CHAPTER 11
Managing
compensation &
benefits
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Chapter outcomes
• Explain the link between pay, motivation and performance
• Define job evaluation and discuss four popular methods of
performing it
• Develop a time-based pay system using pay grades and steps
• Discuss three types of individual incentives
• Discuss why gainsharing, profitsharing and employee stock
ownership plans (ESOPs) have grown as organisational
incentive plans
• Understand executive compensation methods
• Understand the growth of employee benefits and their
organisational objectives
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Definitions
• Compensation often used interchangeably with wage and salary
administration
• Compensation is a broader concept
• Compensation/total rewards refers not only to extrinsic
rewards such as salary and benefits, but also to intrinsic
rewards such as achieving personal goals, autonomy and more
challenging job opportunities
• Wage and salary administration usually refers strictly to the
monetary rewards given to employees
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Monetary
rewards
(Direct
payments)
Extrinsic
rewards
Compensation of
employees
(Financial)
Benefits
(Indirect
payments)
Hourly wage
Salary
Bonuses
Commissions
Pay incentives
Skills-based/competencybased
Insurance
Retirement
Paid holidays
Paid public holidays
Food services
Medical
Recreation
Recognition
Promotion opportunities
(Non-financial)
Working conditions
Interesting work
For use with Human Resource Management in South
Africa 4eopportunities
Training
Intrinsic rewards
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Compensation objectives
•
•
•
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Attracting good/talented employees
Retaining good/talented employees
Motivation
Legal considerations
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Objectives of a compensation system
1. Attract good/talented
applicants
Wage survey to determine the “going
rate” in the labour market
2. Retain good/talented
applicants
Job evaluation system that employees
perceive as “equitable”
3. Motivate employees
Reward good performance
Documentation of HR records
4. Comply with the law
Government legislation
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Motivation and performance
model
Feedback to employee
Employee sets
expectations
and goals
Employee
performs
job
Performance is
evaluated
Rewards
are
given
Employee
considers equity
of performance
rewards
Employee sets new goals and expectations based
on prior experiences
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Job evaluation (JE)
• Process of systematically analysing jobs to determine the relative
worth of jobs within the organisation that results in an organisation’s
pay system
• Result is a pay system with pay rates for each job depending on the
status of the job according to the hierarchy
• Does NOT review the employees in the job but the worth of the
position
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Job evaluation (JE) (continued)
• JE methods:
– Job ranking
– Factor comparison
– Classification method
– Point method
– Patterson method
– Hay method
– TASK
– Peromnes
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Job evaluation (JE) (continued)
• Job evaluation committee
• Outside assistance
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Pay systems
• Time-based systems
• Person-based systems
• Performance-based systems
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Guidelines for incentive plans
•
•
•
•
•
Bold incentives
Emphasis on team performance
Quick feedback
Above-average base
Simple formula
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Incentive plans
• Problems with incentive plans
• Different types:
– Cash profit-sharing
– Stock ownership or options
– Business incentives
– Productivity/gain-sharing
– Team/group incentives
– Individual performance awards
– Special recognition awards
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Executive compensation
• 4 forms of pay:
– (1) Base salary
– (2) Annual bonus
– (3) Long-term incentives
– (4) Benefits and perquisites (“perks”)
• Golden parachutes
• Stock options
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Benefits
• Types of benefits
• Benefits required by law:
– Unemployment insurance
– Compensation for injuries and diseases
• Voluntary benefits
• Paid time off
• Insurance
• Employee services
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Total benefit planning
• Flexible benefit plans
– Cafeteria plan
– Buffet plan
– Alternative dinners plan
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Advantages of flexible plans
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•
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Meet diverse needs of employees
Control benefit costs
Improve benefits offered
Attract and retain employees
Avoid unions
Avoid duplicate coverage
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Summary
•
•
•
•
Organisations use both extrinsic and intrinsic rewards to
compensate employees for their time and effort. Pay systems
are designed to attract, retain and motivate employees while
complying with government legislation.
Job evaluation is used to evaluate jobs systematically and to
assign them to pay grades. The HR specialist strives to
maintain a pay system that employees view as equitable, both
internally and externally. Standard methods of evaluation
include ranking, classification, point and factor comparison.
Each offers different advantages.
Pay systems are usually designed to compensate people for
the amount of work they produce (piecework), the skills they
learn and use or the time they spend on the job (hourly and
salaried). Most employees in South Africa are paid through
time-based systems.
Individual employee, team-based and organisationwide
systems, such as profit-sharing and gainsharing, are replacing
automatic pay increases to relate pay to performance.
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Summary
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•
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•
Executive compensation has become a complex area of HR
functions. Top executives often receive compensation in as many
as four areas, including salary, bonuses, long-term incentives and
benefits.
Employee benefits are not just a fringe cost to employers; they
represent a substantial percentage of the total payroll. Benefits
are usually awarded to all workers or on a seniority basis.
Certain benefits are required by law, including unemployment
insurance and compensation for injuries and diseases.
Retirement income is provided through private/government
pension plans and personal savings. Employers believe that they
directly or indirectly provide all these sources - which constitute
the single most expensive benefit area.
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning
Summary
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Health insurance programmes provided by employers have expanded to
include life/disability insurance, as well as the traditional medical and
hospitalisation coverage.
Paid time off from work represents a major benefit cost.
Flexible benefit plans are of great interest to employers because they
help contain benefit costs and provide employees with more
individualised benefit programmes.
Changing employee demographics have caused employers to offer
childcare programmes to help employees meet their family needs.
For use with Human Resource Management in South Africa 4e
by Grobler, Wärnich et al
ISBN: 1408019515 © 2010 Cengage Learning