1. 12-1 McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. fundamentals of Human Resource Management 3 rd edition by R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright CHAPTER 12 Recognizing Employee Contributions with Pay

2. 12-2 Incentive Pay Incentive pay – forms of pay linked to an employee’s performance as an individual, group member, or organization member. Incentive pay is influential because the amount paid is linked to certain predefined behaviors or outcomes. For incentive pay to motivate employees to contribute to the organization’s success, the pay plans must be well designed.

3. 12-3 Most Companies Use Incentive Pay

4. 12-4 Effective incentive pay plans meet the following requirements: 1.Performance measures are linked to the organization’s goals. 2.Employees believe they can meet performance standards. 3.The organization gives employees the resources they need to meet their goals. 4.Employees value the rewards given. 5.Employees believe the reward system is fair. 6.The pay plan takes into account that employees may ignore any goals that are not rewarded.

5. 12-5 Pay for Individual Performance Piecework ratesStandard hour plansMerit payIndividual bonusesSales commissions

6. 12-6 Pay for Individual Performance: Piecework Rates Piecework Rate A wage based on the amount workers produce. Straight Piecework Plan Incentive pay in which the employer pays the same rate per piece, no matter how much the worker produces. Differential Piece Rates Incentive pay in which the piece rate is higher when a greater amount is produced.

7. 12-7 Pay for Individual Performance: Standard Hour Plans and Merit Pay Standard Hour Plan An incentive plan that pays workers extra for work done in less than a preset “standard time.” These plans are much like piecework plans. They encourage employees to work as fast as they can, but not necessarily to care about quality or service. Merit Pay A system of linking pay increases to ratings on a performance scale. They make use of a merit increase grid. The system gives the lowest paid best performers the biggest pay increases.

8. 12-8 Figure 12.2: Ratings and Raises – Underrewarding the Best

9. 12-9 Pay for Individual Performance: Performance Bonuses Performance bonuses are not rolled into base pay. The employee must re-earn them during each performance period. Sometimes the bonus is a one-time reward. Bonuses may also be linked to objective performance measures, rather than subjective ratings.

10. 12-10 Pay for Individual Performance: Sales Commissions Commissions – incentive pay calculated as a percentage of sales. Some salespeople earn a commission in addition to a base salary. Straight commission plan – some salespeople earn only commissions. Some salespeople earn no commissions at all, but a straight salary.

11. 12-11 Many car salespeople earn a straight commission, meaning that 100% of their pay comes from commission instead of salary.

12. 12-12 Test Your Knowledge John works twisting pretzels in a pretzel factory. Pablo works on IT systems integration at a credit card company. The best pay plans for these individuals would be ________ and _______, respectively. a)Merit pay, individual bonus b)Sales commissions; merit pay c)Piecework, Merit pay d)Individual bonus, sales commissions

13. 12-13 Pay for Group Performance GainsharingBonusesTeam Awards

14. 12-14 Pay for Group Performance: Gainsharing Gainsharing – group incentive program that measures improvements in productivity and effectiveness and distributes a portion of each to employees. Gainsharing addresses the challenge of identifying appropriate performance measures for complex jobs. Gainsharing frees employees to determine how to improve their own and their group’s performance.

15. 12-15 Organization Conditions Necessary for Gainsharing to Succeed 1.Management commitment. 2.Need for change or strong commitment to continuous improvement. 3.Management acceptance and encouragement of employee input. 4.High levels of cooperation and interaction. 5.Employment security. 6.Information sharing on productivity and costs. 7.Goal setting.

16. 12-16 Organization Conditions Necessary for Gainsharing to Succeed (continued) 8.Commitment of all involved parties to the process of change and improvement. 9.Performance standard and calculation that employees understand and consider fair and that is closely related to managerial objectives. 10.Employees who value working in groups.

17. 12-17 Pay for Group Performance: Group Bonuses and Team Awards Group Bonuses Bonuses for group performance tend to be for smaller work groups. These bonuses reward the members of a group for attaining a specific goal, usually measured in terms of physical output. Team Awards Similar to group bonuses, but are more likely to use a broad range of performance measures: – Cost savings – Successful completion of a project – Meeting deadlines

18. 12-18 Group members that meet a sales goal or a product development team that meets a deadline or successfully launches a product may be rewarded with a bonus for group performance.

19. 12-19 Figure 12.4: Types of Pay for Organizational Performance

20. 12-20 Pay for Organizational Performance: Profit Sharing Profit sharing – incentive pay in which payments are a percentage of the organization’s profits and do not become part of the employees’ base salary. Profit sharing may encourage employees to think like owners. Evidence is not clear whether profit sharing helps organizations perform better.

21. 12-21 Considerations for Setting Up a Profit-Sharing Plan 1.Get supervisors on board with the plan. 2.Make sure employees understand how the plan works. 3.Identify the behaviors and results that contribute to greater profits. 4.Make sure managers understand that they contribute to the profit-sharing goals by encouraging their employees and keeping them focused on their goals.

22. 12-22 Considerations for Setting Up a Profit-Sharing Plan (continued) 5.Consider linking rewards to the department’s or division’s performance, if profits can be assigned to the group. 6.Make the rewards big enough to matter. 7.Time the profit-sharing payments for maximum effect.

23. 12-23 Pay for Organizational Performance: Stock Ownership Stock Options Rights to buy a certain number of shares of stock at a specified price. Traditionally, stock options have been granted to executives. Some companies are trying to push eligibility for options further down the organization’s structure. ESOPs Employee Stock Ownership Plan (ESOP) – an arrangement in which the organization distributes shares of stock to all its employees by placing it in a trust. This is the most common form of employee ownership.

24. 12-24 Figure 12.5: Number of ESOPs

25. 12-25 Test Your Knowledge For each of the following jobs, identify the best type of incentive (e.g., individual, group, organizational). Be prepared to explain your answer. 1.Director of Marketing, Pepsi 2.Recruiter, Verizon 3.Cashier, CVS (drugstore) 4.Salesperson, Macy’s a)Individual b)Group c)Organizational

26. 12-26 Balanced Scorecard Balanced scorecard – a combination of performance measures directed toward the company’s long- and short-term goals and used as the basis for awarding incentive pay. The four categories of a balanced scorecard include: – financial – customer – internal – learning and growth

27. 12-27 Balanced Scorecard (continued) It combines the advantages of different incentive pay plans. It helps employees understand the organization’s goals. By communicating the balanced scorecard to employees, the organization shows employees information about what its goals are and what it expects employees to accomplish.

28. 12-28 Processes That Make Incentives Work Participation in Decisions Employee participation in pay-related decisions can be part of a general move toward employee empowerment. Employee participation can contribute to the success of an incentive plan. Communication Communication demonstrates to employees that the pay plan is fair. When employees understand the requirements of the incentive pay plan, the plan is more likely to influence their behavior as desired. Important when the pay plan is being changed.

29. 12-29 Incentive Pay for Executives Short-Term Incentives Bonuses based on the year’s profits, return on investment, or other measures related to the organization’s goals. Actual payment of the bonus may be delayed to gain tax advantages. Long-Term Incentives Include stock options and stock purchase plans. Rationale for these long- term incentives is that executives will want to do what is best for the organization because that will cause the value of their stock to grow.

30. 12-30 Incentive Pay for Executives: Ethical Issues Incentive pay for executives lays the groundwork for significant ethical issues. When an organization links pay to its stock performance, executives need the courage to be honest about their company’s performance even when dishonesty or clever shading of the truth offers the tempting potential for large earnings.

31. 12-31 Summary Incentive pay is pay tied to individual performance, profits, or other measures of success. Organizations select forms of incentive pay to energize, direct, or control employees’ behavior. To be effective, incentive pay should encourage the kinds of behaviors most needed, and employees must believe they have the ability to meet the performance standards. Employees must value the rewards, have the resources they need to meet the standards, and believe the pay plan is fair.

32. 12-32 Summary (continued) Organizations may recognize individual performance through such incentives as piecework rates, standard hour plans, merit pay, sales commissions, and bonuses for meeting individual performance objectives. Common group incentives include gainsharing, bonuses, and team awards. Incentives for meeting organizational objectives include profit sharing and stock ownership.

33. 12-33 Summary (continued) A balanced scorecard can be used as the basis for awarding incentive pay. It also helps employees to understand and care about the organization’s goals. The mix of pay programs is intended to balance the disadvantages of one type of incentive with the advantages of another type. Communication and participation in decisions can contribute to employees’ feelings that the organization’s incentive pay plans are fair.

34. 12-34 Summary (continued) Communication is especially important when the organization is changing its pay plan. Because executives have such a strong influence over the organization’s performance, incentive pay for them receives special attention. Performance measures should encourage behavior that is in the organization’s best interests, including ethical behavior.

35. 12-35 McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. fundamentals of Human Resource Management 3 rd edition by R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright CHAPTER 13 Providing Employee Benefits

36. 12-36 The Role of Employee Benefits Benefits contribute to attracting, retaining, and motivating employees. The variety of possible benefits helps employers tailor their compensation to the kinds of employees they need. Employees have come to expect that benefits will help them maintain economic security. Benefits impose significant costs.

37. 12-37 Figure 13.1: Benefits as a Percentage of Total Compensation

38. 12-38 The Role of Employee Benefits (continued) Benefits packages are more complex than pay structures, making them harder for employees to understand and appreciate. The important role of benefits is one reason that benefits are subject to government regulation. – Legally required benefits. – Tax laws can make benefits favorable.

39. 12-39 Table 13.1: Benefits Required by Law BENEFITEMPLOYER REQUIREMENT Social SecurityFlat payroll tax on employees and employers. Unemployment InsurancePayroll tax on employers that depends on state requirements and experience rating. Workers’ Compensation Insurance Provide coverage according to state requirements. Premiums depend on experience rating. Family and Medical LeaveUp to 12 weeks of unpaid leave for childbirth, adoption, or serious illness.

40. 12-40 Benefits Required by Law: Social Security The federal Old Age, Survivors, Disability, and Health Insurance (OASDHI) program which combines: – Old age (retirement) insurance – Survivor’s insurance – Disability insurance – Hospital insurance (Medicare Part A) – Supplementary medical insurance (Medicare Part B)

41. 12-41 Benefits Required by Law: Social Security (continued) Employers and employees share the cost of Social Security through a payroll tax. The percentage is set by law. In 2008, employers and employees each paid a tax of 7.65% on the first $102,000 of the employee’s earnings – 6.2% of earnings goes to OASDHI – 1.45% of earnings goes to Medicare (Part A) – For earnings above $102,000 only the 1.45% for Medicare is assessed

42. 12-42 Benefits Required by Law: Unemployment Insurance A federally mandated program administered by the states. Focuses on minimizing the hardships of unemployment: – Payments to unemployed workers. – Help in finding new jobs. – Incentives to stabilize employment. Most funding comes from federal and state taxes on employers.

43. 12-43 Benefits Required by Law: Unemployment Insurance (continued) The size of the unemployment tax imposed on each employer depends on the employer’s experience rating: – The number of employees a company has laid off in the past and the cost of providing them with unemployment benefits. Careful human resource planning can minimize layoffs and keep their experience rating favorable.

44. 12-44 Benefits Required by Law: Unemployment Insurance (continued) To receive benefits, workers must meet four conditions: 1.They meet requirements demonstrating they had been employed. 2.They are available for work. 3.They are actively seeking work. 4.They were not discharged for cause, did not quit voluntarily, and are not out of work because of a labor dispute.

45. 12-45 Benefits Required by Law: Workers’ Compensation State programs that provide benefits to workers who suffer work-related injuries or illnesses, or to their survivors. They operate under a principle of no-fault liability: – An employee does not need to show that the employer was grossly negligent in order to receive compensation. – The employer is protected from lawsuits.

46. 12-46 Benefits Required by Law: Workers’ Compensation (continued) Major categories of benefits: – Disability income – Medical care – Death benefits – Rehabilitative benefits The amount of benefits income varies from state to state. It is generally two-thirds of the worker’s earnings before the disability. The benefits are tax free.

47. 12-47 Benefits Required by Law: Workers’ Compensation (continued) The cost of the workers’ compensation insurance depend on the: – Kinds of occupations involved – State where the company is located – Employer’s experience rating Unfavorable experience ratings lead to higher insurance premiums.

48. 12-48 Benefits Required by Law: Unpaid Family and Medical Leave Family and Medical Leave Act (FMLA) of 1993 – Requires organizations with 50 or more employees to provide up to 12 weeks of unpaid leave: After childbirth or adoption To care for a seriously ill family member For an employee’s own serious illness – Employers must also guarantee these employees the same or comparable job when they return to work.

49. 12-49 Benefits Required by Law: Unpaid Family and Medical Leave (continued) When employees experience pregnancy and childbirth, employers must also comply with the Pregnancy Discrimination Act. If an employee is temporarily unable to perform her job due to pregnancy, the employer must treat her in the same way as any other disabled employee. – e.g., modified tasks, alternative assignments, disability leave, or leave without pay

50. 12-50 Test Your Knowledge XYZ company has determined that they will have to reduce their benefits costs to stay competitive. Which of the following solutions is not a choice for XYZ? a)Eliminate health coverage b)Reduce the percentage of employees’ Social Security insurance they pay. c)Reduce their unemployment insurance costs by managing their workforce to avoid layoffs. d)Institute a safety program to minimize worker’s compensation costs.

51. 12-51 Optional Benefits Programs Paid Leave Group Insurance Retirement Plans “Family- Friendly” Benefits Other Quality of Work-Life Benefits

52. 12-52 Figure 13.2: Percentage of Full-Time Workers with Access to Selected Benefit Programs

53. 12-53 Optional Benefits Programs: Paid Time Off Vacation Holidays Sick Leave Personal Days Floating Holidays Jury Duty Funerals Military Duty Time Off to Vote Paid Time Off (PTO) Bank – Most flexible approach – Employer pools pools personal days, sick days, and vacation days for employees to use as the need arises

54. 12-54 Paid time off is a way for employees to enjoy time with their families and to refresh their bodies and spirits.

55. 12-55 U.S. Workers Take Short Vacations On average, workers in the United States are allowed two weeks of vacation. They don’t take all the days to which they are entitled.

56. 12-56 Optional Benefits Programs: Group Insurance Medical InsuranceLife InsuranceDisability InsuranceLong-Term Care Insurance

57. 12-57 Medical Insurance 70% of all full-time employees in the U.S. receive medical benefits Policies typically cover: – Hospital expenses – Surgical expenses – Visits to physicians Additional coverage may include: – Dental care – Vision care – Birthing centers – Prescription drug programs Mental Health Parity Act (1996)

58. 12-58 Medical Insurance (continued) Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 – Federal law that requires employers to permit employees or their dependents to extend their health insurance coverage at group rates for up to 36 months following a qualifying event: Layoff Reduction in hours Employee’s death

59. 12-59 Medical Insurance (continued) Employer approaches to controlling health care benefits costs: 1.Managed Care 2.Health Maintenance Organizations (HMO) 3.Preferred Provider Organizations (PPO) 4.Flexible Spending Accounts 5.Consumer-Driven Health Plans (CDHP) 6.Employee Wellness Programs (EWP)

60. 12-60 Figure 13.3: Health Care Costs in Various Countries

61. 12-61 Life Insurance Employers may provide life insurance to employees or offer the opportunity to buy coverage at low group rates. Term life insurance – if the employee dies during the term of the policy, the employee’s beneficiaries receive a death benefit payment. – Usually twice the employee’s yearly pay. Additional benefits may include accidental death and dismemberment.

62. 12-62 Disability Insurance Short-Term Disability Insurance Insurance that pays a percentage of a disabled employee’s salary as benefits to the employee for six months or less. Long-Term Disability Insurance Insurance that pays a percentage of a disabled employee’s salary after an initial period and potentially for the rest of the employee’s life.

63. 12-63 Optional Benefits Programs: Retirement Plans About half of employees working in the private business sector have employer- sponsored retirement plans. Contributory plan - retirement plan funded by contributions from the employer and employee. Noncontributory plan - retirement plan funded entirely by contributions from the employer.

64. 12-64 Figure 13.4: Sources of Income for Persons 65 and Older

65. 12-65 Optional Benefits Programs: Retirement Plans (continued) Defined benefit plan – pension plan that guarantees a specified level of retirement income. The employer sets up a pension fund to invest the contributions. Such plans must meet the funding requirements of the Employee Retirement Income Security Act (ERISA) of 1974. – The employer must contribute enough for the plan to cover all the benefits to be paid out to retirees.

66. 12-66 Optional Benefits Programs: Retirement Plans (continued) Employee Retirement Income Security Act (ERISA): federal law that increased the responsibility of pension plan trustees to protect retirees, established certain rights related to vesting and portability, and created the Pension Benefit Guarantee Corporation. Pension Benefit Guarantee Corporation (PBGC): federal agency that insures retirement benefits and guarantees retirees a basic benefit if the employer experiences financial difficulties.

67. 12-67 Optional Benefits Programs: Retirement Plans (continued) Defined contribution plan – retirement plan in which the employer sets up an individual account for each employee and specifies the size of the investment into that account. – Money purchase plans – Profit-sharing and employee stock ownership plans – Section 401(k) plans These plans free employers from the risks that investments will not perform as well as expected. The responsibility for wise investing is with each employee.

68. 12-68 Figure 13.5: Value of Retirement Savings Invested at Different Ages

69. 12-69 Test Your Knowledge Jakar does not know a lot about investing and wants to ensure he has some retirement income when he is old enough to retire. Agnes plans on changing employers every few years and is interested in investing her own money. Which plan would be best for Jakar and Agnes, respectively? a)Defined contribution; defined benefit b)Contributory; defined benefit c)Defined benefit; defined contribution d)Defined contribution; non-contributory

70. 12-70 Optional Benefits Programs: Retirement Plans (continued) Cash balance plan – retirement plan in which the employer sets up an individual account for each employee and contributes a percentage of the employee’s salary. – The account earns interest at a predefined rate. – This arrangement helps employers plan their contributions and helps employees predict their retirement benefits. – If employees change jobs, they generally can roll over the balance into an individual retirement account (IRA).

71. 12-71 Optional Benefits Programs: Retirement Plans (continued) Vesting Rights Guarantee that when employees become participants in a pension plan and work a specified number of years, they will receive a pension at retirement age, regardless of whether they remained with the employer. Summary Plan Description Report that describes a pension plan’s funding, eligibility requirements, risks, and other details. Employers also provide an individual benefit statement which describes the employee’s vested and unvested benefits.

72. 12-72 Optional Benefits Programs: “Family-Friendly” Benefits Family LeaveChild Care BenefitsCollege Savings PlansElder Care

73. 12-73 Figure 13.6: Percentage of Employers Offering Various Levels of Child Care Benefits

74. 12-74 Optional Benefits Programs: Other Quality of Work-Life Benefits Subsidized cafeterias On-site health care services Moving and relocation expenses Employee discounts on products Employee buying service Tuition reimbursement On-site fitness center On-site dry cleaning services Dues for professional organizations Off-site company recreation area Pet services

75. 12-75 Selecting Employee Benefits Decisions about which benefits to offer should take into account: – The organization’s goals and objectives – The organization’s budget – The expectations of the organization’s current employees and those it wishes to recruit in the future. An organization that does not offer expected benefits will have difficulty attracting and keeping employees.

76. 12-76 Employees’ Expectations and Values Employees expect to receive benefits that are legally required and widely available. They value benefits they are likely to use. The value employees place on various benefits is likely to differ from one employee to another.

77. 12-77 Employee Expectations and Values (continued) Organizations can address differences in employees’ needs and empower their employees by offering flexible benefits plans in place of a single benefits package for all employees. Cafeteria-style plan: a benefits plan that offers employees a set of alternatives from which they can choose the types and amounts of benefits they want.

78. 12-78 Suggested Ways Employers Can Control the Cost of Health Benefits 1.Shop for bargains. Every year, the company should research available plans and compare quotes from different providers. 2.Know what employees care about. Would they be willing to accept a higher deductible if it means the company can also afford prescription drug coverage? 3.If employees are willing to take responsibility for their own health care spending, offer a health- savings account or consumer-driven plan.

79. 12-79 Suggested Ways Employers Can Control the Cost of Health Benefits (continued) 4.Review your claims history. You might be able to identify correctable problems. 5.Encourage healthy behavior with incentives like discounts for health club memberships, free health screenings, and lower premiums for employees who participate in a wellness program. 6.Promote a workplace culture that values healthy habits. 7.Measure the results of any initiative you try.

80. 12-80 Legal Requirements for Employee Benefits Benefits required by lawTax treatment of benefitsAntidiscrimination lawsAccounting requirements

81. 12-81 Communicating Benefits to Employees Organizations must communicate benefits information to employees so that they will appreciate the value of their benefits. This is essential so that benefits can achieve their objective of attracting, motivating, and retaining employees. Employees are interested in their benefits, and they need a great deal of detailed information to take advantage of benefits.

82. 12-82 Summary Like pay, benefits help employers attract, retain, and motivate employees. The variety of possible benefits also helps employers tailor their compensation packages to attract the right kinds of employees. Employees expect at least a minimum level of benefits, and providing more than the minimum helps an organization compete in the labor market. Benefits are also a significant expense, but employers provide benefits because employees value them and many benefits are required by law.

83. 12-83 Summary (continued) Employers must contribute to the Old Age, Survivors, Disability, and Health Insurance program known as Social Security through a payroll tax shared by employers and employees. Employers must also pay federal and state taxes for unemployment insurance. State laws require that employers purchase workers’ compensation insurance. The major categories of paid leave are vacations, holidays, and sick leave.

84. 12-84 Summary (continued) Medical insurance is one of the most valued employee benefits. To manage the costs of health insurance, many organizations offer coverage through a health maintenance organization or preferred provider organization, or they may offer flexible spending accounts. Retirement plans may be contributory or noncontributory. These plans may be defined benefit plans or defined contribution plans.

85. 12-85 Summary (continued) Employers have responded to work-family role conflicts by offering family-friendly benefits. In deciding the contents of a benefits package, organizations need to establish objectives and select benefits that support those objectives. Organizations should also consider employees’ expectations and values. Employers must comply with the numerous laws and regulations affecting how they design and administer benefits programs.

86. 12-86 Summary (continued) Communicating information about benefits is important so that employees will appreciate the value of their benefits. Communicating their value is the main way benefits attract, motivate, and retain employees.