock may be purchased or earned.
• Organization may facilitate stock purchase
through payroll contributions.
• Organization may structure stock purchase as a
form of ERISA-governed qualified retirement
plan (ESOP).
– Nonleveraged ESOPs
– Leveraged ESOPs
© SHRM
4-64
Long-Term Executive Incentives
SPHR only
Stock option plans (ISOs and NQSOs)
Stock purchase plans
Phantom stock
Restricted stock grants
Restricted stock units
Performance grants
© SHRM
4-65
Direct Sales Compensation
Straight
salary
Straight
commission
Salary plus
commission
Use when:
More time is
spent on
service than
sales.
There is a long
sales cycle.
© SHRM
Goal is to
increase
volume and
control costs.
Organization
needs to reward
behaviors that
support strategy.
Plan needs to be
adaptable.
4-66
Compensation for Professionals
Dual career ladder
Allows senior
technical
personnel to earn
as much as
management
personnel.
© SHRM
Maturity curves
Correlate pay with
time spent in the
field.
Used for teachers,
engineers, and
technical personnel.
4-67
Controlling Costs
Setting
ranges
• Setting upper
and lower
compensation
bounds.
• Using comparatios to
evaluate if
policies are
being
implemented
appropriately.
© SHRM
Budgeting
• Top-down
approach is
best at
controlling
costs.
Auditing
• Monitoring of
expenditures.
4-68
Indirect Compensation
Designed to:
• Reward continued employment and
promote loyalty.
• Protect employees’ physical and
financial well-being.
• Help to recruit and retain talent.
• Improve productivity, work quality, and
competitiveness.
• Provide tax-effective purchase of
insurance and benefits.
© SHRM
4-69
Benefit Needs Assessment
Review organization’s
strategy.
Review total rewards
philosophy.
Analyze benefits
design and utilization
data.
Analyze workforce
demographics.
Conduct gap analysis.
© SHRM
4-70
The purpose of a gap analysis is to
A. determine which employees are underinsured.
B. revise benefits that are not meeting employee
or organizational needs.
C. eliminate benefits that are the most costly.
D. ensure that all employees receive the same
benefits.
© SHRM
4-71
Employee Retirement Income
Security Act (ERISA)
• Establishes minimum standards for benefit
plans.
• Plans must conform to the Internal Revenue
Code’s requirements to receive tax advantages.
• Sets up the Pension Benefit Guaranty
Corporation (PBGC).
– Plans or their sponsors pay premiums to the PBGC.
– PBGC guarantees payment of vested benefits up to a
maximum limit to employees covered by pension
plans.
© SHRM
4-72
Fiduciary Responsibility
According to ERISA:
• Plan must be operated for exclusive
benefit of participants and their
beneficiaries.
• Employer must follow the prudent person
rule.
• Individuals may sue for recovery for
fiduciary breaches that impair the value of
plan assets.
© SHRM
4-73
ERISA Rules
Defines minimum
eligibility requirements
for retirement plan
benefits.
© SHRM
Defines minimum
vesting schedules for
cliff and graded vesting.
Age 21
Employees are
always 100%
vested in their own
contributions.
Completion of 12
months of service,
with few
exceptions
EGTRRA sets
vesting schedules
for employer
contributions.
4-74
Retirement Equity Act (REA)
• Provides legal protections for spousal
beneficiaries of retirement plan
participants.
• Requires written spousal consent for:
– Changes in retirement plan distribution
elections.
– Changes in spousal beneficiary designations.
– In-service withdrawals.
© SHRM
4-75
Consolidated Omnibus Budget
Reconciliation Act (COBRA)
Provides continuous group medical
coverage after a qualifying event.
Type of event determines the length of
coverage, generally 18 to 36 months.
Employer can charge actual cost plus a
2% administrative fee.
© SHRM
4-76
According to COBRA, an organization
with at least 20 employees must offer
A. health insurance to its employees.
B. continued medical coverage to employees
terminated for gross misconduct.
C. COBRA benefits to workers if the organization
terminates its health plan.
D. COBRA benefits to spouses of deceased workers.
© SHRM
4-77
COBRA Regulations (2004)
 Update general and
qualifying event notices.
 Provide an initial notice
within 90 days of the date
an employee/spouse is
covered under the plan
and mail the summary
plan description to the
residence.
 Establish reasonable
notification procedures
and communicate them
to all employees.
© SHRM
 Provide a notice of unavailability
of continuation of coverage
within 14 days of the date plan
administrator is informed of the
qualifying event.
 Notify individuals whose
coverage ends before the
maximum continuous coverage
period allowed.
 Notify individuals whose
coverage is ending of that fact
and of any continuation options
available.
4-78
COBRA Coverage Amendments
American Recovery
and Reinvestment
Act (ARRA)
• Made significant changes to
COBRA continuation
coverage rules for
employees involuntarily
terminated between
September 1, 2008, and
May 31, 2010.
© SHRM
Patient Protection
and Affordable Care
Act (PPACA)
• Generally requires group
health plans to provide
coverage to dependent
children up to age 26.
4-79
Health Insurance Portability and
Accountability Act (HIPAA)
Key provisions:
 Limits exclusions for preexisting
conditions.
 Guarantees renewability as long as
premiums are paid.
 Gives workers leaving a job with
employer-sponsored health coverage the
right to purchase coverage on their own.
© SHRM
4-80
HIPAA Privacy Rule
• Permits covered entities to use or disclose protected
health information for:
– Treatment, payment, and health-care operations.
• A written authorization from the patient is required if
outside of these purposes.
• Organizations must:
–
–
–
–
–
–
© SHRM
Establish systems for tracking protected health information.
Designate a privacy officer and complaint process.
Ensure that individuals cannot waive their rights.
Establish a system of consistently enforced sanctions.
Keep records for six years.
Establish written contracts with third parties.
4-81
After using employer-sponsored EAP services to visit a
psychologist, an employee pays out of pocket for additional
sessions—beyond the EAP coverage. The employee’s manager
calls the psychologist without the employee’s consent. Based on
information learned from the conversation, the manager
terminates the employee. This action
A.
B.
C.
D.
ignores progressive discipline procedures.
demonstrates reasonable and prudent behavior.
violates the employee’s expectation of privacy.
upholds HIPAA Privacy and Security Rules.
© SHRM
4-82
HIPAA Security Rule and ARRA
• Imposes new requirements regarding:
– Notification of security breaches of protected health information.
– Extension of HIPAA Privacy and Security Rules to include
business associates.
– Enforcement and civil penalties for violations of HIPAA Privacy
and Security Rules.
– Access and accounting requirements.
• Provides funding to improve the nation’s health-care
information technology systems.
• Includes incentives to promote the use of electronic
health records, telemedicine, and clinical data
repositories.
© SHRM
4-83
Older Worker’s Benefit Protection Act
(OWBPA)
Prohibits older workers from waiving their ADEA rights
unless they are given 21 days to consider the agreement
and consult an attorney (45 days for group terminations).
Employees have seven days to revoke the agreement after
signing.
Release must reference age discrimination claims under
ADEA.
© SHRM
4-84
Family and Medical Leave Act
(FMLA)
• Covers employers with 50
or more employees for 20
or more workweeks in
current or preceding year.
• Employee must have
worked at least 12 months
for employer, have worked
1,250 hours in past year,
and work at a site that 50
or more employees work
within 75 miles of.
© SHRM
• Provides up to 12
workweeks of unpaid,
job-protected leave for
birth or adoption of a
child or serious health
condition of a child,
spouse, parent, or the
employee.
4-85
FMLA Updated Regulations
Department of Labor regulations pertaining
to:
• “Serious health condition” definition.
• Employee’s notice of FMLA leave.
• Intermittent leave.
• Medical certification.
• Fitness for duty.
© SHRM
4-86
FMLA Expansion
FMLA-eligible employees are entitled to:
Qualified
exigency
leave
• FMLA leave due to a spouse, son,
daughter, or parent being on or
called to covered active duty.
Up to 12
workweeks
Military
caregiver
leave
• FMLA leave for an eligible
employee who is the spouse, son,
daughter, parent, or next of kin to a
covered service member with a
serious injury or illness.
Up to 26
workweeks
during a 12month
period
© SHRM
4-87
Uniformed Services Employment and
Reemployment Rights Act (USERRA)
• Protects the employment, reemployment, and
retention rights of persons who serve in the
uniformed services.
– Requires employees to provide oral or written notice
of the need for leave (30 days if feasible).
– Allows for five years of leave.
– Gives employees on leave the same seniority-based
benefits they would have received if they had not
taken leave.
© SHRM
4-88
Uniformed Services Employment and
Reemployment Rights Act (USERRA)
• Requires that leave not create a break in
service for pension plan purposes.
• Requires that employer health plans permit
employees on leave to continue coverage at
their expense for up to 24 months. (A 2%
charge for administrative costs can be added.)
• If state laws provide protection beyond
USERRA, employees are entitled to the
maximum protection.
© SHRM
4-89
According to USERRA, employees
called up for active duty are entitled to
A. higher limits for salary deferral contributions.
B. credited service for retirement plan purposes.
C. lower copayments and deductibles for
continued family medical benefits.
D. an early vesting schedule for retirement
benefits.
© SHRM
4-90
Mental Health Parity Act (MHPA)
Addresses parity between mental health benefits and
medical benefits.
Applies to group health plans of more than 50 employees.
Changes made by the Mental Health Parity and Addiction
Equity Act (MHPAEA) require covered employers that
provide group health plans to cover mental illness and
substance abuse on the same basis as physical
conditions.
© SHRM
4-91
Genetic Information Nondiscrimination Act
(GINA)
Protects individuals from
having genetic information
used:
• In employment.
• To impact health plan
eligibility, enrollment, or
premiums.
Limits exceptions for genetic
testing to:
• Wellness programming.
• Physician’s request.
• Checking biological effects
of toxic substances in the
workplace.
• Requires that the disclosure
of protected genetic healthcare information be governed
by HIPAA.
• Civil penalties of $100 per day,
10 years’ imprisonment.
© SHRM
4-92
Pension Protection Act (PPA)
• Makes Economic Growth and Tax Relief Reconciliation Act
provisions due to sunset in 2010 permanent.
• Requires pension plans to become fully funded over a seven-year
period starting in 2008.
• Allows employers to automatically enroll employees into a 401(k)
plan with default contribution levels.
• Allows non-spouse beneficiaries to transfer assets inherited from a
qualified retirement plan into a traditional IRA.
• Requires plans to provide benefit statements and SPDs.
• Establishes requirements for 403(b) plans and makes them more
like 401(k) plans.
© SHRM
4-93
Patient Protection and Affordable Care Act
(PPACA)
Extensive health-care insurance reforms
with a rolling time frame.
2010
2011
2012
2013
2014
2015
2016
2017
2018
Examples:
• Affordable minimum health
coverage
• Lifetime maximum benefit limits
• Preexisting conditions
• Small employer health-care tax
credit
• Preventive care
© SHRM
• Dependent coverage
• Uniform explanation of coverage
• Summary of material modifications
(SMM)
• Annual benefit limits
• State health exchanges
• "Cadillac plan" tax
4-94
Economic Growth and Tax Relief
Reconciliation Act (EGTRRA)
• Adjusts minimum vesting schedules for employer
matching contributions to defined contribution plans.
– Three-year cliff vesting
– Six-year graded vesting (20% after two years and 20% per
year thereafter)
• Sets permissible compensation limits—Code Section
401(a)(17).
• Sets limits on annual pensions—Code Section
415(b)(1)(A).
• Permits catch-up contributions for employees age 50 and
older.
• Modifies distribution and rollover rules.
© SHRM
4-95
Sarbanes-Oxley Act (SOX)
Enacted in response to Enron and other
corporate accounting scandals.
Requires administrators to notify plan
participants of blackout periods for 401(k) or
defined contribution plans.
Prohibits insider trading during the blackout
period.
© SHRM
4-96
Blackout Notice Requirements
• Must be done in writing 30 days in
advance and must contain:
– Reasons for blackout.
– Identification of affected rights and
investments.
– Expected beginning date and length of
blackout.
– Statement that individuals should evaluate the
appropriateness of their current investment
decisions.
© SHRM
4-97
Whistleblower Provisions
• Protects employees who:
– Report conduct that they
“reasonably believe” violates
federal securities laws.
– File, testify in, or assist in a
proceeding related to securities
fraud.
• Employer cannot take adverse
action or discriminate against
employees for taking part in
protected activities.
© SHRM
4-98
Tax and Accounting Treatment
• FASB decides how organizations should
report financial information to shareholders.
– Required companies to treat employee stock
options as an expense on financial statements
beginning in 2005.
• IRS implements and interprets tax legislation:
– Revenue rulings.
– Private-letter rulings.
© SHRM
4-99
Benefits Required by Statute
• Social Security/Medicare
• Unemployment
insurance
• Workers’ compensation
• COBRA
• FMLA
© SHRM
LAW
4-100
Social Security
Benefits
Qualifications
Calculations
© SHRM
• Retirement income.
• Disability, death, and survivor’s benefits.
• People must work 40 quarters, or at least ten
years.
• Calculated as a set percentage of salary:
• Yearly maximum limit.
• Deducted from employees’ pay.
• People who work and receive payments
must still pay in.
4-101
Social Security Benefits
• Retirement income:
– Depends on individual’s average earnings.
– Pays reduced benefits at age 62; full benefits are indexed
to year of birth.
• Disability benefits:
– Are paid when workers cannot work for at least five
months.
– Are paid when workers have an impairment that is
expected to continue for 12 months or result in death.
– Start after a five-month waiting period.
• Death and survivor’s benefits
© SHRM
4-102
Medicare
• Not dependent on
income or ability to pay.
• Employee and employer
pay a percentage of
salary; there is no yearly
maximum.
• All individuals are
eligible at age 65.
• Employer benefits are
primary for employees
65 and older who are
working.
© SHRM
Part A (hospital insurance) is
mandatory.
Part B (medical insurance) is
optional.
Part C (Medicare Advantage
Plans) is optional.
Part D (outpatient
prescription drugs) is
optional.
4-103
EEOC Ruling on Medicare
 EEOC ruling allows employers to reduce
health benefits for Medicare-eligible retirees to
avoid paying premiums that are higher than
those paid for retirees not covered by
Medicare.
 The rule was in response to a federal appeals
court decision stating that health insurance
benefits received by Medicare-eligible retirees
be the same or cost the same as health
insurance benefits received by younger
retirees.
© SHRM
4-104
Unemployment Insurance
• Mandatory benefit funded primarily by
employers and administered by states.
• Eligibility in most states includes:
–
–
–
–
–
–
Being available and actively seeking work.
Not refusing suitable employment.
Not having left job voluntarily.
Not being unemployed because of labor dispute.
Not being terminated for misconduct.
Working a minimum number of weeks.
• Duration: 26 weeks.
© SHRM
4-105
Workers’ Compensation
State insurance paid by the employer.
Protects workers in case of a work-related
injury or disease.
Employers assume all costs, regardless of who
is to blame for an accident.
Experience-rated; employers who have a high
number of claims pay more.
© SHRM
4-106
Benefits of Qualified Deferred
Compensation Plans
Allow organizations to recruit and retain
employees.
Allow people to retire, creating
opportunities for others.
Provide tax deferrals for plan participants
if plans comply with ERISA and IRS Code.
© SHRM
4-107
Characteristics of Qualified Plans
• Under ERISA, plans must:
– Be in writing and be communicated to
employees.
– Be established for exclusive benefit of
employees/beneficiaries.
– Satisfy rules concerning eligibility, vesting,
and funding.
– Not favor officers, shareholders, or HCEs.
© SHRM
4-108
Defined Benefit Plans
Flat-dollar
formula
Flat-dollar
formula
• Benefit amount is
• Benefit
basedamount
on a is
based
on a formula.
formula.
••Employer
the
Employerfunds
funds
plan
the
the and
planbears
and bears
risk.
the risk.
••Insured
byby
the
PBGC.
Insured
the
PBGC.
Career-average
Career-average
formula
formula
Final-pay
Cash balance plan
formula
Cash balance
Final-pay
formula plan
© SHRM
4-109
Defined Contribution Plans
Flat-dollar formula
Profit-sharing plans
•• Benefit
amount
is
Employees
and/or
employers
a
based
on a pay
formula.
specific amount per
• Employer
funds the
person into the fund.
plan
and
bears
the
• Benefits are
risk.
determined by
amountsby
contributed
• Insured
the PBGC.
Career-average
Money
purchase plans
formula
Cash balance plan
ESOPs
and fund performance.
Final-pay
formula
401(k) plans;403(b)
plans;
Roth 401(k)/403(b) plans
© SHRM
4-110
Other Tax-Deferred Plans
Individual
retirement
accounts (IRAs)
Roth IRAs
Savings Incentive
Match Plan for
Employees
(SIMPLE)
© SHRM
Simplified
Employee
Pensions (SEPs)
457 plans
4-111
529 Plans
• Referred to as qualified tuition programs
(QTPs).
• Federal tax-free way to save money for
college.
– College savings plan
• Establishes an account for a future student.
• May be used at any college.
– Prepaid tuition plan
• Locks in future tuition at current price.
• Used at participating in-state public colleges and
universities.
© SHRM
4-112
Nonqualified Deferred Compensation
Plans
• Provide additional benefits to key executives.
• Do not qualify for favorable treatment under
ERISA.
• Employees defer reporting income; not subject
to the limits placed on qualified plans.
• Employer contributions are not deductible.
• Funds are not protected by ERISA or PBGC.
Examples:
Top hat plans, 457(f) plans, excess deferral plans,
rabbi trusts
© SHRM
4-113
Qualified Domestic Relations Orders
(QDROs)
• Create or recognize the right of an alternate
payee to receive all or a portion of pension
benefits.
• Orders must relate to child support, alimony,
or marital property rights and must be made
under state domestic relations law.
Related case: Kennedy v. Plan Administrators for
Dupont Savings
© SHRM
4-114
Health-Care Plans
• Indemnity or fee-forservice plans (offered
less frequently).
– Full-choice plans.
– Employees can go to
any qualified physician.
– Fees are generated
when services are
used.
© SHRM
• Managed care plans
(offered most frequently).
− Prepaid capitated
health-care plans.
− Members enroll and pay
a set monthly or annual
fee.
− Members must use
HMO physicians and
facilities to get low fees;
no need to submit
claims.
4-115
Other Health-Care Options
Prescription drug
plans
Dental plans
Beyond basic
medical
coverage …
Vision care plans
© SHRM
Alternative health
care
4-116
Health-Care Funding
Fully
insured
• Employer pays
premiums to a
third-party
insurance
carrier that
bears the risk.
© SHRM
Self-funded
• Employer
assumes the
role of the
insurance
company and
assumes some
or all the risk.
Health
alliances
• Health
insurance
purchasing
cooperatives
(HIPCs) act as
purchasing
agents for
large groups
of employers
in a region.
4-117
Controlling Health-Care Costs
Change the
delivery
system.
Let
employees
choose.
Redesign the
policies.
Promote
prevention
and wellness.
Conduct
careful
reviews.
Undertake a
utilization
review.
Consider
medical
tourism.
© SHRM
4-118
Consumer-Directed Health Care
Objective: To help employers control costs while
allowing employees to make decisions about their
health care.
Health
reimbursement
accounts
Health savings
accounts
Combine a highdeductible medical plan
with individual HRAs
Tax-sheltered savings
accounts used to pay
for medical expenses
© SHRM
4-119
Health Reimbursement Account
(HRA)
• Employer purchases a high-deductible medical
plan.
• Plan reimburses employees for eligible and
substantiated health-care expenses.
• Employees may NOT contribute on any pretax
basis.
• Subject to COBRA continuation.
• If self-funded, must meet nondiscrimination
requirements and not favor HCEs.
© SHRM
4-120
Health Savings Account (HSA)
• Individuals are covered
by a high-deductible
health plan.
• Employer contributions
are deductible;
employee contributions
are excluded from
income when done
through a Section 125
plan.
© SHRM
• Earnings grow tax-free,
and distributions for
qualified medical
expenses are tax-free.
• Unused funds can be
carried over from year
to year, are portable,
and can be used into
retirement.
4-121
Section 125 Plans
Premiumonly
plans
• Employees receive favorable tax treatment on benefits
already offered.
Flexible
spending
accounts
• Pretax dollars are set aside to pay for dependent care or
unreimbursed expenses.
• “Use-it-or-lose-it” option amended to contain a grace period
of two and one-half months at the end of the plan year.
Full
cafeteria
plans
• Benefit credits are used to purchase benefits.
• Unused credits can be cashed out.
• Additional benefits may be bought through pretax salary
reductions.
© SHRM
4-122
An employer pays an FSA medical claim for $500
in March. In April, the employee leaves the
organization after setting aside only $250. What
happens in this situation?
A. The employee must return $250 to the organization.
B. The employer may withhold $250 from the employee’s last
paycheck.
C. The employee is entitled to the reimbursement as paid.
D. The employee becomes ineligible for COBRA coverage.
© SHRM
4-123
Income Replacement Protection
Employerprovided sick
leave
• Pays 100% of
pay for a set
number of
days.
© SHRM
Short-term
disability
• Replaces a
portion of lost
income.
• Typically 50%
to 70% for up
to six months.
Long-term
disability
• Begins when
short-term
coverage
expires.
• Usually
integrated
with Social
Security.
4-124
Life Insurance Protection
Group-term
life insurance
• Lump-sum payment to
beneficiaries.
Excess
group-term
life insurance
• Insurance over $50,000 is
taxed as imputed income.
Dependent
group life
insurance
© SHRM
• Employees can insure
spouses/dependent
children.
4-125
Long-Term Care Insurance
• Coverage for people who are chronically
ill for at least 90 days.
• Not counted as employee income.
• Employers can deduct their part of the
insurance premiums.
© SHRM
4-126
Paid Leave
• Paid leave for
events:
– Holiday pay
– Vacation pay
– Pay for legally
protected activities
– Leave of absence
– Bereavement leave
– Personal days
© SHRM
• Paid-time-off banks
– Paid time off is
lumped into one
account.
4-127
Other Benefits
Child and
elder care
Prepaid legal
insurance
Benefits
Transportation
assistance
Tuition
reimbursement
© SHRM
4-128
Which of the following items is generally
subject to federal taxation?
A. $1,000 reimbursement for a business trip
B. $300 per month for parking
C. $20 gift from a vendor
D. $1,500 for a job-related training seminar
© SHRM
4-129
Global Compensation and Benefits
Considerations
SPHR only
• Standardization
versus localization
• Culture
• Competitive labor
market
© SHRM
• Collective bargaining,
employee
representation, and
government mandates
• Economic factors
• Taxation
• Laws and regulations
4-130
International Compensation
Approaches
SPHR only
Negotiation/ad hoc
Pure localization
Higher-of-home-or-host-country
Home-country-based balance sheet
Headquarters-based balance sheet
Lump-sum
Cafeteria
© SHRM
4-131
SPHR only
What is the advantage of paying an
international assignee a differential between
home-country costs and assignment costs?
A. It preserves purchasing power regardless of country
of origin.
B. It requires minimal planning and is easy to administer.
C. It is more tax-effective for the employee.
D. It gives the international assignee a choice.
© SHRM
4-132
International Benefit Variations
SPHR only
Benefits that are government-provided
Benefits that are government-mandated
Benefits that are voluntary (discretionary)
Benefits that are market practice
Tax treatment of benefits
© SHRM
4-133
Nonsalary International Benefits
SPHR only
Social security
Paid time off
Retirement
Severance
Health and welfare insurance (health care,
disability, and life insurance)
© SHRM
4-134
Totalization Agreements
SPHR only
International social
security
agreements.
Eliminate dual
social security
coverage and taxes
for employers and
workers.
Fill gaps in benefit
protection for
workers.
© SHRM
4-135
Evaluating the Compensation
and Benefits System
• Is it in compliance?
• Is it compatible with the organization’s
mission and strategy?
• Does it fit the culture? Is it appropriate for
the workforce?
• Is it internally equitable?
• Is it externally competitive?
© SHRM
4-136
Required Communication
• ERISA requires:
– Summary plan description, summary annual report, and
summary of material modifications.
– Filing Form 5500 with the DOL.
• Other required communications include:
–
–
–
–
–
FMLA policy.
COBRA continuation of benefits notice.
Special HIPAA enrollment rights and privacy rights.
Medicare Part D notification.
PPA notice and disclosure requirements for retirement
plans.
– Explanation of stock options (SEC regulations).
– Posting of all required federal, state, and local employment
laws.
© SHRM
4-137
Voluntary Communication
Communication
plans
© SHRM
Direct
communication
4-138
Self-Service Technology Benefits
• Reduced
administrative work
for HR.
• Increased accuracy
of employee data.
• Improved timeliness
in information and
employee
transactions.
© SHRM
• Reduced dollars
spent on other
traditional HR
delivery channels
(e.g., paper-based
transactions).
• Enhanced
reputation as a
“green,”
environmentally
conscious
employer.
4-139