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Chapter 9: Compensation and Benefits
Another common paid-off plan is sick leave. This benefit is provided when an individual is
sick or otherwise physically unable to perform his or her job duties. Most organizations allow
an individual to accumulate sick time on the basis of some schedule, such as 1 sick day per
C. Other Benefits
Also, in an attempt to reduce health-care costs, some companies have introduced a different
type of benefit known as a wellness program. Wellness programs concentrate on keeping
employees from becoming sick rather than simply paying expenses when they do become
An additional group of benefits is often referred to collectively as life-cycle benefits, or
benefits targeted at different stages in an employee’s life. The most common are childcare and
elder-care benefits. Child-care benefits are becoming more popular because the changing
nature of the workforce and the fact that being considered a family-friendly organization is
increasingly viewed as a competitive advantage in attracting talented workers. Elder-care
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Finally, employee perquisites are provided. A perquisite, or perk, as it is informally known, is
an extra benefit that may or may not have any direct financial value but is considered an
important reward by employees. A perk might include a bigger office, a company car,
membership in a country club, stock purchase options, premium insurance coverage, and so
forth.
Nonetheless these programs are not without problems. One challenge is the cost of
administering such plans. Another problem is what is known as adverse selection. This refers
to the fact that the employees most likely to select a benefit, such as children’s braces, is also
most likely to use the benefit, which tends to drive up benefits costs. Finally, given a choice
of benefits, employees are not always rational in their choices.
VII. Contemporary Issues in Compensation and Benefits
Three contemporary issues in compensation and benefits include executive compensation,
growing legal issues, and how best to evaluate compensation and benefits programs.
A. Executive Compensation
Most senior executives receive their compensation in two forms: base salary and some form
of incentive pay. The traditional method for incentive pay is in the form of bonuses, which
can be exceed their base pay by some multiple.
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Aside from stock-option plans, other kinds of executive compensation are also used by some
companies. Among the popular are such perquisites as memberships in private clubs, access
to company recreational facilities, and similar kinds of benefits. Some organizations
B. Legal Issues in Compensation and Benefits
The Fair Labor Standards Act includes provisions for minimum wage, overtime, and child
labor. It also specifies which employees are covered by the overtime provisions and which are
exempt; this usually affects whether an employee is paid wages or a salary. Even nonexempt
workers are sometimes asked to work more than 40 hours with no overtime pay; in exchange,
they are offered time off, which is usually referred to as comp time. Comp time is often not as
beneficial to the employee, who would otherwise earn more in total pay, but it is more cost-
Of course, the most legal issue in this area deals with the Employee Retirement Income
Security Act (ERISA) of 1974. This law was passed to protect employees who had
contributed to their pensions but were unable to collect those benefits later. This situation
occurred primarily because of the restrictions that the organization had placed on employees
before they could receive benefits. (Vesting rights are guaranteed rights to receive pension
benefits.) Under ERISA, however, vesting rights become operational after 6 years at the most,
and employees with less service are still usually eligible to receive some portion of their
retirement benefits.
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C. Evaluating Compensation and Benefit Programs
Given the enormous cost to an organization of compensation and benefit packages, its
managers clearly must carefully assess the benefit of these packages for the organization. In
Closing Case: Negotiating Salaries on the Web
Case Summary
Once upon a time, negotiations about wages and salaries were typically handled in a meeting
between the employee and his or her manager. The same approach was used both for individuals
who were being offered their first job with the company and for existing employees who felt they
deserved a raise. But in both cases, the supervising manager and the organization itself usually
Case Questions
1. How do you foresee using the Internet in your initial job search after you finish school?
Students’ answers to this question might vary. The Internet would play a major role in
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Chapter 9: Compensation and Benefits
2. Are there drawbacks to using the Internet to search for salary information?
Students’ answers to this question might vary. Yes, there are drawbacks to using the
The following items appear on the in-text Instructor Prep Cards. These notes and
suggested talking points should help instructors conduct these exercises with the students.
Discussion Questions
1. What is compensation? What are the basic differences between wages and salaries?
Compensation is the set of rewards that organizations provide to individuals in return for
their willingness to perform various jobs and tasks within the organization. It includes
2. What are the basic strategic options an organization has for its compensation policies?
One set of options is based on the decision relating to basis of pay. Most organizations base
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Chapter 9: Compensation and Benefits
3. Identify and summarize the basic methods of job evaluation.
The classification system attempts to group sets of jobs together into clusters, often called
grades. Steps include grouping sets of jobs into grades, ranking the grades in level of
importance, and determining the number of job categories or classifications. Once grades
The factor comparison method assesses jobs on a factor-by-factor basis, using a standard
factor comparison scale as a benchmark. To compare jobs, commonly used systems
include five job factors: responsibilities, skills, physical effort, mental effort, and working
conditions. Managers are typically advised to follow six steps: (1) select and define
comparison factors; (2) identify benchmark or key jobs; (3) rank benchmark jobs on each
compensation factor; (4) allocate a part of each benchmark job’s wage rate to each job
factor; (5) prepare two sets of ratings, based on the ranking and the assigned wages, to
determine the consistency demonstrated by the evaluators; and (6) develop a job
comparison chart to display the benchmark jobs and the monetary values that each job
receives for each factor. An advantage is that it is a detailed and meticulous method for
evaluating jobs. The method is extremely complex and difficult to use, and it involves a
fair amount of subjectivity.
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4. Why are job classes needed? How are they developed?
Job classes represent gradations of responsibility and competence that exist regarding the
performance of a specific job. The organization will want to differentiate between people
with different competencies, for example, by creating a series of job grades within a job
5. How does pay compression develop? Why is it a problem?
Pay compression is a circumstance in which individuals with substantially different levels
of experience and/or performance abilities are being paid wages or salaries that are
6. What are the purposes of employee benefits programs?
One basic purpose is based on efficiency wage theory, which suggests that firms can
actually save money and become more productive if they pay more because they attract
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Chapter 9: Compensation and Benefits
7. What benefits are mandated by law?
Unemployment insurance is intended to provide a basic subsistence payment to employees
who are between jobs. Employers pay premiums to the unemployment insurance fund for
their state. The premium is increased if more than an average or designated number of
Social security, also called the Old Age Survivors and Disability Insurance Program, was
designed to provide limited income to retired individuals to supplement their own personal
savings, private pensions, part-time work, and so forth. The program is funded through
employee and employer taxes, currently 7.65 percent of earnings on the first $72,600 of
income. Individuals are eligible for partial benefits at age 62 or full benefits at age 65. The
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8. What are the most common benefits not mandated by law?
Insurance coverage is probably the most common optional protection plan provided by
9. Describe the basic components of the Social Security Act of 1935.
The Social Security Act of 1935 has several basic components. For instance, the act
10. What are your feelings about the executive compensation controversy?
Executive compensation has been criticized because of the monetary amounts involved, the
Ethical Dilemmas in HR Management
Scenario Summary
Students are to assume that they are a human resource manager for a service organization. The
boss would like the human resource manager to communicate to employees the value of the
benefits offered to them, but the boss wants the information manipulated so that it looks better
than it really is. The boss figures that these are the potential costs that could be incurred for
everyone and that the company should get credit for being generous, although many employees
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Chapter 9: Compensation and Benefits
do not take full advantage of all benefits.
Questions
1. What are the ethical issues in this situation?
2. What are the basic arguments for and against what your boss is instructing you to do?
For manipulating the information:
• The costs that could potentially be incurred really do reflect the benefits that
3. What do you think most managers would do? What would you do?
Students’ answers will vary. Most students will probably say that this action would be
Assignment
The purpose of this exercise is to familiarize students with the issues surrounding cafeteria-style
benefit programs. Students are asked to consider an organization’s current benefits plan and
devise various plans for converting to a cafeteria-style benefit plan. In class, the exercise should
take 25 to 45 minutes, depending on time available. This exercise is probably best conducted in
small groups if conducted as an in-class exercise. Alternatively, individual students or groups of
students may be assigned this activity outside of class.
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Step 1 (10 to 15 minutes): Assuming the role of the human resource manager of a medium-size
manufacturing company, students are given information about the company’s current benefits
Steps 2 and 3 (15 to 30 minutes): Students are then to devise a plan for converting the benefits
package to a cafeteria-style plan. Students are to outline as many options as they can think of,
based on the original set of benefits as a starting point. Instructors may guide students having