Module 4: Total Rewards
16% PHR (36 questions)
12% SPHR (27 questions)
© SHRM
4-1
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
• Extends prevailing wages to federal
suppliers
• Stipulates overtime pay
Service
Contract Act
• Requires prevailing wages/benefits
on all federal contracts
© SHRM
4-2
Fair Labor Standards Act
(Wage and Hour Law)
• Applies to enterprises 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
4-3
IRS Independent Contractor Test
Behavioral
control
Financial
control
Type of
relationship
© SHRM
4-4
Behavioral Control
• Instructions the business gives the worker.
– When and where to do the work
– What tools or equipment to use
• Training the business gives the worker.
– Independent contractors ordinarily use their
own methods
4-5
Financial Control
• The extent to which the worker has unreimbursed
business expenses.
• The extent of the worker’s investment.
• The extent to which the worker makes services
available to the relevant market.
• How the business pays the worker.
• The extent to which the worker can realize a profit
or loss.
4-6
Type of Relationship
• Written contracts exist describing the relationship
the parties intended to create.
• Whether the business provides the worker with
employee-type benefits, such as insurance, a
pension plan, vacation pay, or sick pay.
• The permanency of the relationship.
• The extent to which services performed by the
worker are a key aspect of the regular business of
the company.
4-7
Exempt and Nonexempt Employees
Type of
Employee Importance:
Exempt
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
4-8
FLSA Exemptions
Minimum salary
An exempt employee
must meet three
requirements,
referred to as whitecollar exemptions.
Paid on a salary basis
without improper
deductions
Perform exempt
duties
© SHRM
4-9
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 federal law.
• However, the lower the percentage, the greater
the legal risk if challenged.
© SHRM
4-10
Executive Exemption
An employee must:
© SHRM
Have a primary
duty of managing
an enterprise,
department, or
subdivision.
Direct the work of
at least two fulltime employees or
their equivalent.
Have the
authority of the
employer to hire
and fire.
Affect promotion
decisions.
4-11
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.” (“matters of significance” refers to
the level of importance or consequence of the work
performed.)
© SHRM
4-12
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.
• Creative professionals
– Must meet minimum salary requirements.
– Perform work that requires invention, imagination,
originality, or talent.
– Perform in a recognized field of creative or artistic
endeavor.
© SHRM
4-13
Highly Compensated Exemption
A highly compensated employee must:
• Make an annual salary 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.
© SHRM
4-14
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:
– Application of systems analysis techniques and
procedures.
– Design, development, documentation, analysis,
creation, testing, or modification of computer systems.
– Design, documentation, testing of computer programs
related to machine operating systems.
– A combination of these duties.
© SHRM
4-15
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
4-16
Improper Deductions
• Employers who make improper deductions will
lose the exemption for all employees in the same
job classification working under the individuals
responsible for the improper deductions during
the time period the deductions were made 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 fullday increments. (A narrow FMLA exception may
occur.)
© SHRM
4-17
Safe Harbor
A “safe harbor” provision prevents an employer
from losing an overtime exemption for improper
pay deductions – regardless of the reason for the
improper deductions – where:
• The employer has a clearly communicated policy
prohibiting improper pay deductions.
• Employees are reimbursed for any improper
deductions.
• The company makes a good-faith effort to comply
in the future.
© SHRM
4-18
FLSA Basic Overtime Provisions
• Sets rate of overtime pay (1.5 times regular pay
(which includes base pay, shift premiums,
production bonuses) after 40 hours worked).
• Requires overtime on time worked, not time
compensated (sick pay, jury duty pay, holiday pay,
vacation pay, etc).
• Sets workweek as any fixed, recurring period of
168 hours (7 days  24 hours).
© SHRM
4-19
Compensatory Time
• Overtime usually must be paid in
cash.
• Public-sector employers may
grant compensatory time off.
• At present, compensatory time
is not allowed for private-sector
nonexempt employees.
• Public employees can accumulate
“comp” time.
– Police/fire fighters 480 hrs
– Public employees 240 hrs
© SHRM
4-20
FLSA Child Labor Provisions
Restrict hours and conditions of employment for minors.
Age
Under
age 14
FLSA Regulations
 Prohibited from most nonfarm work
 May be employed by parents
 Certain jobs permitted (e.g., actors, newspaper
carriers)
Ages 14-  During school hours: 3 hours/day, 18 hours/week
15
 During school vacations: 8 hours/day, 40
hours/week
 Hours restricted
Ages 16-  Prohibited from hazardous jobs
17
 No other restrictions
© SHRM
4-21
Minimum Wage Provisions
Fair Minimum Wage Act of 2007
Raises
minimum
wage to
$7.25 per
hour in
three phases
© SHRM
Requires
Provides
payment of
$2.13 an hour
higher wage
cash wage if
if state and
claiming a tip
federal laws
credit
differ
4-22
Administrative Concerns
• FLSA applies to private-sector employers engaged in
interstate commerce and retail service firms with 2 or more
employees and gross sales of at least $500,000/year
• Wage and Hour Division of the DOL enforces FLSA
minimum-wage provisions
• Any covered employee can initiate a complaint
• Criminal penalties - $10,000 and 6 months in the big house
for willful violations
• Where state and federal laws differ “always follow the
regulation that most benefits the employee”
• Look at state law as it applies to exempt employees. State
laws may be more restrictive than federal law.
4-23
Portal-to-Portal Act
• Amends FLSA and defines general rules for hours
worked.
• Provides guidelines on:
– On-call/standby time – OT not required by FLSA if off
the premises as long as the employee is not otherwise
restricted
– Preparatory/concluding activities. IBP., v. Alvarez
– Waiting time.
– Meals and breaks – Rest periods of 5 to 20 minutes are
considered hours worked. Meal periods of 30 minutes
or longer, if employee is relieved or duty, are not
considered hours worked.
– Travel time. Employee Commuting Flexibility Act
– Training time is generally included.
© SHRM
4-24
Equal Pay Act (EPA)
• Mandates equal pay for equal work.
• Defines equal work based on:
Skills
© SHRM
Working
conditions
Effort
Responsibility
4-25
Work Opportunity Tax Credit (WOTC)
• Federal
tax credit
to
Work
Opportunity
Tax
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.
Credit (WOTC)
4-26
Types of Compensation
Total rewards
Direct
compensation
Pay systems
© SHRM
+
Indirect
compensation
Benefit and recognition
programs
4-27
Objectives of a Total Rewards
System
• Aligned with mission and
strategy
• Compatible with
corporate culture
• Appropriate for the
workforce
• Externally equitable
• Internally equitable
• Effective in recruiting
and retaining employees
© SHRM
4-28
Organization’s Mission and Strategy
• All organizations need to have their rewards system
support the organization’s mission and strategy. The first
consideration should be reviewing the organization’s
mission and its business strategy.
• The total rewards system should be an outgrowth of the
organization’s strategic business plan and the plan should
be adjusted to accommodate updates to the plan.
• HR should consider where the organization is in its life
cycle when designing or updating the plan.
• Influences on the total rewards packages include the
degree of competition, the level of product demand, and
industry characteristics.
4-29
Corporate Culture
• Compensation systems must fit the organization’s
culture and fundamental assumptions about
employees
• Entitlement-oriented – Believes that employees are
entitled to benefits such as health care as a
condition of employment. There is less emphasis
on employee contributions, initiative, and
responsibility and more emphasis on the
profitability of the organization as a whole.
• Contribution-oriented – Sees the employees as
contributors. Compensation programs are more
performance-driven. Emphasize performancebased pay, incentives, and shared responsibility
for benefits.
4-30
Workforce v. Rewards Program
Rewards program must fit the workforce
• Reward programs will be different for unskilled
workers vs. experience, highly educated
professionals.
• Packages for nonunion employees often focus
more on salary combined with direct and indirect
incentives based on employee effort.
• Packages for union employees focus more on
salary and benefits as outlined by the union
contract.
• Conducting surveys is one way to keep in touch
with employee needs and preferences.
4-31
External Equity
• Compares an organization to other
organizations that share its industry,
occupation, and location. Defines a
company’s relevant labor market.
• Organizations may decide to:
Lag
© SHRM
Match
Lead
4-32
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.
© SHRM
4-33
Job Evaluation
• A systematic determination of the relative worth of jobs
within the organization and is concerned with the value of
a job to the organization. The process establishes a relative
worth of jobs by establishing a hierarchy of jobs.
• Follows job analysis, which focuses on job descriptions and
specifications.
• Supports the need for the total rewards system to further
the organization’s strategic objectives and is intertwined
with the organization’s concern for pay equity.
4-34
Job Evaluation Methods
Job-to-job
comparison
Job-topredeterminedstandard
comparison
© SHRM
Nonquantitative
Methods
Quantitative
Methods
Job
ranking
Factor
comparison
Job
classification
Point-factor
method
4-35
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
4-36
Job-to-Job Comparison
• Job ranking- Involves establishing a hierarchy of
jobs from lowest to highest based on each job’s
overall importance to the organization. Evaluates
the whole job and compares one job to another.
Not used when evaluating a large number of jobs.
It’s quick, inexpensive and easily explained.
• Paired-comparison- Used where there are many
jobs to evaluate. Each job is compared with every
other job. The job with the largest number of
“greater than” rankings is the highest-ranked job.
4-37
Job-to-predetermined-standard
Comparison
• Job Classification- Involves grouping jobs into a
predetermined number of grades or classification,
each having a class description to use for job
comparisons.
• Best known classification system is the General
Schedule (GS) system used by the federal
government.
• Good to use in grouping a large number of jobs
together. Understandable to employees. Difficult
to use with groups having overlapping jobs.
4-38
Quantitative Evaluation
• Uses a scaling system to evaluate the value of one
job as compared to another.
• Provides a score.
Point-factor
method
Less complex, most
commonly used
© SHRM
Factor comparison
method
Most complex, used
infrequently
4-39
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.
• Compensable factors include: Skill, Responsibility, Effort, Working
Conditions, and Supervision of Others.
Job A
220
Jul 27, 2007
© SHRM
300
Job B
400
500
Job C
600
Points
Job D
700
800
Job E
900
1,000
Jan 25, 2008
4-40
Factor Comparison Method
• Best used in the limited instances when wages are
steady over time and the organization uses a flat
rate for each job.
• It is sometimes used as part of a labor contract.
• Involves the ranking of each job by each selected
compensable factor and then identifying dollar
values for each level of each factor to develop a
pay rate for an evaluated job.
• It is complex and rarely used.
4-41
Market-Based Evaluation
• Not a true job evaluation system; can be used to
develop a job-worth hierarchy.
• Prices jobs in the labor market in which a
company competes.
• Uses prevailing rates as the relative “worth” of the
jobs.
$$
© SHRM
$
4-42
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)
© SHRM
External
published
survey data
Ability to:
 Participate in survey
 Provide some input
to survey design
 x
 x
 Limited participation,
if any (e.g., may
submit salary data)
 No control/no input to
survey design
 x
 No participation
 No control/no input
to survey design
 Widely available
 May need to
purchase survey data
Example:
Local HR association
contracts with a
compensation firm
Examples:
 Mercer
 Towers Watson
 x
 x
Examples:
 DOL surveys
 BLS surveys
 SHRM surveys
 x
4-43
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
4-44
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
4-45
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, or 50th percentile is
the middle number in the
range.
Mode is the most frequently
occurring wage.
Salaries
# 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
Weighted Average = $65,909
© SHRM
4-46
Quartiles and Percentiles
• Show how groups relate to each other.
• Show if an organization leads, lags, or
matches the job market.
0%
50%
Q1
$55,000
Entry wage
© SHRM
Q2
$60,000
100%
Q3
$65,000
Midpoint
Q4
$70,000
$75,000
Maximum wage
4-47
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
4-48
Compa-Ratios
• Compa-ratios are an indicator as to how actual
wages match, lead, or lag the market.
• Divide the pay level 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 comparatio is:
$16 ÷ $18 = .89 or 89%
• A compa-ratio below 1.00 means wages are below
the midpoint; a compa-ratio greater than 1.00
means wages exceed the midpoint.
© SHRM
4-49
Broadbanding
• Combines several salary grades or job
classifications.
Management
$50,000
Technical
$22,000
$105,000
Supervisory
$68,000
Service Experts
$17,000
© SHRM
$38,000
4-50
Broadbanding Advantages and
Disadvantages
Advantages
• Provides wider ranges.
• Reduces the number of job
grades.
• Provides more autonomy
to line managers.
• Enhances employee
mobility.
• Supports de-layering
efforts.
© SHRM
Disadvantages
• Lacks a salary control
feature.
• Difficult to maintain
perception of equity.
• Reduces the opportunity
for promotion.
• Can lead to divergence
from the market.
4-51
Completing Paychecks
• Gross earnings- Include regular wages plus
additional earning such as tips, shift premiums,
PTO, bonuses, and OT.
• Taxable wages- All remuneration for services
(including benefits) that are taxable when paid.
• Withholding federal and state taxes- Wagebracket method is based on tables provided by the
IRS. The percentage method is used in
computerized payroll. If supplemental wages such
as bonuses are paid, they may be taxed differently.
4-52
Completing Paychecks
• Social Security tax is a percentage of employee’s
salary up to a yearly maximum, with employer
matching that amount. Employers required to
match to the maximum each year regardless of an
employee’s previous earnings with another
employer. Medicare taxes are withheld with no
yearly maximum.
• Voluntary deductions include union dues,
charitable deductions.
• Involuntary deductions include tax levies, child
support.
• Involuntary deductions are withheld before
voluntary deductions.
4-53
Payroll Record Keeping
• Employer is required to keep a master file of
employment records (includes)
– Name, gender, DOB, and Social Security
number
– Hire date, hours worked per day or week, and
regular rate of pay
– Form W-4, allowances claimed, marital status,
and W-2
– Form 1099 for independent contractors with >
$600 of services during the previous year
– Payroll data for the organization
4-54
Payroll Record Retention
• Under the FLSA and the ADEA, employers must
retain payroll records for two or three years,
depending on the record. States may have longer
retention requirements.
• Records must be in retrievable form, there is no
federal requirement to maintain a paper copy of
records.
• Records should be retained on a rolling basis
beginning with the date on which they were
created.
4-55
Payroll Systems
• Hardware
– Manual system
– Service bureau
– In-house mainframe or minicomputer
– Networked system
• Software
– Off-the-shelf software
– Vendor-supplied software
– Customized system
4-56
Base-Pay Systems
• Develop a pay determination system that helps
attract, retain, and motivate employees.
• Employees receive base pay in the form of a
salary or an hourly wage.
© SHRM
4-57
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 survey data for the job.
• There may be a training wage in a flat-rate job.
© SHRM
4-58
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
4-59
Automatic Step-Rate
• At prescribed intervals, the employee with the
required seniority receives a one-step increase.
• Most commonly used in union and public-sector
environments (ex: teachers)
4-60
Step-Rate with Variability-Based
Performance
• Similar to the time-based system, but the size or
timing of increases may vary if performance is
substantially above or below standard.
• A competent employee could skip steps.
4-61
Combination Step-Rate and Performance
Structure
• Employees receive increases on a step-rate basis
up to the job rate. Above the job rate, increases
are granted only for above-standard performance.
• Requires adequate resources to develop and
administer a performance appraisal system and
communication so employees understand it.
4-62
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.
• Merit raises are permanent increases in payroll
costs.
© SHRM
4-63
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.
• Best used when costs are known and precise.
© SHRM
4-64
Person-Based System
• Employee’s characteristics rather than the job
performed determines pay. Links pay to the
number of skills a worker can perform.
• Superior knowledge or skill mastery is rewarded.
– Knowledge-based (pay is based on the level of
knowledge the employee has in a field)
– Skill-based (pay is linked to the number of
different skills an employee is qualified to
perform)
– Competency-based (pay is linked to the level at
which an employee can operate in defined
“competencies”)
© SHRM
4-65
Pay Variations
• Red-circle rates
− Rates above the range maximum
• Green-circle rates
– Rates below the range minimum
• Pay compression
− Small differences in pay regardless of
experience, skills, or seniority
© SHRM
4-66
Pay Adjustments
© SHRM
Pay
adjustment
matrix
COLAs
General pay
increase
Seniority
Lump-sum
increases
Marketbased
increases
4-67
Cost-of-Living Adjustment (COLAs)
• Given to all employees regardless of their
performance or company profitability
• Prevalent during inflationary periods, more
common in union contracts
• Based on consumer price index (CPI)
– Tying budgets or pay to the CPI is called
indexing
4-68
General Pay Increases
• Given to all employees based on local competitive
market requirements.
• Awarded regardless of employee performance.
• The increase is not directly linked to the cost of
living and is more likely to reflect the employer’s
ability to fund such compensation increase.
4-69
Lump-Sum Increases (LSI)
• A one-time payment of all or part of a yearly pay
increase. The base wage rate is not adjusted by
the increase.
• Advantage is that other wage and benefits linked
to the base rate (OT, shift premium, etc.) are not
impacted.
4-70
Market-Based Increases
• Used by organizations to be competitive in
attracting new talent or to retain current
employees.
• Salary increases are usually added to base pay and
may be called equity increases.
4-71
Time-Based Differential Pay
• Differentiates based on when and or where an employee
works.
• Except for overtime, FLSA does not require differential
pay.
Shift pay
Emergency-shift pay
Premium pay
Hazard pay
On-call or call-back pay
Reporting pay
Travel pay
© SHRM
4-72
Geographic Differential Pay
Differentials for labor costs
Differentials to attract workers to
certain locations
Differentials for foreign pay
© SHRM
4-73
Incentive Pay
• Paying for performance
beyond expectations.
• Usually involves a
significant amount of
employee’s pay.
• May be a factor when
determining overtime
pay.
• Motivates employees
to perform at higher
levels.
Research tax ramifications before implementing any
incentive pay plan.
© SHRM
4-74
Requirements for Incentive Pay
• Organizational conditions
– Base pay must be fair and equitable
– Strategic planning must be in place
– Management must be committed to the plan
• Plan necessities
– Plan must be in concert with other
organizational programs
– Must be in the line of sight
– Must have a sunset clause
– Incorporates short and long-term perspectives
4-75
Process Readiness for Incentive Pay
• Communication channels must be effective and
ongoing. The communication process must work
on paper, one on one, and in group meetings.
Employees have to understand the plan and
change their behavior appropriately.
• Incentive plans cannot solve problems of mistrust
or low morale.
• A credible measurement process must be in place.
Incentive plans will fail if management and
employees do not understand or believe in the
reliability of the reported results.
4-76
Types of Incentive Pay Plans
• Incentive plans must be tailored to fit each
organization; one size does not fit all
• There are 3 types of incentive pay plans:
– Individual incentive plans
– Group incentive plans
– Organization-wide incentive plans
4-77
Individual Incentive Plans
• The purpose of individual incentive plans is to
improve individual performance.
• They should be kept separate from base pay.
Piece rates
Commissions
Cash bonuses
Recognition programs
© SHRM
4-78
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.
• Each person receives the same amount as a
percentage of pay.
© SHRM
4-79
Organization-Wide Incentive Pay
Plans
Profit-sharing plans
• Allow employees to
share in profits.
• Include cash and
deferred profitsharing.
© SHRM
Performance-sharing
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.
4-80
Stock Ownership Plans
SPHR only
• Encourage employees to share in the success of
the firm.
• Stock may be purchased or earned.
• Company may facilitate stock purchase through
payroll contributions.
• Company may structure stock purchase as a form
of ERISA-governed qualified retirement plan
(ESOP).
– Nonleveraged ESOPs
– Leveraged ESOPs
© SHRM
4-81
Benefits of ESOPs
SPHR only
• Creates an ownership stake among employees
• Provides a ready buyer for the company’s stock
• Provides some protection from possible takeover
attempts
• Provides a relatively low-cost benefit to employees
• Can provide some tax advantages for the employer
• Can provide a source of capital gains income for
employees
4-82
Executive Incentives
• Two factors are distinctive about executive pay
plans
– The incentives usually account for a greater
share of an executive’s total direct
compensation package
– Incentives are generally linked to the
performance of the entire organization or the
major units/businesses
4-83
Executive Incentives
SPHR only
Stock option plans (ISOs and NQSOs)
Stock purchase plans
Phantom stock
Restricted stock grants
Restricted stock units
Performance grants
© SHRM
4-84
Incentive Stock Options (ISOs)
• Provides optionees with the ability to acquire stock
during a period after the option becomes vested
and before it expires at a fixed price.
• It is a valuable means of providing the upside of
stock ownership without the optionees having to
invest their own funds.
• Cannot be issued to nonemployees.
4-85
Stock Purchase Plans
• Broad-based plans available to most publicly
traded company’s employees
• Required to be broad-based if they are intended to
qualify for favorable tax treatment
4-86
Phantom Stock
• Used when a company does not view ownership of
real equity by its executives as desirable but seeks
to create some of the incentives that go along with
having executives feel aligned with the company’s
owners.
• Phantom stock arrangements that mimics an
option grant is referred to a stock appreciation
right (SAR).
• Arrangements that mimic a restricted stock is
referred to as a phantom stock award.
4-87
Restricted Stock Grants
• Essentially a transfer of stock or a gift to an
executive or member of a company’s board of
directors, with forfeiture provisions that result in a
possible loss of the shares if certain conditions are
not met. Can be given to non-employees.
• While stock options have value only if the stock
goes up, restricted stock has value if it remains
stable since it was a gift.
4-88
Restricted Stock Units
• Similar to Phantom Stock Arrangements.
• Main reason to use RSUs is to control the timing
of the grantee’s income, as the arrangement is
treated as a type of nonqualified deferred
compensation arrangement where payment is in
stock rather than in cash.
• Useful in deferring compensations of key
executives to a date that is after they have retired.
4-89
Performance Grants
• Used by public companies to link stock-based
compensation to company performance.
• Used to motivate recipients to achieve goals that
are valuable to the company and its shareholders.
4-90
Direct Sales Compensation
Straight
salary
Straight
commission
Salary plus
commission
Use when:
There is a long
sales cycle.
More time is
spent on service
than sales.
© SHRM
Goal is to
increase volume
and control
costs.
Company needs
to reward
behaviors that
support strategy.
Plan needs to be
adaptable.
4-91
Compensation for Professionals
Dual-ladder
progression
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.
4-92
Controlling Costs
• Companies can control costs by setting pay ranges
– Setting upper and lower compensation bounds.
– Using compa-ratios to evaluate if policies are
being implemented appropriately.
• Budgeting
– Top-down approach is best at controlling costs.
• Auditing
– Monitoring of expenditures.
© SHRM
4-93
Indirect Compensation
• Designed to:
– Reward continued employment.
– Retain talent.
– Improve productivity, work quality, and
competitiveness.
– Protect employees’ physical and financial
well-being.
• Must be affordable for employers and
attractive to employees.
© SHRM
4-94
Benefit Needs Assessment
• Employee benefits are a significant factor in an
organization’s total budget and the reward
package offered to employees.
• HR should develop a benefits package that fulfills
the objectives of the employer and the employee.
Example: If a gap analysis reveals overlapping benefits
then a utilization review may be required.
• It must match the organization’s business
strategies, support the organization’s mission and
vision, and meet employee’s needs.
4-95
Benefit Needs Assessment
Review organization’s
strategy.
Review total rewards
philosophy.
Analyze benefits design
and utilization data.
Analyze workforce
demographics.
Conduct gap analysis.
© SHRM
4-96
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
4-97
Fiduciary Responsibility
SPHR only
According to ERISA:
• Employer must follow the prudent person rule.
• Plan assets must be segregated from other
company assets and must be operated for
exclusive benefit of participants and their
beneficiaries.
• Employer may not misuse funds set aside to
provide benefits.
• Employer must follow minimum funding
standards that apply to retirement benefit plans.
• Individuals may sue for recovery for fiduciary
breaches that impair the value of plan assets.
© SHRM
4-98
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.
4-99
Vesting
• The process by which a retirement benefit
becomes nonforteitable, that is, when the
employee is permanently entitled to a portion or
all of their benefit derived from employer
contributions.
• Graded vesting is the process by which the
benefits derived from employer contributions
become incrementally nonforteitable over a set
period of years.
• Cliff vesting requires participants to complete a
specific number of years of service with the
employer before they get any vested benefits, after
which they are 100% vested.
4-100
Defined Benefit Plans
• ERISA requires that employer contributions to
defined benefit plans with cliff vesting must
become 100% vested after no longer than five
years of service.
• Contributions to plans with graded vesting must
become 100% vested after no longer than seven
years, and employees must become vested at least
20% a year for each year of service beginning with
the third year of service.
4-101
Defined Contribution Plans
• Plans with cliff vesting must become 100% vested
after no longer than three years.
• Plans with graded vesting must become 100%
vested after no longer than six years, and
employees must become vested at least 20% per
year of service, beginning with the second year of
service.
4-102
ERISA Considerations
• Summary Plan Descriptions (SPD’s) must be
issued at least every 5 yrs.
• When plans are modified in interim yrs,
summaries of material modification (SMMs) or
new SPD’s may be given to participants.
• Participants must receive a summary annual
report (SAR).
• Form 5500 must be filed with IRS (if the employer
has at least 100 employees participating in the
plan) and available for participants to inspect.
4-103
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
4-104
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.
• Federal law does not require employers to provide healthcare benefits, but if the employer does provide those
benefits and employs 20 or more people, the employer
must allow for the continuation of benefits in the event of
termination of employment, divorce, death, etc.
(Exception is allowed for termination of employment due
to the employee’s gross misconduct)
© SHRM
4-105
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 you are 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.
4-106
COBRA Coverage Expansion
American Recovery and Reinvestment Act (ARRA):
• Changes COBRA continuation coverage rules.
• Provides COBRA premium subsidies to employees
involuntarily terminated between September 1, 2008, and
December 31, 2009, including dependents who are
COBRA-qualified beneficiaries.
• Permits (but does not require) group health plans to allow
eligible individuals to elect alternative coverage.
• Requires temporary amendments to COBRA election
notices.
4-107
Health Insurance Portability and
Accountability Act (HIPAA)
Key provisions:
• Limits exclusions for preexisting conditions.
• Allows people to change jobs without having to worry about
loss of coverage by making coverage without preexisting
exclusions possible.
• Guarantees renewability as long as premiums are paid.
• Individuals who have had employment-based coverage for
at least 18 months and who are ineligible for or who have
exhausted COBRA are ensured availability of coverage
without preexisting condition limitations if there is not a 63
day break between the end of coverage and obtaining new
coverage.
• Makes health coverage portable.
• The preexisting condition limitation to COBRA was cut off.
© SHRM
4-108
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.
4-109
Leggitt v. First National Bank of
Oregon
• The employer was found guilty of invading
employee’s privacy by intentionally intruding in
her private affairs when a company representative
met with a psychologist (to whom the employee
had been referred by the EAP) and questioned
him about her condition.
4-110
HIPAA Security Rule
Requires the Organization to:
•
•
•
•
•
Assess potential risks and vulnerabilities
Protect against threats to information
Implement and maintain appropriate security measures
Ensure compliance with these safeguards by all staff
Mandates employee information be protected through
comprehensive security measures.
• “It is an ongoing process, not a one time project”
4-111
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.
4-112
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.
© SHRM
• Release must reference
age discrimination
claims under ADEA.
4-113
Family and Medical Leave Act (FMLA)
• Covers employers with 50 or
more employees within 75 miles
of a given workplace.
• Employee must have worked at
least 12 months for employer
and 1,250 hours in past year.
• Provides 12 weeks of unpaid
leave for birth or adoption of a
child or serious health condition
of a child, spouse, parent, or the
employee
• Covers in loco parentis
relationships.
© SHRM
• Employer can require employee
to take unpaid FMLA leave
concurrent with any relevant
paid leave.
• Employer must continue
employee’s health benefits while
employee is on approved FMLA
leave.
• Employees are required to pay
their portion of cost of benefits.
4-114
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.
• What constitutes a “qualifying exigency leave”
under the FMLA’s military leave provisions.
• Employer notices about FMLA.
© SHRM
4-115
FMLA Expansion
FMLA-eligible employees are entitled to:
• Qualified exigency leave.
– Up to 12 workweeks of FMLA leave due to a spouse,
son, daughter, or parent being on or called to covered
active duty.
• Military caregiver leave.
– Up to 26 workweeks of unpaid FMLA leave during a
12-month period 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.
4-116
Uniformed Services Employment and
Reemployment Rights Act (USERRA)
• Protects the employment, reemployment, or 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.
– Provides additional protection for disabled veterans.
© SHRM
4-117
Uniformed Services Employment and
Reemployment Rights Act (USERRA)
• 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.)
• Requires that leave not create a break in service
for pension plan purposes.
• If state laws provide protection beyond USERRA,
employees are entitled to the maximum
protection.
© SHRM
4-118
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.
4-119
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 to
$265,000 per day plus up to
10 years’ imprisonment.
© SHRM
4-120
Pension Protection Act
• 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.
© SHRM
4-121
Safe-Harbor for Qualified Default
Investment Alternatives (QDIAs)
• Makes it easier for employers to automatically enroll
workers in the company’s 401-(k) and other defined
contribution plans.
• Provides limited protection from employee lawsuits to
fiduciaries who invest the assets of participants who do not
provide direction, such as automatically enrolled workers.
• Provides three default investment options.
– Lifestyle funds – Asset allocation shift gradually over time
– Balanced funds – Have a fixed blend of stocks and bonds
– Professionally managed funds – Assets managed by an outside
advisor
4-122
Patient Protection and Affordable
Care Act of 2010
• Require employers with more than 50 full-time employees
to provide health coverage that meets minimum benefit
specifications or pay a $2,000 per employee penalty.
• Eliminates lifetime maximum benefits limits and restricts
annual limits.
• Creates a small employer health-care tax credit.
• Establishes state-run health-care exchanges to purchase
individual and small business coverage beginning in 2014.
• Places an excise tax on “high value” health plans effective
in 2018.
4-123
Economic Growth and Tax Relief
Reconciliation Act (EGTRRA)
• Permits catch-up
contributions for employees
age 50 and older.
• Modifies distribution and
rollover rules.
• 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)
© SHRM
4-124
Sarbanes-Oxley Act (SOX)
• Enacted in response to Enron and other
corporate scandals.
• Requires administrators to notify plan
participants of blackout periods for 401(k) or
defined contribution plans.
• Prohibits trading by directors or executive
officers during the blackout period.
© SHRM
4-125
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
4-126
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
4-127
Tax and Accounting Treatment
• The Financial Accounting Standards Board
(FASB) is private body that decides how
financial firms 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
4-128
Benefits Required by Statute
•
•
•
•
•
Social Security/Medicare
Unemployment insurance
Workers’ compensation
COBRA
FMLA
© SHRM
4-129
Social Security
• Provides:
– Retirement income.
– Disability, death, and
survivor’s benefits.
• To qualify:
– People must work 40
quarters or ten years.
© SHRM
• Calculated as a set
percentage of salary:
– Yearly maximum
limit
– Deducted from
employees’ pay
– People who work and
receive payments
must still pay in.
4-130
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
4-131
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.
4-132
EEOC Ruling on Medicare
• EEOC ruling allows employers to reduce health
benefits for Medicare-eligible employees to avoid
paying premiums that are higher than those paid for
employees 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.
4-133
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
4-134
Workers’ Compensation
• Workers’ Compensation is regulated by the
states. It is a state insurance paid by the
employer.
• Protects workers in case of a work-related injury
or disease.
• Experience-rated; employers who have a high
number of claims pay more.
• Employers assume all costs, regardless of who is
to blame for an accident.
© SHRM
4-135
Deferred Compensation
• Provides income to employees at some future time
as compensation for work performed now.
• Nonstatutory benefits are those that are offered by
the employer to best meet the needs of the
organization and its employees.
• Benefits are not required by law.
4-136
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
4-137
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
4-138
Defined Benefit Plans
Flat-dollar formula
Flat-dollar formula
••Benefit
Benefitamount
amount is
is
based
basedon
onaaformula.
formula.
••Employer
Employerfunds
funds the
the
plan
planand
andbears
bearsthe
the
risk.
risk.
••Insured
Insuredby
bythe
thePBGC.
Career-average
Career-average
formula
formula
Cash balance plan
Final-pay
formula
PBGC.
Final-pay formula
Cash balance plan
© SHRM
4-139
Types of Defined Benefit Plans
• Flat-dollar formula - Usually seen in plans
covering hourly-paid employees under a collective
bargaining agreement. Example: The plan might
pay $80 for each year of service, which equates to
$1,600/month retirement benefit for someone who
retires with 20 years of service.
• Career-average formula - Participants earn a
percentage of the pay for each year they are in the
plan or the yearly earnings are totaled then
averaged over the years in the plan.
4-140
Types of Defined Benefit Plans
• Final-pay formula - Bases benefits on the average
earnings during a specified number of years. The
greatest cost to the employer.
• Cash balance plan – Expresses the promised
benefit in terms of a hypothetical account balance.
– In a cash balance plan, benefits are not affected by
decreases in the fund. As with all defined benefit plans,
the employer assumes the investment risks on plan
assets.
– Upon retirement, the employee may elect a lifetime
annuity or a lump sum (with spousal consent).
4-141
Defined Contribution Plans
Flat-dollar formula
Profit-sharing plans
••Benefit
amount
is
Employees
and/or
based
on a formula.
employers
pay a
specific amount
per
• Employer
funds the
person
thethe
fund.
plan
andinto
bears
•risk.
Benefits are
determined
byPBGC.
fund
• Insured
by the
Career-average
Money
purchase plans
formula
Cash balance plan
ESOPs
performance.
401(k) plans
Final-pay
formula
403(b) plans
© SHRM
4-142
Types of Defined Contribution Plans
• Profit-sharing plans – Company distributes a
portion of it’s profits to its employees (profits are
not required for contributions).
• Money purchase plan – The employer’s
contribution is a fixed percentage of an eligible
employees compensation. The percentage is
written into the plan, and the contribution is
mandatory, even if the business has no profits.
4-143
Types of Defined Contribution Plans
• Employee stock-ownership plan (ESOP) – Stock
shares are provided to the employee’s account.
• 401(k) plan – Allows employees to make taxfavored pay deferral toward retirement savings
through payroll deduction.
• 403(b) plan – Allows employees of tax-exempt
organizations to contribute pretax dollars toward
retirement savings.
4-144
Roth 401(k) and 403(b) Plans
• Allows after-tax contributions to existing 401(k)
and 403(b) plans
• Same annual dollar limits as pre-tax contributions
• They must be fully vested
• Same distribution rules (age 591/2), hardship,
death, disability, severance, or termination of the
plan
4-145
Phased Retirement
• Final rules now permit employees approaching
normal retirement age to reduce the number of
hours worked or work in a different capacity.
• The pension plan is permitted to pay retirement
benefits to a participant who has reached normal
retirement age, even if the participant has not
severed employment with the employer.
• The 591/2 age requirement for phased retirement
participants has been deleted.
4-146
Other Tax-Deferred Retirement
Plans
• Individual Retirement Accounts (IRAs) – Tax deferred
account to which wage earners can contribute an amount
up to a yearly maximum.
• Roth IRA – Account providing tax-free income growth;
contributions are made with after-tax dollars.
• Simplified Employee Pension (SEP) - Tax-deferred
account to which the self-employed and employees of very
small businesses can contribute.
• Savings Incentive Match Plan for Employees (SIMPLE) –
Retirement plan by which employees can contribute each
year to a 401(k) plan or IRA.
• 457 Plans – Plans that allows employees of states, political
subdivisions, and certain tax-exempt organizations to defer
receipt of wages.
4-147
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
4-148
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: Rabbi trusts, top hat plans, and excess
deferral plans
© SHRM
4-149
Nonqualified Deferred Compensation
Plans
• Top Hat Plans – Designed to provide retirement
benefits for a select group of management or
highly paid employees.
• Excess Deferral Plans – Provides an additional
nonqualified benefit to those executive employees
whose contributions to the qualified plan are
limited due by limitations on qualified plan
benefits.
• Rabbi Trusts – Offers limited protection for the
segregated deferred funds.
4-150
Qualified Domestic Relations Orders
(QDROs)
• Creates or recognizes 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.
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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.
– There is an incentive for
the provider to provide
more services.
© 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.
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Other Health-Care Options
• Dental plans
• Vision care plans
• Prescription drug
plans
• Alternative health
care
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Health-Care Funding
Fully
insured
Employer pays
premiums to a
third-party
insurance
carrier that
bears the risk.
Fully selfinsured
Employer
assumes the role
of the insurance
company and
bears the risk.
Partially
self-insured
Employer
purchases specific
or aggregate stoploss coverage to
limit risk.
No “stop-loss.”
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Consumer-Directed Health Care
Objective: To help employers control costs while
allowing employees to make decisions about their
health care.
Health
reimbursement
accounts
Combine a highdeductible medical plan
with individual HRAs
© SHRM
Health savings
accounts
Tax-sheltered savings
accounts used to pay
for medical expenses
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Health Reimbursement Account
(HRA)
• Employer purchases a high-deductible medical plan.
• Plan reimburses employees for eligible and substantiated
health-care expenses.
• Only employer funding is allowed. Employees may NOT
contribute on any pretax basis.
• Subject to COBRA continuation.
• If self-funded, must meet nondiscrimination requirements
and not favor HCEs.
• The employee can “roll over” the remaining unpaid funds
into the next year.
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Health Savings Account (HSA)
• A tax-sheltered saving account similar to an IRA, but it is
created primarily for the purpose of paying for medical
expenses.
• 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.
• 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.
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Section 125 Plans
“Cafeteria Plans”
• Premium-only plans (POPs)
– Employees receive favorable tax treatment on benefits already
offered, they create no new benefits, and are the simplest Section
125 plan and the easiest to maintain.
• Flexible spending accounts (FSAs)
– 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.
– Nonprescription drugs or medicines can be reimbursed.
• Full cafeteria plans
– Benefit credits are used to purchase benefits.
– Unused credits can be cashed out.
– The administrative and maintenance costs to the employers for full
cafeteria plans are the greatest among the Section 125 options.
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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.
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Life Insurance Protection
• Group-term life
insurance
– Lump-sum payment
to beneficiaries.
• Excess group-term life
insurance
• Dependent group life
insurance
– Employees can insure
spouses/dependent
children.
– Insurance over
$50,000 is taxed as
imputed income.
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Long-Term Care Insurance
• Coverage to people who are chronically ill
for at least 90 days.
• Not counted as employee income.
• Employers can deduct their part of the
insurance premiums.
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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.
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Other Benefits
Child and
elder care
Prepaid legal
insurance
Benefits
Transportation
assistance
Tuition
reimbursement
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Global Compensation and Benefits
Considerations
SPHR only
• Standardization versus
localization
• Culture
• Competitive labor market
• Collective bargaining,
employee representation,
and government mandates
• Economic factors
• Taxation
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International Compensation
Approaches
SPHR only
• Negotiation/ad hoc
• Pure localization
• Higher-of-home-or-hostcountry
• Home-country-based balance
sheet
• Headquarters-based balance
sheet
• Lump-sum
• Cafeteria
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Expatriate Compensation
Approaches
• Negotiation/ad hoc – Typically used when first few assignees
are sent from headquarters. The package is mutually
negotiated between employer and employee.
• Pure localization – The most straight forward method of
assignee compensation. The expatriate is paid basically the
same as local nationals in equivalent positions.
• Higher-of-home-or-host-country – The expatriate is paid the
higher rate of home-country or host country.
• Home-country-based balance sheet – The employer pays the
difference between home-country costs and assignment costs.
• Headquarters-based balance sheet – Expatriates at the same
job level are paid the same regardless of their country of
origin.
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Expatriate Compensation
Approaches
• Lump sum – The employer pays the expatriate a lump sum
(instead of allowances or differentials).
• Cafeteria – The employer offers several options that the
expatriate can choose from, subject to overall limits.
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International Benefit Considerations
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
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International Benefit Considerations
•
•
•
•
•
Social security
Paid time off
Retirement
Severance
Health and welfare
insurance (health
care, disability, and
life insurance)
SPHR only
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Totalization Agreements
SPHR only
• International social
security agreements.
• Eliminate dual social
security coverage and
taxes for companies
and workers.
• Fill gaps in benefit
protection for
workers.
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Evaluating the Total Rewards 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?
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Required Communication
• ERISA requires:
– Summary plan description, summary annual report,
and summary of material modifications.
– Filing Form 5500 with the DOL, seven months after
the end of the plan year.
• Other required communications include:
– Continuation of benefits notice.
– Explanation of stock options (SEC regulations).
– Posting of all required state employment laws.
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