Chapter 8
Variable Pay and Benefits
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Variable Pay: Incentives for Performance
• Variable Pay
 Compensation linked to individual, group/team, and/or
organizational performance.
• Basic assumptions:
 Some people perform better and are more productive
than others.
 Employees who perform better should receive more
compensation.
 Some of employees’ total compensation should be
tied directly to performance.
 Some jobs contribute more to organizational success
than others.
8–2
Developing Successful Pay-for-Performance
Plans
• Reasons for Adopting Pay or Incentive Plans:
 Link strategic business goals and employee
performance.
 Enhance organizational results and reward
employees financially for their contributions.
 Reward employees and recognize different levels of
employee performance.
 Achieve HR objectives, such as increasing retention,
reducing turnover, recognizing training, or rewarding
safety.
8–3
Figure 8-1 Examples of Incentives
8–4
Metrics Options for Variable Pay Plans
8–5
Figure 8-2 Categories of Variable Pay Plans
8–6
Individual Incentives: Piece-Rate Systems
• Straight Piece-Rate Systems
Wages are determined by
multiplying the number of pieces
produced by the piece rate for one
unit.
• Differential Piece-Rate Systems
Employees are paid one piece-rate
for units produced up to a standard
output and a higher piece-rate
wage for units produced over the
standard.
8–7
Individual Incentives (cont’d)
• Bonuses
 A one-time payment that does not become part of the
employee’s base pay.
• Special Incentive Programs
 Numerous special incentive programs have been
used to reward individuals, ranging from one-time
contests for meeting performance targets to awards
for performance over time.
8–8
Purposes of Special Incentives
8–9
Group/Team Incentives
Distribution of
Group/Team Incentives
Timing of
Group/Team Incentives
Design of
Group/Team
Incentive Plans
Decision Making About
Group/Team Amounts
8–10
Conditions for Successful Group/Team Incentives
8–11
Organizational Incentives
• Profit Sharing
 A system to distribute a portion of the profits of the
organization to employees.
 Primary objectives:
Increase productivity and organizational performance
 Attract or retain employees
 Improve product/service quality
 Enhance employee morale

 Drawbacks
Disclosure of financial information
 Variability of profits from year to year
 Profit results not strongly tied to employee efforts

8–12
Employee Stock Plans
• Stock Option Plan
 A plan that gives employees the right to purchase a
fixed number of shares of company stock at a
specified price for a limited period of time.

Number of firms offering this has declined due to changing
laws and accounting regulations.
8–13
Employee Stock Plans
• Employee Stock Ownership Plan (ESOP)
 A plan whereby employees gain significant stock
ownership in the organization for which they work.
 Advantages

Favorable tax treatment for ESOP earnings

Employees motivated by their ownership stake in the firm
 Disadvantages

Retirement benefit is tied to the firm’s performance
8–14
Types of Sales Compensation Plans
• Salary-Only
 All compensation is paid as a base wage with no
incentives.
• Straight Commission
 Compensation is computed as a percentage of sales
in units or dollars.
 The draw system make advance payments against
future commissions to salesperson.
• Salary-Plus-Commission or Bonuses
 Compensation is part salary for income stability and
part commission for incentive.
8–15
Figure 8-3 Sales Metric Possibilities
8–16
Benefits
• Benefit
 An indirect compensation given to an employee or
group of employees as a part of organizational
membership.
 Benefit costs are 30-80% of total payroll costs.
• Strategic Perspectives on Benefits
 Benefits reflect a firm’s philosophy of social and
corporate citizenship.
 Benefits influence recruitment and retention decisions.
 Flexible benefits allow individuals to tailor their benefits
to their own situations.
8–17
Benefits Administration
• Benefits Design






How much total compensation, including benefits, can be provided?
What part of the total compensation of individuals should benefits
constitute?
Which employees should be provided which benefits?
What expense levels are acceptable for each benefit offered?
What is being received by the organization in return for each benefit?
How flexible should the package of benefits be?
• HR Technology and Benefits
 Internet-based HR information systems allows employees to
change their benefit choices, track their benefit balances, and
seek benefit information on-line.
8–18
Benefits
• Benefits Measurement
 As a percentage of payroll
 Expenditures per full-time equivalent employee
 Costs by employee group
 Administration costs
 Health-care benefits costs per participating employee
• Benefits Communication
 Benefits Statements

Annual “personal statement of benefits” that translates the
benefits into dollars to show their worth.
8–19
Types of Benefits
• Government mandated
 Many mandated benefits that employers in the United
States must provide to employees by law.
• Voluntary
 Employers voluntarily offer other types of benefits to
help them compete for and retain employees.
8–20
Figure 8-4 How the Typical Benefits Dollar Is Spent
8–21
Types of Benefits
8–22
Security Benefits
• Worker’s Compensation
 Benefits provided to persons injured on the job.
 State laws require most employers to supply workers’
compensation coverage by purchasing insurance
from a private carrier or state insurance fund or by
providing self-insurance.
• Unemployment Compensation
 A Federal/state payroll tax that funds state
unemployment systems.
 Involuntary unemployment and actively seeking work
is required for persons to claim benefit.
8–23
Increases in Health Benefits Costs
• Changing Co-Payment and Employee
Contributions
 Employees are now required to pay a portion of the
cost of insurance premiums, medical care, and
prescription drugs.
• Using Managed Care
 Approaches that monitor and reduce medical costs
using restrictions and market system alternatives.
 PPO – Preferred Provider Organization
 HMO – Health Maintenance Organization
8–24
Controlling Health-Care Costs
• Consumer-Driven Health (CDH) Plan
 Also known as defined-contribution health plans,

Employers contribute a set amount to employees to cover
their own health-related expenses.
• Advantages for Employers
 More of the increases in health-care benefits are
shifted to employees
 The focus of controlling health-care usage falls on
employees, who may have to choose when to use
and not use health-care benefits.
8–25
Controlling Health-Care Costs
• Health Savings Accounts (HSAs)
 Often combined with high-deductible insurance plans
 Both employees and employers can make
contributions to an account.
 Individual employees can set aside pre-tax amounts
for medical care into an HSA.
 Unused amounts in an individual’s account can be
rolled over annually for future health expenses.
 Incentives are included to encourage employees to
spend less on health expenses.
• Health-Care Prevention and Wellness
8–26
Health-Care Legislation
• Consolidated Omnibus Budget Reconciliation
Act (COBRA) Provisions
 Requires that most employers (except churches and
the federal government) with 20 or more employees
offer extended health-care coverage to certain
groups.
Employees who voluntarily quit
 Widowed or divorced spouses and dependent children of
former or current employees
 Retirees and their spouses whose health-care coverage ends

8–27
Health-Care Legislation
• Health Insurance Portability and Accountability
Act (HIPAA) of 1996 Provisions
 Allows employees to switch their health insurance
plan from one company to another, regardless of preexisting health conditions.

Health plans must continue to cover sick employees.
 Require employers to provide privacy notices to
employees.
 Regulate the disclosure of protected health
information without authorization.
8–28
Retirement Benefits
• Social Security Act of 1935
 Established a system providing old age, survivor’s,
disability, and retirement benefits.

Benefit payments are based on
an employee’s lifetime earnings.
 Administered by the Social
Security Administration.
8–29
Pension Plans
• Pension Plans
 Retirement programs established and funded by
employers and employees.
• Defined-benefit plans
 Employees are promised a definite pension amount
based on age and length of service.
• Defined-contribution plans
 Employer makes an annual payment to an
employee’s account with the benefit payout
determined by the financial performance of the
employee’s retirement.
8–30
Pension Plans (cont’d)
• Employee Retirement Income Security Act
(ERISA)
 Regulates pension funds to assure their soundness.

Requires many firms to offer retirement plans to all
employees if offered to any employees.

Accrued benefits must be paid to departing employees.

Requires minimum funding for IRS approval and purchase of
plan termination insurance.
8–31
Financial and Family-Oriented Benefits
• Insurance benefits
 Life, disability, long-term care, legal, etc.
• Financial benefits
 Credit unions, purchase discounts, thrift plans,
savings plans, stock investment plans
• Family-oriented benefits
8–32
Family-Oriented Benefits
• Family Medical Leave Act (FMLA)
 Employers with 50 or more employees
 Employees who have worked at least 12 months and
1,250 hours in previous year
 Employers must allow eligible employees to take up
to a total of 12 weeks of unpaid leave during any 12month period for:
Birth, adoption, or foster care placement of a child
 Caring for a spouse, a child, or a parent with a serious health
condition
 Serious health condition of the employee

8–33
Family-Oriented Benefits
• Child-Care Assistance
• Benefits for Domestic Partners
 Domestic Partners or Spousal Equivalents
8–34
Time-Off and Other Miscellaneous Benefits
•
•
•
•
•
•
Work breaks
Holiday pay
Vacation pay
Sick leave
Paid-time-off
Leaves of Absence
 Family Leave
 Military Leave
 Election Leave
 Jury-duty Leave
 Funeral Leave
8–35