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Chapter 9
Compensation
and Benefits
Copyright ©2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LEARNING OUTCOMES
2
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
1. Describe the basic issues involved in
developing a compensation strategy
2. Discuss how organizations develop a wage
and salary structure
3. Identify and describe the basic issues involved
in wage and salary administration
4. Discuss the basic considerations in
understanding benefit programs
3
LEARNING OUTCOMES (Continued)
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
5. Identify and describe mandated benefits
6. Identify and describe nonmandated benefits
7. Discuss contemporary issues in compensation
and benefits
4
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Compensation and Benefits
• Compensation: Set of rewards that
organizations provide to individuals for their
willingness to perform tasks within the
organization
• Benefits: Items of value beyond their
wages, salaries, and other forms of direct
financial compensation that employees
receive from the organization
• Rewards
• Incentives
5
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Basic Purposes of Compensation
• To provide appropriate and equitable
rewards to employees
• To help employees focus on activities that
the organization considers important
• To increase employee efforts along desired
lines
• To motivate individuals by creating a
perception that their efforts and
contributions are recognized and rewarded
LO 1
6
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Internal and External Equity
• Internal equity: Comparisons made by
employees to other employees within the
same organization
• External equity: Comparisons made by
employees to others employed by different
organizations performing similar jobs
• Pay surveys: Surveys of compensation paid to
employees by other employers in a particular
geographic area, industry, or occupational
group
LO 1
7
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Wage versus Salaries
• Wages: Hourly compensation paid to
operating employees
• Time acts as the basis for determining wages
• Salary: Income paid to an individual on the
basis of performance, not on the basis of
time
LO 1
8
Figure
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
9.2 Strategic Options for Compensation
LO 1
9
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Determinants of Compensation Strategy
• Overall organizational strategy
• Ability to pay
• Ability to attract and retain employees
• Ability to bargain with unions
LO 1
10
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Job Evaluation
• Determines the relative value of a job to the
organization to compensate adequately and
appropriately those who perform the job
• Methods
• Classification system: Attempts to group sets of
jobs together into clusters, often called grades
• Point system: Requires managers to quantify
the value of various elements of specific jobs in
objective terms
LO 2
11
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Job Evaluation (Continued)
- Point manual: Carefully and specifically
defines the degrees of points from first to
fifth
- Factor-comparison method: Assesses jobs on
a factor-by-factor basis using a factor-
comparison scale as a benchmark
LO 2
12
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Pay for Knowledge and Skill-Based Pay
• Pay for knowledge: Involves compensating
employees for learning specific information
• Skill-based pay: Rewards employees for
acquiring new skills
LO 2
13
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Wage and Salary Administration
• Ongoing process of managing a wage and
salary structure
• Issues related to compensation
• Pay secrecy: Extent to which the compensation
of any individual in an organization is secret
• Pay compression: Occurs when individuals with
substantially different levels of experience or
performance abilities are paid relatively equal
- Pay inversion: New employees are paid more
than experienced employees because of
changes in the external market
LO 3
14
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Nature of Benefits Programs
• Most organizations provide their employees
with an array of benefits
• Cost of benefits programs
• Organizations spend huge amounts on benefits
• Employees are asked to bear costs of benefits
• Purposes of benefits programs
• To attract better-qualified people
• To increase job satisfaction and subsequent
turnover
LO 4
15
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Mandated Benefits
• Unemployment insurance: Provides a basic
subsistence payment to employees who are
between jobs
• Created in the United States as part of the Social
Security Act of 1935
• Social security: Designed to provide limited
income to retired individuals
• Officially called the Old Age Survivors and
Disability Insurance Program
• Many people have come to view it as their
primary source of retirement income
LO 5
16
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Mandated Benefits (Continued)
• Workers’ compensation: Insurance that
covers individuals who suffer a job-related
illness or accident
• Employers pay the cost of this insurance
• Health care
• Patient Protection and Affordable Care Act,
2010, was introduced to:
- Increase the quality and affordability of
health-care insurance
- Lower the number of uninsured employees
- Reduce the cost of insurance for all involved
LO 5
17
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Nonmandated Benefits
• Private pension plans: Provide income to
employees at their retirement
• Types: Defined benefit plans and defined
contribution plans
• Paid time off
• Wellness programs
• Life-cycle benefits
• Employee assistance plans and perquisites
• Cafeteria-style benefits plans: Employees
can choose the benefits they want
LO 6
18
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Contemporary Issues in Compensation and
Benefits
• Executive compensation
• Growing legal issues
• Finding the best ways to evaluate
compensation and benefits programs
LO 7
19
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Executive Compensation
• Most senior executives receive their
compensation in two forms
• Base salary
• Some form of incentive pay, such as bonuses and
stock-option plans
• Higher in the United States than in other
countries
• In many firms, there is little or no
relationship between its performance and
the compensation paid to senior executives
LO 7
20
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Legal Issues in Compensation and Benefits
• Fair Labor Standards Act
• Includes provisions for the minimum wage,
overtime, and child labor
• Comp time: Time off that is offered to
nonexempt workers in exchange for working
more than 40 hours with no overtime pay
• Employee Retirement Income Security Act
(ERISA) of 1974
• Passed to protect employees who contributed to
their pensions but were unable to collect those
benefits later
LO 7
21
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Legal Issues in Compensation and Benefits
(Continued)
• Provides protection for the funding underlying
the pension plan
• Benefit plans cannot disproportionately
favor employees with higher income levels
• The Pension Benefit Guaranty Corporation
• Oversees how pension plans are funded and
supports underfunded plans by seizing corporate
assets
• Many firms extend benefits to same-sex
partners
LO 7
22
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
Evaluating Compensation and Benefit
Programs
• Organizations that do not offer competitive
pay and benefit packages:
• Find it difficult to attract employees
• Face high rates of voluntary turnover
• Efficiency of benefit programs depends on
effective communication with employees
• Employees underestimate the cost of their
benefits when they are not fully informed about
their benefits
LO 7
KEY TERMS
23
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
• Compensation
• Benefits
• Internal equity
• External equity
• Pay surveys
• Wages
• Salary
• Maturity curve
• Job evaluation
• Classification system
• Point system
• Point manual
• Factor-comparison
method
• Pay for knowledge
• Skill-based pay
• Wage and salary
administration
• Pay secrecy
• Pay compression
KEY TERMS
24
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
• Pay inversion
• Unemployment
insurance
• Social Security (Old
Age Survivors and
Disability Insurance
Program)
• Workers’
compensation
• Private pension plans
• Defined benefit plans
• Defined contribution
plans
• Wellness programs
• Cafeteria-style
benefits plans
• Vesting rights
SUMMARY
25
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
• Compensation should be the result of a
careful and systematic strategic process
• It is important to determine exactly what
employees on a given job should be paid
• Pay secrecy and pay compression affect
wage and salary administration
• Organizations provide mandated and
nonmandated benefits to their employees
• There are three important contemporary
issues in compensation and benefits

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CH 9 BSAD 310 Fall 2019

  • 1. Chapter 9 Compensation and Benefits Copyright ©2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 2. LEARNING OUTCOMES 2 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 1. Describe the basic issues involved in developing a compensation strategy 2. Discuss how organizations develop a wage and salary structure 3. Identify and describe the basic issues involved in wage and salary administration 4. Discuss the basic considerations in understanding benefit programs
  • 3. 3 LEARNING OUTCOMES (Continued) Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 5. Identify and describe mandated benefits 6. Identify and describe nonmandated benefits 7. Discuss contemporary issues in compensation and benefits
  • 4. 4 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Compensation and Benefits • Compensation: Set of rewards that organizations provide to individuals for their willingness to perform tasks within the organization • Benefits: Items of value beyond their wages, salaries, and other forms of direct financial compensation that employees receive from the organization • Rewards • Incentives
  • 5. 5 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Basic Purposes of Compensation • To provide appropriate and equitable rewards to employees • To help employees focus on activities that the organization considers important • To increase employee efforts along desired lines • To motivate individuals by creating a perception that their efforts and contributions are recognized and rewarded LO 1
  • 6. 6 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Internal and External Equity • Internal equity: Comparisons made by employees to other employees within the same organization • External equity: Comparisons made by employees to others employed by different organizations performing similar jobs • Pay surveys: Surveys of compensation paid to employees by other employers in a particular geographic area, industry, or occupational group LO 1
  • 7. 7 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Wage versus Salaries • Wages: Hourly compensation paid to operating employees • Time acts as the basis for determining wages • Salary: Income paid to an individual on the basis of performance, not on the basis of time LO 1
  • 8. 8 Figure Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 9.2 Strategic Options for Compensation LO 1
  • 9. 9 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Determinants of Compensation Strategy • Overall organizational strategy • Ability to pay • Ability to attract and retain employees • Ability to bargain with unions LO 1
  • 10. 10 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Job Evaluation • Determines the relative value of a job to the organization to compensate adequately and appropriately those who perform the job • Methods • Classification system: Attempts to group sets of jobs together into clusters, often called grades • Point system: Requires managers to quantify the value of various elements of specific jobs in objective terms LO 2
  • 11. 11 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Job Evaluation (Continued) - Point manual: Carefully and specifically defines the degrees of points from first to fifth - Factor-comparison method: Assesses jobs on a factor-by-factor basis using a factor- comparison scale as a benchmark LO 2
  • 12. 12 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Pay for Knowledge and Skill-Based Pay • Pay for knowledge: Involves compensating employees for learning specific information • Skill-based pay: Rewards employees for acquiring new skills LO 2
  • 13. 13 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Wage and Salary Administration • Ongoing process of managing a wage and salary structure • Issues related to compensation • Pay secrecy: Extent to which the compensation of any individual in an organization is secret • Pay compression: Occurs when individuals with substantially different levels of experience or performance abilities are paid relatively equal - Pay inversion: New employees are paid more than experienced employees because of changes in the external market LO 3
  • 14. 14 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Nature of Benefits Programs • Most organizations provide their employees with an array of benefits • Cost of benefits programs • Organizations spend huge amounts on benefits • Employees are asked to bear costs of benefits • Purposes of benefits programs • To attract better-qualified people • To increase job satisfaction and subsequent turnover LO 4
  • 15. 15 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Mandated Benefits • Unemployment insurance: Provides a basic subsistence payment to employees who are between jobs • Created in the United States as part of the Social Security Act of 1935 • Social security: Designed to provide limited income to retired individuals • Officially called the Old Age Survivors and Disability Insurance Program • Many people have come to view it as their primary source of retirement income LO 5
  • 16. 16 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Mandated Benefits (Continued) • Workers’ compensation: Insurance that covers individuals who suffer a job-related illness or accident • Employers pay the cost of this insurance • Health care • Patient Protection and Affordable Care Act, 2010, was introduced to: - Increase the quality and affordability of health-care insurance - Lower the number of uninsured employees - Reduce the cost of insurance for all involved LO 5
  • 17. 17 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Nonmandated Benefits • Private pension plans: Provide income to employees at their retirement • Types: Defined benefit plans and defined contribution plans • Paid time off • Wellness programs • Life-cycle benefits • Employee assistance plans and perquisites • Cafeteria-style benefits plans: Employees can choose the benefits they want LO 6
  • 18. 18 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Contemporary Issues in Compensation and Benefits • Executive compensation • Growing legal issues • Finding the best ways to evaluate compensation and benefits programs LO 7
  • 19. 19 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Executive Compensation • Most senior executives receive their compensation in two forms • Base salary • Some form of incentive pay, such as bonuses and stock-option plans • Higher in the United States than in other countries • In many firms, there is little or no relationship between its performance and the compensation paid to senior executives LO 7
  • 20. 20 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Legal Issues in Compensation and Benefits • Fair Labor Standards Act • Includes provisions for the minimum wage, overtime, and child labor • Comp time: Time off that is offered to nonexempt workers in exchange for working more than 40 hours with no overtime pay • Employee Retirement Income Security Act (ERISA) of 1974 • Passed to protect employees who contributed to their pensions but were unable to collect those benefits later LO 7
  • 21. 21 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Legal Issues in Compensation and Benefits (Continued) • Provides protection for the funding underlying the pension plan • Benefit plans cannot disproportionately favor employees with higher income levels • The Pension Benefit Guaranty Corporation • Oversees how pension plans are funded and supports underfunded plans by seizing corporate assets • Many firms extend benefits to same-sex partners LO 7
  • 22. 22 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 Evaluating Compensation and Benefit Programs • Organizations that do not offer competitive pay and benefit packages: • Find it difficult to attract employees • Face high rates of voluntary turnover • Efficiency of benefit programs depends on effective communication with employees • Employees underestimate the cost of their benefits when they are not fully informed about their benefits LO 7
  • 23. KEY TERMS 23 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 • Compensation • Benefits • Internal equity • External equity • Pay surveys • Wages • Salary • Maturity curve • Job evaluation • Classification system • Point system • Point manual • Factor-comparison method • Pay for knowledge • Skill-based pay • Wage and salary administration • Pay secrecy • Pay compression
  • 24. KEY TERMS 24 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 • Pay inversion • Unemployment insurance • Social Security (Old Age Survivors and Disability Insurance Program) • Workers’ compensation • Private pension plans • Defined benefit plans • Defined contribution plans • Wellness programs • Cafeteria-style benefits plans • Vesting rights
  • 25. SUMMARY 25 Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. HR5 | CH9 • Compensation should be the result of a careful and systematic strategic process • It is important to determine exactly what employees on a given job should be paid • Pay secrecy and pay compression affect wage and salary administration • Organizations provide mandated and nonmandated benefits to their employees • There are three important contemporary issues in compensation and benefits