BSAD 310 Spring 2017 - CH 11

Chapter 11: Employee Incentives

and Benefits

2Lussier and Hendon, Fundamentals of Human Resource Management. © 2017, SAGE Publications.

Why Give Incentives?• To reward employees for past

performance in hope they will repeat desired behaviors and want similar rewards in future

• To move risk associated with paying employees from firm to individual

• To guide employees toward goals


The Value of Incentives and Benefits

• Variable Pay – Compensation that depends on some

measure of individual or group performance or results in order to be awarded

• Incentive Pay– Two basic choices: Individual or Group-

Based incentives


Individual or Group-Based Incentives?

• Individual Incentives – Reinforce performance with rewards that

are significant to a person. • Group Incentives

– Provide reinforcement for actions of more than one individual within organization.


Exhibit 11-1: Individual Incentive Plan Advantages and Disadvantages

6

Exhibit 11-2: Group Incentive Plan Advantages and Disadvantages

Lussier and Hendon, Fundamentals of Human Resource Management. © 2017, SAGE Publications.


Individual Incentive Options• Bonus – A lump sum payment given to employees

at end of a period; most effective after employees reach a specific goal

• Commission – Payment for selling an item, usually calculated as a percentage of item’s price; most effective when it provides a return; also a disincentive to make a “quick sale”

• Merit Pay – Rewards top performers with increases in annual wage that carry over years; most effective when employees understand benefits of incentive and when top performers are rewarded


Individual Incentive Options• Piecework Plans – The more employees

get done, the more they are paid; most effective when managers set performance standards and offer feedback

• Standard Hour Plans – Each task is assigned a “standard” amount of work time for completion; most effective if employees must redo substandard work for no additional pay


Group Incentive Options• Profit Sharing Plans – Portion of

company proceeds paid over time (usually quarterly or annually) through bonus payment; most effective when management doesn’t minimize profits and posts records of revenues and profits; also when employees are trained to increase revenues/decrease costs.


Group Incentive Options• Gainsharing Plans – Accomplished

through factors that cost company money; can be analyzed and modified for performance improvement; more effective than profit sharing because options are difficult to manipulate and employees feel they have more control over results


Group Incentive Options• Employee Stock Ownership Plan (ESOP) –

Company stock given to employees over time; offers tax advantages to firm and employees; motivates employees to feel/act more like owners of firm

• Stock Options– Employees may buy X shares of company stock in future at a preset price; motivates employees to improve value of firm

• Stock Purchasing Plans – Ability to purchase company stock anytime, usually at discount


Executive Compensation:Too Much or Just Enough?

• Excesses in Executive Pay– Questions about ethics and social responsibility

arise when, for example, the CEO’s pay increases while employees take pay cuts and are laid off.

– It harms stakeholders (including employees and shareholders) to reward relatively few executives.

– It affects market value of firms and results in Dodd-Frank Wall Street Reform and Consumer Protection Act.


Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

• Limits executive pay in public corporations and adds requirements for reporting compensation and shareholder involvement with executive compensation

• Intent is to create a sound economic foundation to grow jobs, protect consumers, rein in Wall Street and big bonuses, end bailouts, and prevent another financial crisis


Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

• Significant Provisions– Shareholders can vote on executives’

compensation packages (“say on pay”) and “golden parachutes.”

– Public companies must disclose CEO’s total compensation and total median compensation of employees and ratio.

– Public firms must provide annual information on relationship between executive compensation and total shareholder return.


Executive Incentives• Should be designed to motivate

executives to make decisions that benefit the organization in the short term and the long term. – Perquisites– Short-term bonuses– Long-term stock awards or options


Goal of Executive Compensation

• Creating a system that aligns the behavior of the executive (agent) with the interests of the owners of the firm

• Scorecards• Entrepreneurial organizations


Statutory Benefits • Social Security: Old age, survivors,

and disability insurance (OASDI) programs

• Retirement• Disability and Survivor Benefits• Medicare: National healthcare program

for elderly or disabled


Workers’ Compensation• Provides medical treatment and temporary

payments to employees who are injured on job or become ill because of job

• Paid for by employers• Rates are primarily determined by three

factors:– Occupations– Experience ratings – Level of benefits payable


Statutory BenefitsUnemployment Insurance: Federal program managed by states. Provides payments for a fixed period to employees who lost their jobs through no fault of their own.

• Fails to look for work• Was terminated “for

cause.” • As a member of a

union, participates in a strike against the company (in most states).

• Quit voluntarily• Refuses suitable work• Becomes self-

employed.• Fails to disclose any

monies earned in a period of unemployment.

An individual will be ineligible for UI if he or she:


Statutory Benefits

• Family and Medical Leave Act of 1993 (FMLA) Employers must provide unpaid leave to eligible employees when they or immediate family members have medical issues. In 2007, SHRM found 63% of employers reported abuse of intermittent FMLA leave by employees.

• Patient Protection and Affordable Care Act of 2010 (PPACA) – Employers with more than 50 employees to provide health insurance or face significant penalties levied by federal government.


Consolidated Omnibus Budget Reconciliation Act of

1985 (COBRA) • Employers required to offer temporary health

insurance to individuals who leave their employment for at least 18 months and up to 36 months.

• Cost of insurance is full rate (employer and employee contributions), plus a 2% administrative fee.

• Insurance protection remains without interruption, which is important for employees undergoing medical treatment for pre-existing conditions.


Health Insurance Portability and Accountability Act of

1996 (HIPAA)• If an employee had group health insurance at

a previous job and if new employer has health care coverage, the firm is required to provide the opportunity to participate in their health insurance plan.

• Portability of this benefit is advantageous to people who are undergoing treatment for preexisting conditions.


Employee Retirement Income Security Act of 1974 (ERISA)

• Major Provisions of ERISA– Eligibility: Available to employees over 21 who

have worked in firm for one year – Vesting: Maximum time a firm can retain company

contributions to employee’s account – Portability: Allows employees to move funds from

employer to another qualified fund – Fiduciaries: Must act under the “prudent man” or

Reasonable Person Theory – PBGC: Pension Benefit Guarantee Corporation

ensures retirement funds against failure


Voluntary Benefits• Paid Time Off or PTO – Average cost is approximately

$1 for every $10 in direct wages.• Vacation or Annual Leave – Average vacation time in

2007 was 15 days. • Sick Leave – Approximately three of four employers

provide sick leave to employees.• Holiday Pay – Most companies observe 10 federally

mandated holidays along with some “floating” holidays.• Paid Personal Leave – Two of five companies provide

paid personal leave in addition to vacation and sick leave.


Voluntary Benefits:Group Health Insurance

• Traditional Health Care Plans – Typically cover a set percent of fees for medical services

• Health Maintenance Organization (HMO) – Managed care that provides health maintenance services and medical care

• Preferred Provider Organization (PPO) – Hybrid between traditional fee-for-service plans and HMOs

• Health or Medical Savings Accounts (HSA/MSA) – Allow employers and employees to fund medical savings accounts, with which employees can pay medical expenses with pretax dollars


Retirement Benefits: Defined Benefit Plan

• Not mandatory, but if provided, firm must comply with ERISA provisions.

• Employer-provided benefit plans are available to 74% of full-time workers and 39% of part-time workers in private industry.

• Defined benefit plan provides retiree with a specific amount and type of benefit that will be available when employee retires.


Retirement Benefits: Defined Contribution Plan

• Defined contribution plan identifies only amount of funds that go into a retirement account, not what employee will receive upon retirement.


401k and 403b Plans• 401k Retirement Plan – Savings

investment account for individual employees of corporations.

• 403b Retirement Plan – Similar to 401k, but used for nonprofits

• Matching Contributions – Many employers that offer a 401k or 403b provide matching contributions up to a set maximum.


Retirement Benefits• IRAs and Roth IRAs – Taxpayers can

make tax-free contributions to an IRA (subject to maximum annual income limit). These contributions reduce taxable income by the full amount of contribution in the year in which they are placed in account.

• Simplified Employee Pension (SEP) Plans – For self-employed individuals and members of small companies


Employee Insurance Coverage

• Life Insurance• Disability Insurance – Short-term and/or

long-term protection• Life and Health Insurance • Employer-Sponsored Insurance –

Automobile, identity theft,• Homeowners and renters, and pet

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Exhibit 11-3: Employee Benefits

Lussier and Hendon, Fundamentals of Human Resource Management. © 2017, SAGE Publications.


Administration of Benefits• Flexible Benefit (Cafeteria) Plans – Employees

choose from multiple options.• Modular Plans – Employees choose benefits

from modules, each with a different mix of insurance, employee services, and retirement options; these plans are easiest for HR to manage.

• Core Plus Plans – Core benefits available to all; employees choose from remaining benefits.

• Full Choice Plans – Employees have complete flexibility.


Trends and Issues in HRM• Personalization of Health Care

– Individuals will continue to gain more control of their health care planning over the next several years.

– Individuals will continue to gain power as they become closer to the health care provider by using technology.

– Smartphone apps continue to evolve as a mechanism for managing personal health care.

BSAD 310 Spring 2017 - CH 11

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