Total Rewards Flashcards
(229 cards)
1
Q
Total rewards strategy
A
Plan or method implemented by an organization that provides monetary, benefits-in-kind, and developmental rewards to employees who achieve specific business goals.
2
Q
Total rewards
A
- Direct and indirect remuneration approaches that employers use to attract, recognize, and retain workers
- All forms of financial rewards that employees receive from their employers
3
Q
Benefits
A
- Tangible payments or services
- Provided to broad groups of employees to cover issues such as retirement, health care, sick pay/disability schemes, life insurance, and paid time off, in addition to those required by law.
- Internal and external training and development that employees receive is also considered a benefit.
4
Q
Compensation
A
- Refers to all other financial returns (beyond any tangible benefits payments or services)
- Includes salary and allowances.
5
Q
Perquisites
A
- Compensation provided on an individual basis in the form of goods or services.
- Examples of perquisites include automobiles and mobile devices.
6
Q
Incentives or premiums
A
- Payments in return for the achievement of specific, time-limited, targeted objectives.
- Often calculated as a percentage of base salary.
- Payment may be made in a lump sum or as ongoing payments over a specified period of time.
7
Q
Components of Total Rewards System
A
- Compensation
- Benefits
- Flexibility
- Social interaction
- Stability
- Status/recognition
- Work variety
- Workload
- Work importance
- Authority/Control
- Advancement
- Work conditions
- Development opportunities
- Personal growth
8
Q
Compensation philosophy
A
- Short but broad statement documenting an organization’s guiding principles and core values about employee compensation along with how they will reward competitively
- Framework for consistency and transparency
- “Why” behing pay - supports organization’s strategic plan and helps attract, retain and motivate employees
9
Q
Compensation philosophy development
A
- Typically developed by HR and executive team
- Should be in place prior to developing total rewards strategy
10
Q
Total Rewards Strategy Process
A
- Assessment
- Design
- Implementation
- Evaluation
- (Circles back to assessement)
11
Q
Assessment Stage of Strategy Process
A
- Look at current processes and the effectiveness of reaching goals
- Conduct employee surveys
- Evaluate negative behaviors that are overlooked and compensated
12
Q
Design Stage of Total Rewards Strategy Process
A
- Senior management team and HR identifies and analyzes reward strategies to determine what would best apply in their workplace
- Decisions make on what will be rewarded and what rewards will be
- Consider pay rewards along with benefits/personal development opportunities
13
Q
Implementation Stage of Total Rewards Strategy Process
A
- HR department implements the new rewards system and communicate the new strategy to employees.
- Training for department managers to effectively measure the achievement and employees understand what they need to accomplish to receive the rewards.
- Implementation efforts need to support the long-term needs of the organization to ensure a sustainable business model.
14
Q
Evaluation Stage of Total Rewards Strategy Process
A
Evaluates how well the system achieves its goals:
- Cost-effectiveness
- Compliance with laws and regulations
- Compatible with mission and strategy
- Match organizational culture
- Appropriateness of workforce and equity
15
Q
What influences the size of an organization’s compensation package?
A
- Degree of market competition
- Level of product demand
- Industry characteristics
- Life-cycle stage of the organization
16
Q
Cultural Alignment of Total Rewards
A
National and organization culture influence how people perceive the value of rewards available and compensation
17
Q
Entitlement-oriented
A
- Compensation program that promotes a caring, protective feeling that makes employees feel as if they are a part of the family.
- Feels that employees are entitled to benefits as a condition of employment.
- As benefits increase - less emphasis on individual employee contributions and responsibility and more emphasis on the success of the organization as a whole.
18
Q
Contribution-oriented
A
- Emphasis on the performance and contributions of individual employees.
- Emphasizes performance-based pay, incentives, and shared responsibility for benefits.
- Ex: the firm may require copayments for medical insurance.
19
Q
What is the most common approach towards compensation?
A
- Most are moving away from entitlement approach toward performance approach
- Some have an approach in the middle
20
Q
Reward Systems Alignment with Workforce Preferences
A
- Consider type of workforce (ex: entry level will have different package than highly educated professionals)
- Suveys can be done to see what would be preferred to analyze your workforce
21
Q
Equity in Reward Systems
A
- Fairness of compensation and benefits paid to employees
- Can be internal or external
22
Q
External equity
A
Organization’s compensation levels and benefits are similar to those of other organizations that are in the same labor market and compete for the same employees.
23
Q
External equity: organizations compete with others that share their same
A
- Industry
- Occupation
- Location
24
Q
Lag market competition pay strategy
A
- Controls labor costs by setting pay rates below those of other organizations
- May be used because of economic necessity
- May enable an organization to offset other higher costs such as purchasing, distribution, or sales expenses
- Typically will offer other benefits such as learning and development, attractive roles via career paths, etc.
25
Match market competition pay strategy
* Offers wage rates and benefits packages similar to that of the competition
* Often referred to as being externally competitive
* Most common approach
26
Lead market competition pay strategy
* Offers higher wages and/or better benefits in an attempt to attract and keep the best talent
* Rationalizes that higher-quality employees are more productive, which makes up for the higher salaries
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Correct pay strategy depends on
* The value the employee adds to the organization's success
* Competitivness of the market (supply vs demand)
* Degree the organization can afford to pay for a strategy
* Where the organization wants to place itself as an employer of choice.
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Multiple Pay Strategies
* Organizations can use combination of pay strategies.
* This can cause moral issues and lead valuable employees to seek jobs in other organizations.
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Pay Strategies Include
* Lag market competition
* Match market competition
* Lead market competition
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Issues and Challenges in Global Compensation and Benefits
* Standardization vs localization
* Culture
* Competitive labor market
* Collective bargaining, employee representation, and government mandates
* Economic factors
* Taxation
31
Reasons to Communicate Total Reward Systems
* Educating employees about the organization’s total rewards practices.
* Achieving employees’ buy-in and making them aware of the overall value.
* Supports organization’s strategic objectives.
* Supports goals for performance management.
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What do you need to help employees understand regarding their pay?
* The pay system and how their pay is determined
* This reduces conflicts between employees and management regarding pay
33
Challenges to Transparency in Total Reward Systems
* Complete openness (when employees know how much coworkers are paid)
* Causes jealousy and performance problems and may question fairness
* Risk of employees using info for inappropriate or unintended purposes
* Need to preserve employee privacy and protect proprietary information
* Can do middle group (pay ranges are communicated by individual salaries are separate)
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Considerations when communicating total rewards
* Type of information (required and voluntary communication)
* Communication plans
* Direct communication
* Individualized total compensation statements
* Self-Service Technologies
* Consistent key messages
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Required communication
* Communications that are mandated by laws and statutes
* Due diligence is required so that organizations understand the requirements of applicable laws, regulations, instructions for any applicable forms, or other official guidance
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Voluntary communication
* Above the mandated communication on total rewards programs
* Approach that outlines policies and procedures and the exceptions that managers and HR communicate to employees
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Communication Plans
* Direct, person-to-person communication is sometimes better than written communication
* HR/Manager meet with individual employees in a confidential setting to communicate compensation and benefits issues
* Employee should have the opportunity to ask questions
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Individualized total compensation statements
Show total value of the base pay, incentives, and benefits packages so employees can clearly see the value they receive in the total compensation package
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Employee Self Service in communicating benefits
* Increased accuracy of employee data
* Improved timeliness in information and employee transactions
* Reduced dollars spent on other traditional HR delivery channels (e.g., paper-based transactions)
* Enhanced reputation as a “green,” environmentally conscious employer.
40
Compliance with total reward systems
* Standards and regulations set forth by international organizations
* Ex: International Labor Organization, the Organisation for Economic Co-operation and Development, the United Nations, and the European Union, as well as treaties and agreements
* Extraterritorial application of national law.
* Application of national laws to international-owned subsidiaries operating within a nation’s borders.
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Extraterritorial laws
Extend certain legal requirements of a home country to the activities of its citizens traveling or working abroad and of its entities—such as corporations—operating in host countries.
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How HR can ensure compliance in comp & benefits
* Research local laws vs. organizational practices
* Involve experts - internally or externally to validate complex local compensation and benefit pacakges and requirements to stay compliant
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Compliance with Total Rewards Systems
esearch local laws versus organizational practices. Involve experts, internal or external, to validate particularly complex local compensation and benefits practices and requirements in order to implement compliant and culturally accurate programs.
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Payroll methods
* Internally (in-house)
* External vendor
* Hybrid of both methods
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Steps in Compensation System Design
1. Job Analysis
2. Job Documentation
3. Job Evaluation
4. Pay Structure
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Job analysis
* Studying a job in order to identify the activities/tasks and responsibilities
* Conducted of the job (not the person doing the job)
* Identifies KSAs
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KSA Knowledge
Body of information necessary for task performance
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KSA Skills
Level of proficiency needed for task performance
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KSA Abilities
Capabilities necessary to perform the job
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Job Analysis Gathers InformationOn
* Job context
* Purpose of the job, its work environment, its place in the organizational structure
* Job content
* Duties and responsibilities of people who hold the job
* Job specifications/qualifications
* KSAs required to successfully peform the job
* Performance criteria
* Desired behaviors/results that will constitute performance in the job
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Frequency of Job Analysis
* Current positions - regular and ongoing basis
* Minimum: when there is a vacancy or every two years
* Follow-up assessments for new positions should be completed within 6 months 1 year after job is filled to validate criteria and description as well as compensation
52
Job Analysis Methods
* Observation
* Interview
* Open-ended questionnaire
* Highly structured questionnaire
* Work diary or log
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Observation Job Analysis Method
* Direct observation of employees performing the tasks of a job, recording observations, and translating them into the necessary knowledge, skills, and abilities.
* Provides a realistic view of the daily tasks and activities performed in a job.
* Works best for short-cycle jobs in production.
54
Interview Job Analysis Method
* Face-to-face interview to obtains the necessary information from the employee, peers, supervisors, and team/unit members about knowledge, skills, and abilities needed to perform the job.
* Interviewer uses pre-determined questions, with new ones added based on the response of the employee being interviewed.
* Good for professional jobs.
55
Open-ended questionnaire Job Analysis Method
* Questionnaires to job incumbents, and sometimes to their managers, asking about the knowledge, skills, and abilities necessary to perform the job.
* The answers are then combined, and a composite statement of job requirements is published.
* Produces reasonable job requirements because input is solicited from both employees and managers.
56
Highly Structured Questionnaire Job Analysis Method
* Questionnaires onlyallows specific responses
* Used to determine frequency with which specific tasks are performed, their relative importance, and the skills required.
* Defines job with a relatively objective approach, which also enables analysis to be performed using computer models.
* Good when a large number of jobs must be analyzed and there are insufficient resources to do it.
57
Work diary or log job analysis method
* Diary or anecdotal record maintained by the employee.
* Job information, including the frequency and timing of tasks, is recorded in the diary.
* Logs are usually kept over an extended period of time. They are analyzed, and patterns are identified and translated into duties and responsibilities.
* Provides an enormous amount of data.
* Method can be applicable to task- or process-oriented jobs (e.g., administration, call center operators, shipping and receiving, warehouse).
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How to figure out what employees do on their job
* Obtain information directly from the job incumbent when feasible, although additional input may come from managers, coworkers, and other sources.
* Collect data from multiple job holders and supervisors.
* Select a technique that allows information to be obtained, summarized, and processed with minimal effort.
* Select a technique that is easy to update without having to repeat the entire process from the beginning.
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Job Analysis Deliverables
* Job description
* Job specifications
* Job competencies
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Job specifications
Written statement of the minimum qualifications necessary to perform a job.
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Job competencies
* Clusters of highly interrelated attributes, KSAs, that give the behaviors needed to perform a given job effectively.
* These competencies should be part of a competency model.
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Job description
* Written description of a job and its essential functions and requirements
* Includes
* Tasks
* Knowledge
* Akills
* Abilities
* Responsibilities
* Reporting structure.
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Job Analysis Helps Design Compensation System By
* Set up evaluation criteria for job performance.
* Provides data for comparing pay with other organizations.
* Helps in assigning objective classifications or job titles to employees.
* Communicates expectations to both supervisors and employees.
* Improves an organization’s ability to defend unwarranted charges of discrimination.
* Assists with addressing legal compliance requirements (Ex: reasonable accomidations through ADA).
64
Job evaluation (job valuation)
* Process of determining a job's value and price for the purpose of attracting and retaining employees by comparing the job against other jobs within the organization or against similar jobs in competing organizations
* Helps with pay equity
65
Job-content-based job evaluation
* Job evaluation method in which the relative worth and pay structure of different jobs are based on an assessment of their content (ex: responsibilities and requirements) and their relationship to other jobs within the organization.
* Addresses how jobs are broken down and assess different elements or factors (decision-making relationship)
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Job-content-based job evaluation categories
* Nonquantitative methods
* Quantitative methods
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Nonquantitative methods in job evaluation
* Referred as whole-job methods
* Evaluate whole job and sequence jobs in hierarchical order based on value in the organization (without numerical value assigned to each job)
* The sequence indicates that one job is more important than another, without giving an amount of job much more
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Nonquantitative methods include
* Job ranking
* Job classification
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Job ranking
* Hierarchy of jobs from lowest to highest based on each job's overall value to the organization
* Evaluates whole job, not just parts of it and compares one job to another
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Job ranking advantages
* Fast and inexepensive method of jobevaluation
* Easily explaigned to supervisors
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Job ranking disadvantages
* May not be clear why one job is valued over another
* May not be a large difference between jobs, making ranking ineffective
* Not feasible when there are a large number of positions
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Paired-comparison method
* Job evaluation method
* Each job is compared with every other job being evaluated
* The job with the largest number of “greater than” rankings is the highest-ranked job, etc.
* Used to compare all possible pairs of jobs
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Job classification
* Job evaluation method
* Descriptions are written for each class of jobs
* Individual jobs are then put into the grade that best matches their class description.
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Disadvantages of job classifications
* Process is subjective - wide variety of jobs and job descriptions, jobs could easily fall within more than one grade level.
* Relies on job titles and duties and assumes that the jobs are similar among organizations.
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Quantitative job evaluation methods
Evaluate specific factors on a scale and provides a score that indicates how valuable one job is compared to another
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Compensable factors should:
* Reflect the actual work being done.
* Be supported by documentation such as job descriptions.
* Reinforce the organization’s strategic plan and culture.
* Be valued by all affected parties (stakeholders).
* Be reviewed annually.
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Point-factor system
* Quantatuve job evaluation method
* Looks at compensable factors (such as skills and working conditions) that reflect how much a job adds value to the organization
* Points are assigned to each factor and then added to come up with an overall point value for the job
* Most commonly used method of job evaluation
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Market-based job evaluation
* Job evaluation method
* Relative worth and pay structure of different jobs are based on their market value or the going rate in the marketplace.
* Job content or internal job relationships may be taken into account
* Also known as market pricing
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Market-based job evaluation process
1. Market rates are identified
2. Organizations pay rates are set in accordance with pay policies (rates can be at, above or below market)
3. Organization jobs are slotted into market price and additional jobs may be placed into hierarchy as they compare with benchmark jobs
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Advantage of market pricing
* External competitiveness
* Provides regional, objective basis for negotiating pay rates with individuals and groups
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Disadvantages of market pricing
* Insufficient data
* Potential for poor job matching
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Remuneration surveys
Collect information on prevailing market compensation and benefits practices (including starting wage rates, base pay, pay ranges, statutory and market cash payments, variable compensation, and paid time off).
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Remuneration surveys employer options
* Develop and conduct internal survey
* Look to an external source (include subscribing to an already existing survey or working with service provider to conduct customized survey)
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Internal survey advantages
Ability to shape the design, administration, data analysis and reporting needed by the organization
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Internal survey disadvantages
* Competitors may not be willing to cooperate and to share their pay structures.
* Matching the positions may be difficult.
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Internal surveys with independent consultant benefits
* The organization still maintains control over the internal survey.
* Outsourcing the task may place less demand on organizational resources.
* Enlisting the help of a consultant may ease any concerns about survey credibility; the recommendations from a person outside the organization are sometimes more acceptable to internal stakeholders.
* Can mitigate legal concerns
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External surveys
* Groups like SHRM conduct surveys on wage/job data for wide range of professions, industries and locations
* May draw on extensive database of incumbents and industry benchmarks that provide insight
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Choosing between internal and external survey factors
* Internal time and expertise required
* Relevance/match of external surveyed jobs to organization’s jobs
* How current external survey data is
* Expense associated with type of survey
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Global market considerations regarding surveys
* External third party data is typically used
* Can be hard to obtain comparable salary data in many global markets
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Survey data analysis
Survey data must be verified and may need to be aged, leveled and/or factored for geography (location)
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Benchmarking
* Initiatives range from informal to formal engagements with private firms that provide current survey data sometimes in conjunction with consulting services for a fee.
* Gives insight about competitive compensation and benefit program policy elements (ex: pay strategy, compensation philosophy, initiatives)
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Benefits of benchmarking and consulting
* Access to pay data.
* Knowledge of local and regional laws and cultural practices.
* Assessment of current market position.
* Improved understanding of current market practices as well as key market trends and innovative ideas.
* Better alignment of compensation and benefits strategies with organizational business objectives.
* Identification of improvements and cost savings.
93
Other information sources for compensation and benefit data
* Governments
* Ex: ministries of labor or government statistical bureaus
* International organizations
* Membership-based business organizations
* Ex: employer federations and local chambers of commerce
* Professional, trade, and industrial associations.
94
Steps in developing a pay structure
1. Grouping jobs into pay grades
2. Setting pay ranges
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Pay grades
* Used to group jobs that have approximately the same worth in the organizations
* All jobs in particular grade are paid the same rate or within a pay range
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Purpose of pay grades
Create pay structure for entire organization rather than having to set up separate pay range for each job
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Number of pay grades in organization depends on
* Size of the organization
* Distance between the highest- and lowest-level jobs
* How clearly the organization defines and differentiates jobs
* Organizational policies regarding pay increases and promotions
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Point-factor method pay grades
The pay grade consists of jobs falling within a range of points.
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Job ranking method pay grades
The pay grade will consist of all jobs that fall within two or three ranks.
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Job classification method pay range
Jobs are categorized into classes or grades.
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Setting pay ranges
* Best to have overlap between pay ranges so experienced person can be paid more than inexperienced person in same job
* Minimum, midpoint, and maximum ranges are set based on market data and pay surveys
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Midpoint of pay range
* Market rate paid to experienced, fully performing employees
* Can be an issue with outliers, so many organizations use percentiles or medians instead of means
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Typical level spread
* Hourly positions—40%.
* Salaried positions—50%.
* Executive positions—60%.
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Steps to develop a pay structure
1. Develop a market line for all jobs
2. Use the market line to decide pay grades by grouping together the jobs with similar value to the organization.
3. Spread pay grades evenly over the points or values on the market line, attempting to place jobs in the middle of the pay grade.
4. Calculate the pay ranges for each grade.
1. Assuming that the jobs are placed in the middle of the range (midpoint), set up a range spread that fits with the type of positions and the number of grades.
2. Each pay range will have a minimum, midpoint, and maximum, with equal distance between the minimum and maximum.
5. Calculate individual pay rates using a pay policy line that is set by the organization.
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Compa-Ratios
Indicator on how actual wages match, lead or lag in target market when pay ranges are based on target market rate
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Compa-Ratio Calculation
= pay rate/midpoint
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Compa-ratios below 100% (expressed as a compa-ratio of less than 1.00) means
* Employee is paid less than midpoint
* Occurs when employee is
* New to job or organization
* Poor performer
* Working for an organization that adopts lag strategy with pay
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Compa-ratios above 100% (1.00) means
* Wages exceed midpoint Occurs when
* Organization adopts lead strategy with pay
* Managers are not following salary increase policies
* Employers are long-tenured and/or high performers
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Broadbanding
Combining several salary grades or job classifications with narrow pay ranges into one band with a wider salary spread.
110
Advantages of Broadbanding
* Provides wider ranges than the spread of a traditional pay range
* Reduces the number of job grades
* Supports de-layering efforts
* Reduces the number of reporting levels within an organization
* Provides more autonomy to line managers in salary and promotion decisions
* Enhances employee mobility as employees can transfer without requiring a change in assigned pay range
111
Disadvantages of Broadbanding
* Reduces the value of ranges as parameters for governing pay rates
* Less control for the organization in salary and promotion decisions
* Creates overly broad salary ranges
* Less control of salary costs as there is no mechanism to tie the salary growth of individual employees to the skills necessary for advancement to the next higher-level position
* Makes it hard to justify salary differentials if two employees are in the same broadband doing similar work
* Can lead to the perception of pay inequity and increase the potential for pay discrimination charges
* Reduces the opportunity for promotion and accompanying job title and base salary changes; fewer salary ranges lessens promotions to another range, which can lead to retention issues
* Risks divergence from market pay practices; paying too little relative to competitors could mean higher employee turnover and paying too much could mean higher product or service costs
112
Single or Flat-Rate Systems
* Provides each incumbent of a job with the same rate of pay, regardless of performance or seniority
* Often set to correspond to target market survey data relating to the job
* Ex: newly hired employee may make $12/hour with a $0.50/hour raise after six months. All other factory workers earn $12.50/hour.
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Time-Based Step-Rate Systems
* Pay is based on longevity in the job and pay increases occur on a predetermined schedule
* Pay increase occur on pre-determined schedule
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Types of time-based step-rate systems
* Automatic step-rate pay structure
* Step-rate with variability-based performance considerations
* Combination step-rate performance structure
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Automatic step-rate pay structure
* The pay steps are usually divided into a number of steps that are 3% - 7% apart.
* At set time periods, each employee with the required seniority receives a one-step increase.
116
Step-Rate with Variability-Based Performance Considerations
* Pay steps are usually divided into a number of steps.
* Size or timing of increase may vary if performance is substantially above or below standard.
* Capable employees can skip steps (move from step 2 to step 4)
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Combination Step-Rate and Performance Structure
Employees receive increases on a step-rate basis up to the job rate. Above the job rate, increases to higher steps are granted only for above-standard performance.
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Performance-based pay
* Also called merit pay or pay for performance.
* Individual's performance on the job is the basis for the amount and timing of pay increases
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Ways to structure performance-based pay
* Form of measurement is established, goals are set, and compensation is linked to the measures of work quality or goals.
* Having these goals will help make effective use of the salary budget, especially if that budget is small.
120
Employee understanding of performance based pay
* Employees are hired at or near pay range minimum
* Increases are tied to performance and degree of job mastery
* They must understand how the system works and relationship between performance and pay
* Employers should be able to explain differences in pay increases between employees
121
Difficulties in Using Merit Pay
* The incentive value of the reward offered may be too small to motivate performance.
* The link between performance and rewards may be weak.
* Merit raises are permanent increases in payroll costs.
* Union contracts limit pay-for-performance.
* Managers may have limited personal control over organizational performance.
* Managers may be reluctant to distinguish between performance levels.
* Performance appraisal definitions and guidelines may lack precision.
* People may think their own performance is above average.
* Merit pay runs contrary to intrinsic motivation in the work itself.
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Guidelines for Effective Use of Merit Pay
* Gain executive buy-in
* Align the merit pay system with organizational goals and culture
* Develop accurate performance appraisal systems that recognize proficiency (not just tenure or other subjective measures)
* Train supervisors in the mechanics of the performance appraisal system and in the art of giving feedback.
* Tie meaningful rewards closely to performance.
* Use a wide range of increases to differentiate between performance levels.
* Implement accountability measures
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Productivity-based pay
Pay based on the quantity of work and outputs that can be accurately measured.
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Productivity-based pay systems
* Straight price-rate system
* Differential piece-rate system
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Straight Piece-Rate System
* Employee receives a base wage rate and is awarded additional compensation for the amount of output produced.
* Ex: employee earns minimum wage plus 10¢ per item produced.
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Differential Piece-Rate System
* Employee receives one piece rate up to the standard and then a higher rate once the standard has been exceeded.
* Ex: An employee may be paid $8/hour plus 10¢ for each item up to 200
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Productivity-based system works best if:
* Units of output can be measured.
* A a clear relationship between employee effort and quantity of output exists.
* The job is standardized, the work flow is regular, and delays are few or consistent.
* Quality is less important than quantity, or, if quality is important, it is easily measured and controlled.
* Costs are known and precise.
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Person-based pay
* Pay systems in which employee characteristics, rather than the job, determine pay
* Two employees may perform similar tasks, but person with superior knowledge or skill mastery receives more pay
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Approaches to person-based pay
* Knowledge-based system
* Skill-based system
* Competency-based system
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Knowledge-based system
* Pay is based on the level of knowledge the employee has in a field.
* Typically used for compensating learned professions such as scientists or teachers, although staff professionals may also be paid this way.
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Skill-based system
* Base pay on the number of different skills an employee is qualified to perform.
* Employees increase their pay by acquiring new skills, even if they do not use the skills in their current assignment.
* Commonly used in a production environment.
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Competency-based system
* Set pay at the level at which an employee can operate in defined competencies (e.g., directing or training others).
* Commonly found when rewarding professional groups of employees.
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Single- or flat-rate system advantages
Works well for routine, simple jobs. Implemented and administered simply.
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Single- or flat-rate system disadvantages
Does not reflect individual performance, seniority, or skill differences.
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Time-based step-rate system advantages
* Best suited to routine jobs where the qualifications of job incumbents increase with time.
* Enables an organization to reward long-term employment.
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Time-based step-rate system disadvantages
* Generally does not reflect the varying rates at which incumbents become proficient.
* Does not reflect performance differences, except for unsatisfactory performance.
* Can raise average pay levels over time even if performance is below average.
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Performance-based/merit pay system; pay for performance advantages
* Works best where individual performance is valued and accurately measured against specific goals, objectives, and metrics.
* Rewards and encourages superior performance.
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Performance-based/merit pay system; pay for performance disadvantages
* Requires well-documented performance appraisal systems on which managers have been thoroughly trained.
* Can be manipulated by supervisors to benefit certain employees over others.
* Bias or subjectivity in performance appraisals may lead to employee discrimination claims.
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Productivity-based system advantages
* Works best where emphasis is on quantity of work and outputs are accurately measured.
* Encourages high level of employee productivity.
* Ties pay to the volume of the work performed.
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Works best where Productivity-based system disadvantages
* May sacrifice quality of work without careful supervision.
* May lead to inflexibility in the workforce because employees may want to stay with the job for which they are paid the most.
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Person-based system advantages
* Works best where skill/knowledge levels are well defined and development of employees is valued.
* Encourages a flexible and better-trained workforce. May reduce need for specialists.
* Allows for work teams that are highly interdependent.
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Person-based system disadvantages
* Can be costly in terms of both administration and training.
* May result in higher pay rates.
* Skills/knowledge must be effectively used to provide the organization with an offset to the higher pay rates.
* May be more difficult to institute cost controls.
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Red-circle rates
Situations in which employees' pay is above the range maximum.
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Green-circle rates
Situations in which an employee's pay is below the minimum of the range.
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Pay Compression
Occurs when there is only a small difference in pay between employees regardless of their experience, skills, level, or seniority
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Pay Compression Occurs When
* Beginning salaries are raised due to increases in the minimum wage or inflation.
* New hires can make same amount as employees in the same job with more experience who began at a lower wage.
* Labor market pay levels increase more rapidly than an employer’s pay adjustments.
* An example would be hiring an inexperienced systems engineer at or close to what more-experienced systems engineers earn because of escalation in competitive hiring rates. If the inexperienced systems engineer is paid more than the experienced ones, pay compression occurs.
* There is not enough difference between pay levels.
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Ways to counteract pay compression
* Match the market in pay rates for all employees, not just new hires.
* Provide other benefits to employees affected by pay compression.
* Continuously evaluate survey data and update pay ranges accordingly.
* Provide incentive plans for managers.
* Increase the amount of time off awarded.
* Provide longevity bonuses.
* Monitor salaries for inflation.
* Install a more aggressive merit pay program.
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Pay adjustment matrix
Technique that integrates performance appraisals and pay adjustments
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Cost-of-living adjustment (COLA)
* Pay adjustment given to eligible employees regardless of performance or organizational profitability
* Usually linked to inflation.
* Typically an equal hourly increase or percentage of current employee's pay
* Payments are sometimes a lump sum, either quarterly or at some other specified time
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General pay increase
* Pay increase given to employees based on local competitive market requirements
* Awarded regardless of employee performance.
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Seniority Increase
Based on time employee has spend in the organization
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Lump-sum increase (LSI)
* Also called performance bonus
* One-time payment made to an employee
* Typically used with red-circle employees
* Base pay is typically not adjusted
* Advantage to organization as other types of pay does not increase
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Market-Based Increases
* Also called equity increases
* Increases to keep salary competitive in attracting new talent and keeping key employees
* Usually added to base pay
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Differential pay (or variable pay)
* Depends on performance and is not added to the employee’s base pay.
* Allows organizations to better control their labor costs and to tie performance and pay together.
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Hazard pay
* Type of differential pay
* Used in some industries to compensate employees on increased level of risk
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Time-Based Differential Pay
* Shift pay
* Emergency-shift pay
* Premium pay
* On-call or call-back pay
* Reporting pay
* Travel pay
* Overtime pay
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Geographic Differential Pay
* Labor costs
* Attract workers to certain locations
* Foreign countries - base-pay structure plus allowances to reflect factors that affect the economics of employees who work in foreign countries.
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Incentive pay
* Form of direct compensation where employers pay for performance beyond normal expectations to motivate higher performance.
* Tied to aspects of the jobthat employees can inflience
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Types of incentive pay
* Individual
* Group
* Organization-wide
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Individual incentive pay purpose
Improve individual performance
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Types of individual incentive pay
* Piece-rate system
* Workers who produce more earn more
* Commission
* Percentage of sales
* Noncash reward programs
* Gifts, awards, trips
* Used to recognize individuals for their performance, contributions or length of service
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Group incentive pay
Used when measuring individual performance is difficult or when performance requires cooperation of the group
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Group incentive pay types
* Garnisharing plans
* Organization shares portion of gains from successful group effort
* Team bonuses
* Based on achieving group goals and objectives
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Organization wide pay
Reward overall results
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Organization wide pay tupes
* Profit sharing or stock ownership
* Bonus program tied to organization goals
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For an incentive pay plan to be successful, organizations need to have the following in place:
* Competitive base salaries
* Fairly stable management presence and strategic direction
* Good communication between management and employees
* Reliable method for measuring the results linked to incentives
* Commitment from the top down to communicate the plan and to provide ongoing training and coaching
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Incentive Pay Global Considerations
* Must be culturally appropriate
* Global regulations
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Executive pay differs from employee pay
* Incentives make up most of executive's total direct compensation packages
* Incentives are usually linked to the performance of the entire organization or the major units/businesses
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Types of Executive Compensation
* Annual salary
* Stock option plans
* Stock purchase plans
* Restricted stock grants
* Phantom stock
* Restricted stock units
* Performance grants
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Stock option plans : Executive compensation
Executives may be given the option to purchase company stock at a pre-determined price for a certain period of time, usually five to ten years.
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Stock purchase plans: Executive compensation
* Broad-based plans often available to most or all of a public company’s employees
* This type of plan allows executives the opportunity to purchase shares at a discount or without paying brokerage fees.
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Restricted stock grants executive compensation
* The recipient cannot sell the stock from a restricted stock grant until a certain time period has passed.
* Usually the employee must remain with the company during this time period.
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Phantom stock: executive compensation
This consists of cash awards designed to mimic shares of stock, without actually conveying equity via the granting of shares.
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Restricted stock units Executive compensation
* Often used to defer compensation of key executives until after they have retired
* A promise of a certain amount of stock once specified restrictions have been fulfilled.
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Performance grants executive compensation
Stock-based compensation that is tied to organizational performance.
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Global Variations in Executive Pay Practices
* Globally, most shareholders consider an organization’s financial success as the primary indicator of executive performance
* The organizational metrics used to evaluate the relationship between executive remuneration and performance vary.
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HR’s Role in Executive Compensation
* Determining if in-house or outside expertise is necessary to handle executive compensation
* Ongoing assessment of the existing program's effectiveness to see if changes need to be made
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Direct Sales Compensation Types
* Straight salary
* Straight commission
* Salary plus commission and/or bonus
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Straight Salary Used When
* The sales staff spends a significant amount of time servicing customers rather than securing sales
* Ex: training, trade shows, or handling customer inquiries)
* Measuring sales performance is difficult.
* Nature of the sales process makes it impossible to separate one individual’s efforts from those of the support people who also help secure the sale.
* There is a long sales cycle.
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Straight Commission Used When
* The organization’s objectives are to motivate sales volume
* Even if that means less service
* Holding down the cost of sales is important.
* Competitors also compensate through commission-only systems.
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Salary plus Commission and/or Bonus Used When
Is the most widely used approach
* Salespeople are thought to be motivated by financial gain.
* Allow organizations to directly reward behaviors that best support their organizational strategy.
* It is adaptable and allow organizations to readjust the plan to fit current conditions.
* Competitors usually use the same strategies
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Compensation for Outside Directors/Board Members
* Base pay or retainer
* Fees
* Usually for attending meetings, chairing a committee, or other services
* Benefits such as liability and life insurance
* Perquisites similar to those offered to executives
* Nonqualified stock options/grant plans
* Nonqualified deferred compensation programs
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Compensation for internationally assigned employees
* Foreign service premium
* Cost-of-living, housing, and travel allowances
* Educational allowance for children
* Relocation allowance
* Tax differential payments
* Spousal assistance
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Metrics for Compensation Costs
* Compensation ratio
* Total organization compensation expense
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Compensation Ratio
* Relationship of current salaries to the midpoints of the salary ranges
* Shows if employees are being paid appropriately on the basis of their skills, experience, and performance.
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Compensation Ratio Formula
Employee's pay rate/ pay range midpoint
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Total Organization Compensation Expense
All costs associated with employment, including salaries, overtime, benefits, and bonuses
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Total Organization Compensation Expense Purpose
Tracking total compensation as a percentage of total costs helps an organization manage the costs associated with human capital, including evaluating the use of fixed versus variable compensation.
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Total Organization Compensation Expense Formula
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Indirect compensation
* Employee benefits
* Tangible payments or services provided to broad groups of employees to cover issues such as retirement, private health coverage, sick pay/disability schemes, life insurance, and paid time off.
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Considerations when budgeting for benefits
* Benefits that are required by law
* Those that enable employers to compete for employees
* Cost-effective to purchase and administer
* Employee preference
* Provide creative choices
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Benefits that are government-provided
* Benefits that are administered and provided directly by the government, usually paid for through taxes.
* Ex: health-care and retirement benefits, but they may include other benefits, such as life, disability, or unemployment insurance.
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Benefits that are government-mandated
* Benefits are provided by employers because the law requires them to do so.
* Ex: Country law often requires employers to provide specific types of leave, a certain amount of vacation each year, and time off for statutory holidays.
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Benefits that are voluntary or discretionary
* Benefits provided voluntarily by the employer may not be totally discretionary; competitive practice or employee relations may put pressure on the employer.
* Ex: additional health-care benefits where government-supplied health care is not satisfactory. Or additional annual vacation days may be awarded.
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Benefits that are market practice
* Benefits offered and adjusted compared to the external market.
* Ex: providing a car or transportation allowance, child-care vouchers, or meal vouchers.
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Tax treatment of benefits
* Benefits are taxed differently in different countries.
* Ex: different tax rates and schemes for cash and noncash compensation, benefits, or perquisites.
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Benefits needs assessment
1. Review the organization's strategy
2. Review the organization’s compensation philosophy.
3. Analyze demographics of the organization's workforce (full/part time, age, and their needs)
4. Analyze the design and utalization data on all benefit plans
5. Compare and find what works best for the organization and employees
1. Organizational needs and budget
2. Employee needs
3. Existing set of benefits
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Benefit needs assessment gap analysis
Used to identify set of benefits that match the needs of the organization and employees
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Issues that can come from gap analysis
* Needs are not being met by existing benefits
* Benefits are not addressing organizational or employee needs
* Benefits overlap each other
* Benefits being underutilized
* Benefits are too costly but are heavily used by employees
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What to do when needs that are not being met by existing benefits
Research new benefits or revise existing benefits.
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What to do when benefits that are not addressing organizational or employee needs
Drop or revise benefits that are not meeting needs.
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What to do when benefits overlap each other
Revise benefits that overlap or conduct utilization review and keep only the used benefit(s).
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What to do when benefits are underutalized
Do further research and then drop or revise benefits that are not being used enough.
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What to do when benefits are too costly but heavily used by employees
Adopt cost-containment strategies and reevaluate each benefit.
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Business case of benefits need assessment should consider
* The type of benefits provided
* Who is covered under the plan (for example, employees, dependents, retirees).
* What options employees have
* How the plan will be financed and if employees will share in the costs.
* Who should administer the plan
* Ex: the organization, an insurance carrier, a third-party administrator
* How the benefit plan will be communicated
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PTO
* Most contries - provided equally regardless of status or seniority
* Used to attract senior managers by providing additional time
* Common in even emerging countries
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Sick leave policies can be set by
* Law
* Collective barganing
* Employer
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Other types of leave
* Paid leave to trade union officials and representatives for participation in union activities
* Union and union employees for relevant training
* Workers getting married
* Parents for marriage of child
* Muslim - time off for prayer
* Reasionable time off to carry out public duties and activities
* Sabbaticals/educational leave
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Family-oriented benefits
* Flexible work hours
* Child care
* Elder care
* Domestic partner benefits
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Health-care available through the countries
* Most countries have a statutory universal access/universal coverage health-care system where health care is paid for through some sort of social insurance
* Some countries: employers offer employer-sponsored health insurance.
* Rare for employees to not to be at least partially covered by some form of government-supported health care.
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Employee assistance programs (EAP) Pricing
Usually priced per capita
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Wellness programs purpose
Intended to promote and suppor health, safety and well-being of employees
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Disability benefits
* Disability has different meaning in different countries
* Payments made to employees who are physically unable to perform their jobs because of illness or injury. '
* Can cover injuries/illnesses from the workplace or outside the workplace
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Funding disability payments
Usually a combination of employee contribution, employer contribution and government funding
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Workers' Compensation
* Acts as no-fault insurance policies - employer is protected against being sued by injured employee even though injury occured at the workplace
* The employer is usually exempt from paying the employee’s salary or wages during the accident-related leave period
* Employee receives a portion of their salary during the same period.
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Laws regarding the termination circumstances and pay of terminated employees include
* Issue warnings for misbehavior
* Reason that termination can occur
* Amount of severance payments provided to an employee
* How long wages must continue to be paid to employee after termination
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Unemployment Insurance
* Premiums paid from employers and sometimes employees to pay a percentage of the employee's salary in case of them losing their job at no fault of the employee
* Helps workers who have been terminated transition into an equally suitable job
* Usually have a waiting period followed by time and financial limits
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Types of retirement plans
* Defined benefit
* Defined contribution
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Defined benefit retirement plan
* Promises specific benefit amount upon retirement.
* Vesting schedule is set up.
* Provides benefits based on service and perhaps on salary.
* Amount of benefit is decided by a formula.
* Provides a pre-specified level of benefits.
* Employer bears the investment risk.
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Defined contribution retirement plan
* Amount of money that is to be regularly contributed to the fund is specified.
* No promises are made about the future value of the benefit.
* Employees will be entitled to 100% of their investment and the vested portion of the employer’s contributions upon retirement.
* Requires individual accounts for each employee.
* Amount of the benefit at retirement will depend on the investment return.
* Employee bears the investment risk.
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Fiduciary Responsibility
* Implies legal obligation of one party (for example, the employer) to act in the best interest of another (for example, the employees). The obligated party is typically referred to as a “fiduciary”
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Social Security
* Social insurance, where people receive benefits or services in recognition of contributions to an insurance program
* Ex: provision for retirement pensions, disability insurance, survivor benefits, and unemployment insurance.
* Services provided by government or designated agencies responsible for social security provision
* Ex: medical care; financial support during unemployment, sickness, or retirement; health and safety at work; aspects of social work; and even industrial relations.
* Basic security irrespective of participation in specific insurance programs where eligibility may otherwise be an issue
* Assistance may be given to new-arriving refugees for basic necessities such as food, clothing, housing, education, money, and medical care.
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Perquisites
* Also called executive perks or fringe benefits
* Compensation provided on an individual basis in the form of goods or services.
* They are special incidental payments,benefits, or privileges given to individual employees, over and above their regular rewards
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Common perquisites
* Free/discounted products or services
* Mobile devices
* Professional organizations/certifications
* Training programs
* Education fees
* Housing
* Company car and/or cash car allowances
* Club memberships
* Meal allowances
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Benefits Costs as a Percentage of Total Payroll Costs Use
* Pay and benefits together make up wage costs.
* Take-home pay is only a fraction of the total cost of total rewards.
* This metric identifies the proportion of benefits costs.
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Benefits Costs as a Percentage of Total Payroll Costs Formula
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Health-Care Expense per Employee Formula
228
Health-Care Expense per Employee Use
This measurement can show the per capita cost of the benefit (e.g., the average per person).
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Annual Increase/Decrease in Health-Care Benefit Costs (Previous Years and Projected) Formula
* The expected increase/decrease in the organization’s health-care expense for a given fiscal year
* A comparison of the current health-care expense per employee metric to previous years and projected.
* Shows increasing costs of health-care benefits and helps the organization assess if actions must be taken to control benefits costs
