© 2009 South-Western Cengage. All rights reserved. Chapter 8 Variable Pay and Benefits.

© 2009 South-Western Cengage. All rights reserved.

Chapter 8Variable Pay and Benefits

Chapter 8Variable Pay and Benefits

8–2

Variable Pay: Incentives for Variable Pay: Incentives for PerformancePerformance

• Variable Pay Variable Pay Compensation linked to individual, group/team, and/or Compensation linked to individual, group/team, and/or

organizational performance.organizational performance.

• Basic assumptions:Basic assumptions: Some people perform better and are more productive Some people perform better and are more productive

than others.than others. Employees who perform better should receive more Employees who perform better should receive more

compensation.compensation. Some of employees’ total compensation should be Some of employees’ total compensation should be

tied directly to performance.tied directly to performance. Some jobs contribute more to organizational success Some jobs contribute more to organizational success

than others.than others.

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Developing Successful Pay-for-Developing Successful Pay-for-Performance PlansPerformance Plans

• Reasons for Adopting Pay or Incentive Plans:Reasons for Adopting Pay or Incentive Plans: Link strategic business goals and employee Link strategic business goals and employee

performance.performance. Enhance organizational results and reward Enhance organizational results and reward

employees financially for their contributions.employees financially for their contributions. Reward employees and recognize different levels of Reward employees and recognize different levels of

employee performance.employee performance. Achieve HR objectives, such as increasing retention, Achieve HR objectives, such as increasing retention,

reducing turnover, recognizing training, or rewarding reducing turnover, recognizing training, or rewarding safety.safety.

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Figure 8-1 Examples of IncentivesFigure 8-1 Examples of Incentives

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Metrics Options for Variable Pay PlansMetrics Options for Variable Pay Plans

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Figure 8-2 Categories of Variable Pay Figure 8-2 Categories of Variable Pay PlansPlans

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Individual Incentives: Piece-Rate Individual Incentives: Piece-Rate SystemsSystems

• Straight Piece-Rate SystemsStraight Piece-Rate SystemsWages are determined by Wages are determined by

multiplying the number of pieces multiplying the number of pieces produced by the piece rate for one produced by the piece rate for one unit.unit.

• Differential Piece-Rate SystemsDifferential Piece-Rate SystemsEmployees are paid one piece-rate Employees are paid one piece-rate

for units produced up to a standard for units produced up to a standard output and a higher piece-rate output and a higher piece-rate wage for units produced over the wage for units produced over the standard.standard.

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Individual Incentives (cont’d)Individual Incentives (cont’d)

• BonusesBonuses A one-time payment that does not become part of the A one-time payment that does not become part of the

employee’s base pay.employee’s base pay.

• Special Incentive ProgramsSpecial Incentive Programs Numerous special incentive programs have been Numerous special incentive programs have been

used to reward individuals, ranging from one-time used to reward individuals, ranging from one-time contests for meeting performance targets to awards contests for meeting performance targets to awards for performance over time.for performance over time.

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Purposes of Special IncentivesPurposes of Special Incentives

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Group/Team IncentivesGroup/Team Incentives

Distribution of Distribution of Group/Team IncentivesGroup/Team Incentives

Distribution of Distribution of Group/Team IncentivesGroup/Team Incentives

Timing ofTiming ofGroup/Team Incentives Group/Team Incentives

Timing ofTiming ofGroup/Team Incentives Group/Team Incentives

Decision Making About Decision Making About Group/Team AmountsGroup/Team Amounts

Decision Making About Decision Making About Group/Team AmountsGroup/Team Amounts

Design of Design of Group/Team Group/Team

Incentive PlansIncentive Plans

Design of Design of Group/Team Group/Team

Incentive PlansIncentive Plans

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Conditions for Successful Group/Team Conditions for Successful Group/Team IncentivesIncentives

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Organizational IncentivesOrganizational Incentives

• Profit SharingProfit Sharing A system to distribute a portion of the profits of the A system to distribute a portion of the profits of the

organization to employees.organization to employees. Primary objectives:Primary objectives:

Increase productivity and organizational performanceIncrease productivity and organizational performance Attract or retain employeesAttract or retain employees Improve product/service qualityImprove product/service quality Enhance employee moraleEnhance employee morale

DrawbacksDrawbacks Disclosure of financial informationDisclosure of financial information Variability of profits from year to yearVariability of profits from year to year Profit results not strongly tied to employee effortsProfit results not strongly tied to employee efforts

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Employee Stock PlansEmployee Stock Plans

• Stock Option PlanStock Option Plan A plan that gives employees the right to purchase a A plan that gives employees the right to purchase a

fixed number of shares of company stock at a fixed number of shares of company stock at a specified price for a limited period of time.specified price for a limited period of time. Number of firms offering this has declined due to changing Number of firms offering this has declined due to changing

laws and accounting regulations.laws and accounting regulations.

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Employee Stock PlansEmployee Stock Plans

• Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP) A plan whereby employees gain significant stock A plan whereby employees gain significant stock

ownership in the organization for which they work.ownership in the organization for which they work.

AdvantagesAdvantages Favorable tax treatment for ESOP earningsFavorable tax treatment for ESOP earnings

Employees motivated by their ownership stake in the firmEmployees motivated by their ownership stake in the firm

DisadvantagesDisadvantages Retirement benefit is tied to the firm’s performanceRetirement benefit is tied to the firm’s performance

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Types of Sales Compensation PlansTypes of Sales Compensation Plans

• Salary-OnlySalary-Only All compensation is paid as a base wage with no All compensation is paid as a base wage with no

incentives.incentives.

• Straight CommissionStraight Commission Compensation is computed as a percentage of sales Compensation is computed as a percentage of sales

in units or dollars.in units or dollars. The draw system make advance payments against The draw system make advance payments against

future commissions to salesperson.future commissions to salesperson.

• Salary-Plus-Commission or BonusesSalary-Plus-Commission or Bonuses Compensation is part salary for income stability and Compensation is part salary for income stability and

part commission for incentive.part commission for incentive.

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Figure 8-3 Sales Metric PossibilitiesFigure 8-3 Sales Metric Possibilities

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BenefitsBenefits

• BenefitBenefit An indirect compensation given to an employee or An indirect compensation given to an employee or

group of employees as a part of organizational group of employees as a part of organizational membership. membership.

Benefit costs are 30-80% of total payroll costs.Benefit costs are 30-80% of total payroll costs.

• Strategic Perspectives on BenefitsStrategic Perspectives on Benefits Benefits reflect a firm’s philosophy of social and Benefits reflect a firm’s philosophy of social and

corporate citizenship.corporate citizenship. Benefits influence recruitment and retention decisions.Benefits influence recruitment and retention decisions. Flexible benefits allow individuals to tailor their benefits Flexible benefits allow individuals to tailor their benefits

to their own situations.to their own situations.

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Benefits AdministrationBenefits Administration• Benefits DesignBenefits Design

How much total compensation, including benefits, can be provided? What part of the total compensation of individuals should benefits

constitute? Which employees should be provided which benefits? What expense levels are acceptable for each benefit offered? What is being received by the organization in return for each benefit? How flexible should the package of benefits be?

• HR Technology and BenefitsHR Technology and Benefits Internet-based HR information systems allows employees to Internet-based HR information systems allows employees to

change their benefit choices, track their benefit balances, and change their benefit choices, track their benefit balances, and seek benefit information on-line.seek benefit information on-line.

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BenefitsBenefits

• Benefits MeasurementBenefits Measurement As a percentage of payrollAs a percentage of payroll Expenditures per full-time equivalent employeeExpenditures per full-time equivalent employee Costs by employee groupCosts by employee group Administration costsAdministration costs Health-care benefits costs per participating employeeHealth-care benefits costs per participating employee

• Benefits CommunicationBenefits Communication Benefits StatementsBenefits Statements

Annual “personal statement of benefits” that translates the Annual “personal statement of benefits” that translates the benefits into dollars to show their worth.benefits into dollars to show their worth.

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Types of BenefitsTypes of Benefits

• Government mandatedGovernment mandated Many mandated benefits that employers in the United

States must provide to employees by law.

• VoluntaryVoluntary Employers voluntarily offer other types of benefits to

help them compete for and retain employees.

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Figure 8-4 How the Typical Benefits Dollar Is Figure 8-4 How the Typical Benefits Dollar Is SpentSpent

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Types of BenefitsTypes of Benefits

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Security Benefits Security Benefits

• Worker’s CompensationWorker’s Compensation Benefits provided to persons injured on the job.Benefits provided to persons injured on the job. State laws require most employers to supply workers’ State laws require most employers to supply workers’

compensation coverage by purchasing insurance compensation coverage by purchasing insurance from a private carrier or state insurance fund or by from a private carrier or state insurance fund or by providing self-insurance.providing self-insurance.

• Unemployment CompensationUnemployment Compensation A Federal/state payroll tax that funds state A Federal/state payroll tax that funds state

unemployment systems.unemployment systems. Involuntary unemployment and actively seeking work Involuntary unemployment and actively seeking work

is required for persons to claim benefit.is required for persons to claim benefit.

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Increases in Health Benefits CostsIncreases in Health Benefits Costs

• Changing Co-Payment and Employee Changing Co-Payment and Employee ContributionsContributions Employees are now required to pay a portion of the Employees are now required to pay a portion of the

cost of insurance premiums, medical care, and cost of insurance premiums, medical care, and prescription drugs.prescription drugs.

• Using Managed CareUsing Managed Care Approaches that monitor and reduce medical costs Approaches that monitor and reduce medical costs

using restrictions and market system alternatives.using restrictions and market system alternatives. PPO – Preferred Provider OrganizationPPO – Preferred Provider Organization HMO – Health Maintenance OrganizationHMO – Health Maintenance Organization

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Controlling Health-Care Costs Controlling Health-Care Costs

• Consumer-Driven Health (CDH) PlanConsumer-Driven Health (CDH) Plan Also known as defined-contribution health plans,Also known as defined-contribution health plans,

Employers contribute a set amount to employees to cover Employers contribute a set amount to employees to cover their own health-related expenses.their own health-related expenses.

• Advantages for EmployersAdvantages for Employers More of the increases in health-care benefits are More of the increases in health-care benefits are

shifted to employeesshifted to employees

The focus of controlling health-care usage falls on The focus of controlling health-care usage falls on employees, who may have to choose when to use employees, who may have to choose when to use and not use health-care benefits.and not use health-care benefits.

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Controlling Health-Care Costs Controlling Health-Care Costs

• Health Savings Accounts (HSAs)Health Savings Accounts (HSAs) Often combined with high-deductible insurance plansOften combined with high-deductible insurance plans Both employees and employers can make Both employees and employers can make

contributions to an account.contributions to an account. Individual employees can set aside pre-tax amounts Individual employees can set aside pre-tax amounts

for medical care into an HSA.for medical care into an HSA. Unused amounts in an individual’s account can be Unused amounts in an individual’s account can be

rolled over annually for future health expenses.rolled over annually for future health expenses. Incentives are included to encourage employees to Incentives are included to encourage employees to

spend less on health expenses.spend less on health expenses.

• Health-Care Prevention and WellnessHealth-Care Prevention and Wellness

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Health-Care LegislationHealth-Care Legislation

• Consolidated Omnibus Budget Reconciliation Consolidated Omnibus Budget Reconciliation Act (COBRA) ProvisionsAct (COBRA) Provisions Requires that most employers (except churches and Requires that most employers (except churches and

the federal government) with 20 or more employees the federal government) with 20 or more employees offer extended health-care coverage to certain offer extended health-care coverage to certain groups. groups. Employees who voluntarily quit Widowed or divorced spouses and dependent children of

former or current employees Retirees and their spouses whose health-care coverage ends

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Health-Care LegislationHealth-Care Legislation

• Health Insurance Portability and Accountability Health Insurance Portability and Accountability Act (HIPAA) of 1996 ProvisionsAct (HIPAA) of 1996 Provisions Allows employees to switch their health insurance Allows employees to switch their health insurance

plan from one company to another, regardless of pre-plan from one company to another, regardless of pre-existing health conditions.existing health conditions. Health plans must continue to cover sick employees.Health plans must continue to cover sick employees.

Require employers to provide privacy notices to Require employers to provide privacy notices to employees.employees.

Regulate the disclosure of protected health Regulate the disclosure of protected health information without authorization.information without authorization.

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Retirement Benefits Retirement Benefits

• Social Security Act of 1935Social Security Act of 1935 Established a system providing Established a system providing old ageold age, , survivor’ssurvivor’s, ,

disabilitydisability, and , and retirementretirement benefits. benefits. Benefit payments are based on Benefit payments are based on

an employee’s lifetime earnings.an employee’s lifetime earnings.

Administered by the Social Administered by the Social Security Administration.Security Administration.

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Pension PlansPension Plans

• Pension PlansPension Plans Retirement programs established and funded by Retirement programs established and funded by

employers and employees.employers and employees.

• Defined-benefit plansDefined-benefit plans Employees are promised a definite pension amount Employees are promised a definite pension amount

based on age and length of service.based on age and length of service.

• Defined-contribution plansDefined-contribution plans Employer makes an annual payment to an Employer makes an annual payment to an

employee’s account with the benefit payout employee’s account with the benefit payout determined by the financial performance of the determined by the financial performance of the employee’s retirement.employee’s retirement.

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Pension Plans (cont’d)Pension Plans (cont’d)

• Employee Retirement Income Security Act Employee Retirement Income Security Act (ERISA)(ERISA) Regulates pension funds to assure their soundness.Regulates pension funds to assure their soundness.

Requires many firms to offer retirement plans to all Requires many firms to offer retirement plans to all employees if offered to any employees.employees if offered to any employees.

Accrued benefits must be paid to departing employees.Accrued benefits must be paid to departing employees.

Requires minimum funding for IRS approval and purchase of Requires minimum funding for IRS approval and purchase of plan termination insurance.plan termination insurance.

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Financial and Family-Oriented Financial and Family-Oriented BenefitsBenefits

• Insurance benefitsInsurance benefits Life, disability, long-term care, legal, etc.Life, disability, long-term care, legal, etc.

• Financial benefitsFinancial benefits Credit unions, purchase discounts, thrift plans, Credit unions, purchase discounts, thrift plans,

savings plans, stock investment planssavings plans, stock investment plans

• Family-oriented benefitsFamily-oriented benefits

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Family-Oriented BenefitsFamily-Oriented Benefits

• Family Medical Leave Act (FMLA)Family Medical Leave Act (FMLA) Employers with 50 or more employeesEmployers with 50 or more employees Employees who have worked at least 12 months and Employees who have worked at least 12 months and

1,250 hours in previous year1,250 hours in previous year Employers must allow eligible employees to take up Employers must allow eligible employees to take up

to a total of 12 weeks of unpaid leave during any 12-to a total of 12 weeks of unpaid leave during any 12-month period for:month period for: Birth, adoption, or foster care placement of a childBirth, adoption, or foster care placement of a child Caring for a spouse, a child, or a parent with a serious health Caring for a spouse, a child, or a parent with a serious health

condition condition Serious health condition of the employeeSerious health condition of the employee

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Family-Oriented BenefitsFamily-Oriented Benefits

• Child-Care AssistanceChild-Care Assistance• Benefits for Domestic PartnersBenefits for Domestic Partners

Domestic Partners or Spousal EquivalentsDomestic Partners or Spousal Equivalents

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Time-Off and Other Miscellaneous Time-Off and Other Miscellaneous BenefitsBenefits

• Work breaksWork breaks• Holiday payHoliday pay• Vacation payVacation pay• Sick leaveSick leave• Paid-time-offPaid-time-off• Leaves of AbsenceLeaves of Absence

Family LeaveFamily Leave Military LeaveMilitary Leave Election LeaveElection Leave Jury-duty LeaveJury-duty Leave Funeral LeaveFuneral Leave