Chapter 10 – Compensation: Base Pay and Fringe Benefits
10-1
CHAPTER 10
COMPENSATION: BASE PAY AND FRINGE BENEFITS
Objectives
After reading this chapter, you should be able to
1. Understand the traditional model for base pay programs.
2. Describe the basic approaches to job evaluation.
3. Describe the contemporary trends in compensation.
4. Explain the role of government in compensation.
5. Know the various forms of fringe compensation, including government-mandated
programs.
6. Define the different types of retirement plans.
7. Understand the complexities of international compensation.
Chapter 10 – Compensation: Base Pay and Fringe Benefits
CHAPTER 10 – SUMMARY
I. Overview
A. Compensation refers to all forms of financial returns and tangible benefits received
by employees in return for work performed
B. Research on “high–performance work characteristics” indicates that characteristics
of a firm’s compensation system are strongly related to corporate financial
performance increase in pay inequity
C. Compenstaion Trends include
1.Diversity in Strategies
2.Soaring benefits costs
3.Pay inequity
4.Pay used to communicate organizational change
1. Motivate and direct behavior
2. Attraction and retention of talent
3. At 60-70% of total costs, the cost of compensation can decide success/failure for
organizations
F. Does compensation matter to individual workers?
1. Pay is both instrumental and symbolic to workers
2. U.S. workers prefer pay for performance systems
3. Workers are satisfied with pay when there is equity
G. Does compensation matter at the societal level?
1. Higher production leads to higher standard of living
2. Government controls potential abuse associated with pay
H. 5 Objectives for Effective compensation:
1. Enables an organization to attract and retain competent workers
2. Motivates employees’ performance, fosters a feeling of equity, and provides
direction to their efforts
3. Supports, communicates, and reinforces an organization’s culture, values, and
competitive strategy
4. Cost structure reflects the organization’s ability to pay
5. Complies with government regulations
i. FLSA, EPA, CRA
10-3
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
I. Two parts of compensation
1. Cash compensation- direct pay
2. Fringe compensation – legally required & discretionary
II. Cash Compensation: Base Pay
A. Job evaluation provides means to systematically assign pay to jobs
B. Figure 10-3 Traditional Approach to Compensation
III. The Traditional Approach to Compensation
A. What Is Internal Equity?
1. Individuals perceive that their pay is fair relative to others within the
organization
2. Job evaluation is used to create internal equity among jobs
a) Job analysis
i. Job description contains the “what,” “how,” and “why”
ii. Job specifications identify the KASOCs
b) Rating the job
c) Review job evaluation results by arranging jobs in hierarchical order
B. Job Evaluation Methods
a) Job ranking places jobs in order from most valuable to least valuable
b) Job classification compares jobs with preexisting set of job classes
c) Point factor determines how much of a factor is required for each job
i. Define factors
ii. Assign point total to each factor by relative weights
iii. Factor scales assign the degree the factor is present on job
iv. Point totals are added to arrive at a total value for each job
v. Hay Plan is a popular point factor method
vi. Typically conducted within a job family to establish internal equity
vii. Job hierarchy is established within each family
C. What Is External Equity?
1. Pay practices that are similar to the practices of your competition
2. Salary Surveys
a) Plan data collection activities
i. Benchmark positions
ii. Understand the relevant job market
b) Collect survey information
i. Match job content to survey information
ii. Include all elements of compensation
10-4
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
c) Analyze the information
3. Developing the Pay Structure
a) Tie pay levels to the market
b) Pay above the market
c) Pay for performance
d) Establish pay grades & salary ranges
4. Assessing the Traditional Approach to Pay
a) Basic nature of work is changing
i. Shifting from manufacturing to service economy
ii. Focus on quality has influenced the way work is structured, performed
and supervised
b) Organizations are differentiating themselves from others in the marketplace
c) Questioning employee entitlement mind-set
D. Current Trends in Salary Administration, Figure 10-9
1. Market Pricing
2. Broadbanding
3. Pay for Knowledge, Competencies or Skill
4. Team Pay Plans
IV. Government Influence on Compensation Issues
A. Fair Labor Standards Act (FLSA)
a) Minimum wages
i. Employee must be paid highest of state, city or federal minimum wage
ii. Tipped employees must meet federal standards for minimum wage
b) Overtime Pay
i. 40 hour work week
ii. 1.5 times pay for overtime
iii. Fair Pay Rules
c) Child-labor Laws
i. Restriction on age related to when and what work can be performed
ii. No “hazardous” work
iii. Hours vary by age and time of year
d) Amended in 1963 to include Equal Pay Act
i. Prohibition of pay differnetials based on gender
e) Pay differentials are permitted when they are based on seniority, merit,
quantity or quality of production, or a factor other than sex
B. Dodd-Frank Wall Street Reform and Consumer Protection Act
1. Applies to publicly traded companies
2. Shareholder nomination of corporate directors
3. Compensation Committees composed of independent directors
4. Increased company disclosure of executive compensation
5. Shareholders get an advisory vote on executive pay
10-5
6. “Clawback” provision requires the return of incentive pay based on misstated
financial filings
7. Controversy over implementation
C. Equal Pay Act
1. Requires mean and women be paid the same when they hold substantially equal
jobs
2. Equal defined in terms of skill, effort, responsibility and working conditions
3. Pay differentials are permitted when they are based on tenure, merit, quantity or
quality of production, education, or a reasonable factor other than sex
4. Title VII of CRA may also be used for pay claims
5. The market is a reasonable factor
D. Lilly Ledbetter Fair Pay Act
1. The 180 day filing deadline begins each time a discriminatory paycheck is issued,
not when the first paycheck was issued
2. Provides protection for individuals who may have been affected, e.g. family
3. Applies to all protected classes
E. Prevailing wage laws
1. The Davis-Bacon Act
2. Walsh-Healey Act
3. The Service Contract Act
F. Pay Equity or Comparable Worth Policy
1. Pay structure based on internal assessment of job worth, not comparisons to
external market
2. Proposed as a means to eliminate gender and racial bias
3. Pay equity studies use point-factor job evaluation
4. Comparison across families to determine equity
5. Male vs. female differences reduced under pay equity policy
G. Paycheck Fairness Act
1. Reintroduced in 2010
2. Amendment to the EPA
3. Would establish “equal pay for equivalent work”
4. Exemptions similar to EPA
5. Some states have some form of pay equity policy
6. www.pay-equity.org
Chapter 10 – Compensation: Base Pay and Fringe Benefits
10-6
H. The Wage Gap
a) Statistics indicate women earn 78 cents for every dollar men earn
b) Warren Farrell in “Why Men Earn More,” suggests that women earn less
because of the type of job and hours worked
i) Farrell disputes the arguments attributing the “wage gap” to
discrimination
ii) Men and women with Bachelor’s Degrees in 26 job categories have
comparable salaries
I. Other Compliance Issues
1. 4 HR Audits
a) Compliance
1.Benefits focus on improving quality of life
2. Attractive to companies because
a) Attract, retain, motivate employees
b) Cost advantages
c) Favorable tax treatment
3. Employees underestimate cost of benefits
4. Benefits packages vary by company size and culture
5. Trend to offer flexible, cafeteria style benefits plans
B. Four Categories of Employee Benefits
1. Legal Required Programs/Government-Mandated Programs
a) Social Security
i. Comprehensive program of retirement, survivor, disability and health
benefits
ii. Employers and employees share in the cost of funding
iii. Medicare program provides health care benefits to citizens 65 and older
iv. Legislation needed to meet future obligations
b) Unemployment Insurance
i. Designed to encourage workforce stability
ii. Managed jointly by fed and state
iii. Tax rates based on pay trends and unemployment rates
c) Workers’ Compensation Insurance
i. Managed solely by states
ii. Pay for expenses related to work related illness or injury
iii. No-fault system
iv. Employers fully responsible for cost
d) Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
i. Temporary extension of employer group medical insurance
Chapter 10 – Compensation: Base Pay and Fringe Benefits
10-7
ii. Extends for up to 18 months
iii. Individual pays full cost
e) Family Medical Leave Act of 1993 (FMLA)
i. Eligible workers have 12 months service and 1250 hours
ii. 12 weeks unpaid leave per 12 months
iii. Return to same or equivalent job
iv. Three states have laws requiring paid leave
2. Discretionary Plans: Employee Welfare programs
a) Health Care Plans
i. 80% of employees value their health benefits above all other benefits
ii. Patient Protection and Affordable Care Act (PPACA)
iii. Goal of Act to 1. Provide access to health care 2. Rein in costs 3.
Finance the reform
iv. Trend to shift health care costs to workers or drop benefits
v. General Dynamics Land Systems v. Cline. 540 US 581 (2004) “reverse” age
discrimination is allowed in distribution of health care benefits
b) Wellness programs save money
c) Additional Government Regulation of Health Care Programs
i. Employee Retirement Income Security Act of 1974 (ERISA)
ii. HIPPA
iii. Mental Health Parity and Addiction Equity Act (MHPAEA)
d) Life Insurance – one of oldest and most common benefits
3. Discretionary Plans: Retirement Plans
a) Long-term capital accumulation plans
b) 2 types of Major Retirement plans
i. Defined benefit plans, pay a specific sum for the amount of years worked
and are figured at the age upon retirement
ii. Defined contribution plans, a prescribed amount of money is paid into
the employee’s retirement account (e.g. 401K plans)
iii. Pension Benefit Guaranty Corporation assuming many pensions, funding
deficit of $21.6 billion in 2010
iv. Estimated defined-benefit plans fell $400 billion into red in 2009
v. U.S. trend is to drop or not adopt defined-benefit programs; many large
companies have cut their pensions
vi. 401 (k) plans are increasing
c) Government Role in Pension Plans
i. PBGC
ii. ERISA
iii. Civil Rights Act
iv. ADEA
Chapter 10 – Compensation: Base Pay and Fringe Benefits
10-8
4. Time off Programs
a. Trend PTO banks
b. Vacations
c. Holidays
d. Sick leave
e. Personal days
f. Days to perform civic duties (e.g., jury duty)
g. Long-term disability
5. Employee Services
a. Education programs
b. Employee assistance programs & mental health care
c. Employee recognition programs
d. Child care
C. Communicating the Benefit Program
1. Focus on improving information provided to employees
2. Explain coverage and value
3. Benefits Statements
VI. International Compensation
A. Compensation in Offshore Operations
1.Choice of centralized or decentralized approach
2. Pay for performance increasing
3. Similar process to setting pay in the US
4. Consider regional differences and legislative issues
B. Compensation for Offshore Managers and Key Professionals
1.Global Management skills
2. Going Rate Approach
3. Balance Sheet Approach
4. New Approach creates and international pay scale
1. Hardship premiums
2. Danger pay
E. Allowances
1. Consider impact on purchasing power
2. Housing
3. Educational
4. Relocation
5. Spouse assistance
6. Home leave allowances
F. Expatriate Benefits
1.Variability from country to country
10-9
2. Question to retain parent country benefits, or enroll in host-country benefits
3. Tax issues
a) Resolve issue of double taxation
b) Tax equalization approach
c) Tax protection approach
VII. Summary
A. Individuals are concerned with being paid fairly
B. Organizations are concerned with the importance of compensation in terms of its
effects on employee attitudes, behaviors, performance and other criteria (turnover,
ability to attract job candidates)
C. Compensation plans should be in line with the organization’s philosophy and
support strategic goals
D. Employee benefit plans must suit individual preferences in an increasingly diverse
workforce
E. The government regulation ensures fairness
F. Compensation packages should be assessed based on ability to attract, retain and
motivate the workforce while creating and sustaining competitive advantage
Chapter 10 – Compensation: Base Pay and Fringe Benefits
Equity theory – pay satisfaction is a function of the comparison of an individual’s input to
outcome ratio with their perceptions about the same ratio of referent others
compensation
Foreign service premium – monetary payments meant to encourage employees to accept
expatriate assignments
Fringe compensation – employee benefits that are legally required and discretionary programs
HMOs – Organizations of health-care professionals who provide services on a prepaid basis
Internal equity – employees evaluate pay for their job relative to the pay for other jobs within
their company
Job classification – establishes a specific number of levels, or grades, within which all jobs must
be placed based on broad descriptions designed in advance to reflect the characteristics of the
jobs at each level or grade
