Chapter 9
Determining Pay and Benefits
Chapter 9 Objectives
• Explain how effective compensation systems enhance competitive
advantage
• Understand how people form perceptions about a pay system's
equity
• Describe how organizations can build an equitable pay system
• Define the legal constraints imposed on organizational pay practices
• Understand the various benefit options and their administration
Linking Pay and Benefits to Competitive
Advantage
• If effective, a firm’s
compensation system can:
• Improve cost efficiency.
• Ensure legal compliance.
• Enhance the success of
recruitment efforts.
• Reduce morale and turnover
problems.
Influences of Compensation on
Attitudes and Behavior – Equity Theory
• People form equity beliefs based on two factors:
• Inputs (I): The perceptions that people have concerning what
they contribute to the job (e.g., skill and effort).
• Outputs (O): The perceptions that people have regarding the
returns they get (e.g., pay) for the work they perform.
• People judge the equity of their pay by comparing their
outcome-to-input ratio (O/I) with another person’s ratio,
who is referred to as one’s “referent other.”
Influences of Compensation on
Attitudes and Behavior – Equity Theory
• Equity: O/I ratios of the individual and his or
her referent other are perceived as being
equal.
• Inequity: O/I ratios of the individual and his or
her referent other are perceived as being
unequal.
• When employees’ O/I ratios are less than that
of their referent others, they feel they are being
underpaid.
• When employees’ O/I ratios are greater, they
feel they are being overpaid.
Influences of Compensation on
Attitudes and Behavior – Equity Theory
• When underpaid, employees tend to
decrease inputs or escape the
situation.
• Overpaid employees consider
overpayment just as satisfying as
equity or somewhat dissatisfying, but
not nearly as dissatisfying as
underpayment.
Establishing Pay Rates Within an
Organization
• Employees believe their pay is equitable
when they perceive these circumstances:
Internal consistency: Pay is fair relative to the pay coworkers in
the same organization receive.
External competitiveness: Pay is fair relative to the pay received
by workers in other organizations who hold similar positions.
Employee contributions: Pay fairly reflects their input to the
organization.
Establishing Pay Rates Within an
Organization
• Achieving internal consistency
• Determine the overall importance or worth of each
job.
• Job evaluation is the systematic process for
determining the worth of a job.
• Standards for job evaluation
•
•
•
•
•
Consistency
Freedom from bias
Correctability
Representativeness
Accuracy of information
Establishing Pay Rates Within an
Organization
Achieving Internal Consistency (Cont.)
• How job evaluation is conducted: Point-Factor Method:
• Step 1: Select and define the compensable factors used to determine
job worth.
• Step 2: Determine the number of levels or degrees for each factor.
• Step 3: Carefully define each degree level.
• Step 4: Weigh each compensable factor in terms of its relative
importance.
• Step 5: Assign point values to the degrees associated with each
compensable factor.
• Step 6: Calculate the total point value for a job by summing the points
earned on each compensable factor.
Establishing Pay Rates Within an
Organization
Achieving Internal Consistency (Cont.)
• Assigning jobs to pay grades
• Jobs are grouped into pay grades based on
the total number of points received.
• Pay grades: Job groupings in which all jobs
assigned to the same group are subject to
the same range of pay.
• Companies must decide how many pay
grades to establish.
Establishing Pay Rates Within an
Organization
Achieving external competitiveness
• Collecting salary survey information
• Provides information on pay rates
offered by a firm’s competitors for
certain benchmark jobs.
• Establishing a pay policy
• A pay policy stipulates how well a
company will pay its employees
relative to the market.
• Majority of firms pay at the market
rate.
• When setting its pay policy, a
company must consider its strategic
plan.
Establishing Pay Rates Within an
Organization
Achieving external competitiveness
• Establishing pay rates
• Market rates identified by salary surveys are used for
benchmark jobs.
• For non-benchmark jobs, pay rates are set based on the pay
policy line.
• Pay policy line: A regression line that shows the statistical
relationship between job evaluation points and prevailing
market rates.
Establishing Pay Rates Within an
Organization
Recognizing employee contributions
• An organization must establish a pay
range for each pay grade.
• Each employee must then be placed
within that range based on their
contribution to the organization.
• Pay range specifies the minimum and
maximum pay rates for all jobs within a
grade.
Establishing Pay Rates Within an
Organization
Recognizing Employee Contributions
• Establishing a pay range
• Most employers set market rate as the
midpoint of the range.
• The spread from the midpoint usually varies,
becoming larger as one progresses to higher
pay grades.
• The mechanism for placing each employee
within a pay range differs for new and existing
employees.
• New employees are usually paid at the
bottom of the pay range unless their
qualifications exceed the minimum.
Establishing Pay Rates Within an
Organization
Recognizing Employee Contributions
• Skill-based pay
• A compensation approach that grants employees pay increases for
acquiring new, job-related skills.
• Usually implemented as follows:
• Identify tasks that need to be performed.
• Determine what skills are needed to perform the tasks.
• Develop tests or measures to determine whether an individual has
learned the skills.
• Price each skill based on its value to the organization.
• Communicate to employees the skills they can learn and how much
they will be paid for learning them.
Establishing Pay Rates Within an
Organization
Recognizing Employee Contributions
Skill-based pay
•
Strengths
•
•
•
Financial incentive to improve
skills.
Effective communication and
problem solving skills.
Commitment to the
organization.
•
Weaknesses
•
•
•
•
•
•
Additional labor costs.
May lead to inequity perceptions.
Not cost-effective if company does
not use the new skills.
Problems determining the skill
levels of different employees.
Administrative burden.
Least effective in bureaucratic
organizations.
Legal Constraints on Pay Practices
• The law imposes constraints on
organizational pay practices in two
major areas:
• Minimum wage and overtime
• Pay discrimination
Legal Constraints on Pay Practices
• Minimum wage and overtime
• The Fair Labor Standards Act (FLSA) primarily
regulates minimum wage and overtime pay
practices.
• The act exempts small organizations and certain
types of employees from its minimum wage and
overtime requirements.
• Job categories exempted include executive,
administrative, professional, and outside sales
employees.
Legal Constraints on Pay Practices
• Minimum wage and overtime (cont.)
• Minimum wage provisions: If a state’s minimum wage
level differs from the federal minimum wage level, the
employer must pay the higher of the two rates.
• Overtime provisions: All nonexempt employees who
work in excess of 40 hours/week, must be paid for
overtime worked, no less than one-half times the
employee’s regular pay rate.
Legal Constraints on Pay Practices
• Pay and discrimination
• The Equal Pay Act (EPA)
• The gender pay gap
• Comparable worth and the law
Legal Constraints on Pay Practices
Pay and Discrimination
• The Equal Pay Act
– Prohibits sex discrimination in pay.
– The ‘‘equal pay for equal work’’
standard requires that jobs
requiring an equal level of skill,
effort, and responsibility and
performed under similar working
conditions must be paid equally.
– Unequal pay for equal work is
allowed if differences are based on
seniority, productivity, merit, or any
factor other than sex.
Legal Constraints on Pay Practices
Pay and Discrimination
• The gender pay gap
• Despite the existence of EPA, pay
gap still exists between the sexes.
• This pay gap has been attributed to
women working part-time, staying
for a shorter period in the
workforce, and being less effective
in negotiating starting salaries.
• The ‘‘equal pay for equal worth’’
standard is called comparable
worth.
Legal Constraints on Pay Practices
Pay and Discrimination
• Comparable worth and the
law
– To win a comparable worth
case, plaintiffs must prove
disparate impact caused by
intentional discrimination.
– Employers can win the case if
they can prove that pay
differences are not the result of
intentional discrimination.
Christmas Vacation
Questions:
1. What are Clark’s issues in this scene?
2. Is Clark legitimate in his expectations of a
Christmas bonus?
3. What are some strategies that Clark’s company
could have employed to avoid any potential
backlash to cutting Christmas bonuses?
4. Was Clark’s psychological contract violated?
How might this impact his future work?
5. Is performance truly tied to compensation at
Clark’s company?
6. If the company was concerned with increasing
cash flow, what are some low-cost alternatives to
monetary compensation that might have been
alternatively employed?
The Strategic Importance of
Benefits and Services
• Employee Benefits and Services
– Are in-kind (noncash) payments to employees for
their membership or participation in the organization.
– Are available on a noncontingent basis—employees
receive the same benefits and services regardless of
job performance.
• Key Strategic Challenge
– Offering benefits and services that maximize the
return on the employer’s investments.
12–27
The Strategic Importance of
Benefits and Services
Controlling Costs of
Benefit and Services
Recruiting and
Retaining Talent
Strategic
Challenges
Achieving Business
Objectives
12–28
The Strategic Importance of
Benefits and Services
Controlling Benefit and Services Costs
• In 1929—Total benefits payments
averaged 5% of total pay.
• In 2007—Benefits were 30% of total
pay (about $17,000 per employee).
• Wages and salaries are 40 times greater than
60 years ago; benefits and services are 500
times greater
12–29
Employer Costs for Benefits and Services (Cost per Hour Worked
and as Percentage of Total Compensation, Private Industry)
The Strategic Importance of
Benefits and Services
Recruiting and Retaining Talent
• Innovative benefits and services
packages are important for attracting
and retaining employees.
– Flexible benefits plan
• Provides all employees with a base benefits
and services package and then allows
employees to choose some additional benefits
and services from a wide array of options.
12–31
Mandatory Protection Programs
• Social Security Insurance
• Unemployment
Compensation Benefits
• Workers’ Compensation
and Disability Insurance
• Family and Medical Leave
12–32
Mandatory Protection Programs
Social Security Insurance
• Enacted in 1935 as a forced savings plan
intended to provide older Americans with a
reliable source of income in retirement.
• Medicare provisions were added in 1966.
• Federal Insurance Contributions Act (FICA)
– 6.2% of the first $106,800 income for retirement and
disability
– 1.45% of total income for hospital insurance
(Medicare)
– Equal payroll tax contributions (7.65%) from the
employer and the employee
12–33
Mandatory Protection Programs
Unemployment Compensation
• Is an insurance program that provides
unemployment compensation as income for
employees who lose their jobs.
– Jointly administered by federal and state
governments.
– Tax rates for employers are based on location and
employer history of layoff and dismissals.
– Level of benefits ranges 50-70% of base salary.
12–34
Mandatory Protection Programs
Workers’ Compensation
• Covers costs and lost income due to
injuries or illnesses that result from onthe-job events
– Administered by states
– Fully financed by employers
• Managing workers’ compensation costs:
– Use health care cost-containment
strategies (audit bills, develop preferred
providers, etc.)
– Implement job safety programs
– Combine with disability management
12–35
Mandatory Protection Programs
Family and Medical Leave
• Family and Medical Leave Act (FMLA)
– Covers employers with 50 or more workers
– Required to grant up to 12 weeks of unpaid leave annually
• For birth/adoption of a child
• To care for immediate family member with serious health condition
• For employee with serious health condition
– Employee keeps preexisting health coverage and must be
allowed to return to same or equivalent job.
12–36
Voluntary Protection Programs
Legal Considerations – Retirement Plans
• Qualified Plan
– Covers a broad class of employees
– Receives favorable tax treatment
from IRS
• Nonqualified plan
– Covers only select groups of employees (e.g., senior
management)
– Doesn’t adhere to the strict tax regulations, doesn’t receive
favorable tax treatment.
12–37
Voluntary Protection Programs
Types of Pension Plans
• Defined Benefit Plans
– Benefits are fixed but vary with age and length of
service
• Require funding to match benefit payouts.
• Provide predictable income after
retirement
• Penalize employee mobility
• Are regulated by ERISA
• Are being replaced by
defined contribution plans
12–38
Voluntary Protection Programs
Types of Pension Plans (cont’d)
• Defined Contribution Plans
– Contribution is fixed, payout is variable.
– Each employee has separate account.
– Employer may agree to match a percentage of employee
contributions.
– Employer may contribute (contributory plan) or not
(noncontributory plan).
• 401(k)s and 403(b)s
– Employer and employee contribute to the fund.
– Employee makes investment decisions.
12–39
Voluntary Protection Programs
Legal Considerations
• Employee Retirement Income Security Act of 1974
(ERISA )
– Protects benefits for workers covered by private pension plans;
prohibits unfunded plans
– Specifies provisions for vesting (time when employer’s
contribution belongs to employee)
– Portability: transfer of retirement funds to IRAs
• Pension Benefit Guaranty Corporation (PBGC)
– Administers an insurance program guaranteeing payment of
retirement benefits if a plan is terminated.
12–40
Voluntary Protection Programs
Legal Considerations
Largest PBGC Claims by Firms in Default since 1975
Claim
Vested
Participants
Largest 5 Claims
Year
1. United Airlines
2005
$7,093,803,951
122,541
2. Bethlehem Steel
2003
$3,654,380,116
97,015
3. US Airways
2003
$2,861,901,511
58,823
4. LTV Steel
2002
$1,959,679,993
80,961
5. National Steel
2003
$1,161,019,567
35,404
12–41
Voluntary Protection Programs
Health Care Benefits and Services
• Medical Care Costs
– Most employees underestimate the medical
benefit’s cost to the employer and view
medical care as an entitlement.
– Employers pay an average of $11,500 for a
health insurance plan that covers a family of
four.
– Out of every benefits and services dollar
spent, a quarter goes to health care.
12–42
Voluntary Protection Programs
Types of Health Insurance Plans
Conventional
Insurance Plans
Consumer-Driven
Plans
Health Savings Accounts
(HSAs)
Point of Service
Plans (POSs)
Health Maintenance
Organizations
(HMOs)
Preferred Provider
Organizations
(PPOs)
12–43
Voluntary Protection Programs
Percentage of Enrolled Workers by Type of Health Care Plan
12–44
12–44
Voluntary Protection Programs
Wellness Programs
• Wellness Programs
– Proactive programs to prevent health problems
• May include:
– On-site exercise programs
– Stress-management training
– Assistance to stop smoking
– Weight-loss programs
12–45
12–45
Voluntary Protection Programs
Employee Assistance Programs (EAPs)
• Assist employees with chronic personal problems that
hinder job performance and attendance
• Employees referred to confidential counseling services
• Includes help with alcohol and drug dependencies,
domestic problems, mental disorders, financial
problems
12–46
12–46
Voluntary Protection Programs
Paid Leave
• Off-the-Job Paid Leave
– Holidays and Vacations
• Vacation pay or payment in lieu of vacation
• Deferral of vacation (banking) or loss of vacation days
• Mandated vacations in other countries
– Other Paid Leaves
• Volunteering, adoption, paternity and maternity leave, a day off for an
employee’s birthday, and sabbaticals
• On-the-Job Paid Leave
– Rest periods, lunch periods, washup times, and clothes-changing and
getting-ready times
– Use of onsite physical fitness facilities
12–47
12–47
Voluntary Protection Programs
Work-Life Benefits and Services
• Scheduling Alternatives
– Empower employees to decide how, when,
and where to get their jobs done.
•
•
•
•
Flextime
Compressed workweeks
Telecommuting
Job sharing
12–48
12–48
Voluntary Protection Programs
Prevalence of Work/Life Benefits and Services
12–49
12–49
Voluntary Protection Programs
Work-Life Benefits and Services
•
Child Care Benefits and Services
– Scholarships for children of
employees
– Subsidized tutoring
– Care for sick children
– Subsidized college educations
– On-site or subsidized child care
– Child care referrals
– Extended leaves
– Benefits for employees with
special needs children
– Workplace schools
– Employer-sponsored summer
camps
• Elder Care Services
– Elder care referral services
– Extended leaves beyond the
mandated FMLA requirement.
– Emergency elder care services
– Subsidies to help cover the cost of
elder care
– Long-term care insurance.
12–50
12–50
Voluntary Protection Programs
Work-Life Benefits (cont’d)
• Domestic Partner Benefits and Services
– Employers provide domestic partner benefits and
services to attract and retain talent, comply with the
company’s nondiscrimination policy, and comply with
local laws.
– Federal laws do not require employers to provide
domestic partner benefits and services.
12–51
12–51