Management Chapter 9 Compensation And Benefits People Think Social Security Officially The Old Age

Unlock access to all the studying documents.

View Full Document

Chapter 9: Compensation and Benefits

people think of as Social Security is officially the Old Age Survivors and Disability

Insurance Program. The initial purpose of this program was to provide some limited income

B. Workers’ Compensation

Workers’ compensation is insurance that covers individuals who suffer a job-related illness

or accident. Employers pay the cost of workers’ compensation insurance. The exact premium

paid is a function of each employer’s past experience with job-related accidents and illnesses.

C. Mandated Health Care

The Patient Protection and Affordable Care Act or the Affordable Care Act (commonly

referred to as “Obamacare”) was signed into law in 2010. The basic aim of the act was to

increase the quality and affordability of health care insurance, lower the number of uninsured

VI. Nonmandated Benefits

A. Private Pension Plans

Chapter 9: Compensation and Benefits

In addition to the pension benefits guaranteed under the Social Security Act, many companies

elect to establish private pension plans for their employees. These prearranged plans are

administered by the organization that provides income to the employee at her or his

retirement. Contributions to the retirement plan may come from either the employer or the

B. Paid Time Off

No U.S. laws mandate this type of benefit, but most employees now expect it. Most full-time

employees receive about ten paid holidays per year. In addition, religious holidays (in

addition to Christmas) are also often given. Organizations have to be careful with this

practice, however, because growing diversity in the workplace is accompanied by an

Chapter 9: Compensation and Benefits

personal business such as funerals and weddings.

C. Other Benefits

Private pensions, pay for time not worked, and health insurance are the most common

nonmandated benefits, but many other benefits also are available. 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 sick. In some organizations,

A somewhat different type of service is contained in what are referred to as employee

assistance plans. These programs are designed to assist employees who have chronic

problems with alcohol or drugs or who have serious domestic problems. These programs are

typically voluntary, and referrals are confidential. Yet, the needs of the organization must be

balanced with the needs of the individual to avoid any stigma attached to having the specific

problem.

Chapter 9: Compensation and Benefits

Although most benefits programs are designed for all the employees in an organization,

cafeteria-style benefits plans allow the employee to choose the benefits that he or she really

wants. Under these plans, the organization typically establishes a budget indicating how much

it is willing to spend per employee on benefits. The employee is then presented with a list of

possible benefits and the cost of each; they are free to choose the benefits in any combination

they wish.

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 of incentive pay for executive is in the form of

bonuses, which can exceed their base pay by some multiple.

Chapter 9: Compensation and Benefits

It is clear that CEO compensation can be reduced, and it is true that some CEOs have already

seen their pay cut as company fortunes faltered, but CEOs in the United States are still well

paid. Furthermore, executive compensation in the United States seems far out of line with that

paid to senior executives in other countries.

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-

efficient for the organization.

ERISA also provides protection for the funding underlying the pension plan. The Pension

Benefit Guarantee Corporation oversees how pension plans are funded, and it can seize

Chapter 9: Compensation and Benefits

corporate assets to support underfunded plans. In addition, ERISA allows an employee to

carry a portion of his or her benefits to another job. ERISA also imposes some minimum

requirements for how pension plans are communicated to employees.

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: Holding True at Nucor Steel

Case Summary

For the most part, the watchwords in U.S. business since the 2008–2011 recession have been

cutting payroll, reducing headcount, and eliminating jobs. But Nucor, the country’s largest

steelmaker, still has all its jobs. Hit by a 50-percent plunge in output that had begun in

September 2008, the U.S. steel industry laid off some 10,000 workers by January 2009 and

another 25,000 by 2010. Nucor, however, has refused to follow suit in laying anyone off.

Whenever they don’t have enough steel orders to fill their workweek Nucor employees have

Chapter 9: Compensation and Benefits

The system, however, cuts both ways. Take that defect-free batch of steel, for example. If there’s

a problem with a batch, workers on the shift obviously don’t get any weekly bonus. And that’s if

they catch the problem before the batch leaves the plant. If it reaches the customer, they may lose

up to three times what they would have received as a bonus. “In average–to–bad years,” adds HR

vice president James M. Coblin, “we earn less than our peers in other companies. That’s

supposed to teach us that we don’t want to be average or bad. We want to be good.”

The Nucor system works not only because employees share financial risks and benefits but also

because, in sharing risks and benefits, they’re a lot like owners. And, people who think like

owners are a lot more likely to take the initiative when decisions have to be made or problems

solved.

Case Questions

1. Would you want to work under a compensation system like Nucor’s? Why, or why not?

2. Why don’t more firms use approaches to compensation along the lines of Nucor’s model?

Discussion Questions

Chapter 9: Compensation and Benefits

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

include five job factors: responsibilities, skills, physical effort, mental effort, and working

conditions. Managers are typically advised to follow the six steps given below:

1. Select and define comparison factors.

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

Chapter 9: Compensation and Benefits

Organizations that use the job classification or grading system of job evaluation will

develop job classes using these systems. Organizations that use job rankings, the point

system, or the factor comparison system will need to take the additional step of creating

job classes. Job classes are developed by examining particular jobs and differentiating the

levels of competence within those jobs. For example, the job of mechanic may be broken

down into an entry-level mechanic I grade, a high-level mechanic V grade (where a great

deal of experience and expertise is required), and grades II, III, and IV in between.

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 of employee benefits programs is based on efficiency wage theory. The

theory suggests that firms can actually save money and become more productive if they

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 there is more than an average or designated number

of employees from the organization drawing from the fund at any given time. To be

covered by the insurance, an individual should have worked for a minimum number of

8. What are the most common benefits not mandated by law?

9. What are the implications for Human Resource Management of the uncertainty over

mandated health care coverage?

10. What are your feelings about the executive compensation controversy?

Executive compensation has been criticized because of the monetary amounts involved, the

lack of performance-based criteria, and the differences between top manager pay and

Additional Resource

Skill-Based Pay: HR’s Role