Module 4: Compensation and Benefits 19% PHR 13% SPHR Any student use of these slides is subject to the same License Agreement that governs the student’s use of the SHRM Learning System materials. © SHRM

Compensation Legislation Requires prevailing wages/benefits on federal construction projects Davis-Bacon Act Precludes federal contractors from inducing employees to give up any part of compensation Copeland “Anti-Kickback” Act Extends prevailing wages to federal suppliers Stipulates overtime pay Walsh-Healey Act Requires prevailing wages/benefits on all federal contracts Service Contract Act Davis-Bacon Act - applies to projects over $2000. Applies to laborers and mechanics. Copeland Act – extends the concept of the Davis Bacon Act. Applies to manufacturers and suppliers of goods for federal government contracts in excess of $10,000. © SHRM

Fair Labor Standards Act (Wage and Hour Law) Applies to organizations with employees who engage in interstate commerce, produce goods for interstate commerce, or handle, sell, or work on goods/materials that have been moved in/produced for interstate commerce. Applies to employers with at least $500,000 in annual dollar volume of business. Under FLSA, an employer has no ongoing obligations to independent contractors. Some exceptions: Hospitals. Institutions primarily engaged in the care of the sick, aged, mentally ill or disabled. Schools for children who are mentally or physically disabled or gifted. Preschools, elementary and secondary schools and institutions of higher education. Federal, state and local government agencies. © SHRM

Which of the following factors would indicate independent contractor status? A. Opportunity for profit and loss B. Regular oral and written reports presented to a manager C. Right to end the relationship with the organization at any time without incurring liability Services provided to a single organization Answer A © SHRM

IRS Independent Contractor Test Behavioral control Financial control Type of relationship Behavioral – Does the organization direct or control how the worker does the task? Does the organization train the worker? Financial – Extent to which worker has unreimbursed expenses? Contractors usually have more Extent of the worker’s investment Extent to which worker makes services available to relevant market How the organization pays the worker (Flat fee vs. wage based on time such as hourly, weekley) W2 vs W9 Extent to which worker can make a profit or loss Type of relationship – Written contract Are employee-type benefits provided Permanency of relationship Extent to which services are a key aspect of the regular business of the organization © SHRM

Exempt and Nonexempt Employees Type of Employee Importance: Exempt Excluded from minimum wage and overtime pay requirements of the law. Nonexempt Are not excluded from minimum wage requirements and are entitled to overtime. Overtime is guaranteed to employees who are paid less than $23,660 per year or $455 per week. © SHRM

FLSA Exemptions An exempt employee must meet three requirements. Minimum salary Paid on a salary basis without improper deductions Exempt duties Minimum salary is $455/week © SHRM

Primary Duty Issue A primary duty is the main or most important duty and is an important part of exemption. No particular percentage of exempt duties is required under the FLSA. The lower the total percentage, the greater the legal risk if challenged. Primary duty should be 50% or more to be considered exempt though there is no requirement under the FLSA © SHRM

Executive Exemption An employee must: Have a primary duty of managing an organization, department, or subdivision. Direct the work of at least two full-time employees or their equivalent. Have the authority of the employer to hire and fire. Affect promotion decisions. © SHRM

Administrative Exemption Requires performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers. Includes the exercise of discretion and independent judgment related to “matters of significance.” © SHRM

Learned professionals Creative professionals Professional Exemptions Learned professionals Requires advanced knowledge in a field of science or learning that is acquired by prolonged instruction. Work is intellectual in nature and requires exercise of discretion and judgment. Creative professionals Must meet minimum salary requirements. Perform work that requires invention, imagination, originality, or talent. Perform in a recognized field of creative or artistic endeavor. Having a specialized degree does not guarantee that an employee meets the learned professional exemption. The employee must have as his primary duty the performance of work requiring the advanced knowledge. Creative professionals – Includes fields such as music, writing, acting and graphic arts. © SHRM 4-11

Highly Compensated Exemption A highly compensated employee must: Be paid total annual compensation of $100,000 or more that includes at least $455 per week paid on a salary or fee basis. Perform one of the duties of an exempt executive, administrative, or professional employee. © SHRM

Computer Employees Must meet the salary minimum with a salary of $455 per week or $27.63 per hour. Employee’s pay cannot be subject to deductions inconsistent with the salary basis requirement. Primary duties must fall into one of four categories. Four categories: SEE DOL HANDOUT © SHRM

Outside Sales An employee must: Have a primary duty involving making sales or obtaining orders and contracts. Be customarily and regularly engaged away from the employer’s place of business. Outside sales employees are not subject to the minimum salary requirements of other exemptions. © SHRM

Improper Deductions Employers that make improper deductions will lose the exemption if they did not intend to pay on a salary basis. Example: An exempt employee is normally not subject to deductions for illness in less than full-day increments. (An FMLA exception may occur.) If facts demonstrate that the employer has an actual practice of making improper deductions, the employer will lose the OT exemptions for all employees in the same job classification. If the deduction was isolated, exemption will not be lost. © SHRM 4-15

Safe Harbor A “safe harbor” exists if: The employer has a clearly communicated policy prohibiting improper pay deductions. Employees are reimbursed for any improper deductions. The organization makes a good-faith effort to comply in the future. © SHRM

FLSA Basic Overtime Provisions Sets rate of overtime pay (1.5 times regular pay after 40 hours worked). Requires overtime on time worked, not time compensated. Sets workweek as any fixed, recurring period of 168 consecutive hours (7 days  24 hours). Paid on time worked not time compensated – OT DOES NOT HAVE TO BE PAID ON SICK TIME, HOLIDAY PAY, JURY DUTY, VACATION PAY © SHRM 4-17

Discussion question If a nonexempt employee works unauthorized overtime, does the employee have to be paid for that time? Can an employee who is not paid for his lunch break be expected to sit at his desk and answer emails? Yes but they can be disciplined No, they must be fully relieved of all responsibilities. © SHRM

An employer pays an employee a $40 attendance bonus for working a full 40-hour workweek. If the worker works 45 hours during that week, what will the employee’s gross paycheck be if her hourly rate is $10? A. $495.00 $509.50 $515.00 D. $517.25 Answer D © SHRM

45 hours base pay ($450) + bonus ($40) = $490.00 To calculate the total pay for the week, you must add the bonus to the hours worked at base pay (45  $10/hour = 450 + $40 bonus = $490). To get the average straight time hourly earnings (ASTHE), the $490 is divided by the total hours worked, 45, to yield $10.89. Pay calculation: 45 hours base pay ($450) + bonus ($40) = $490.00 ASTHE = $490/45 hours = $10.89 Overtime premium = $10.89  0.5 = $5.45  5 = $27.25 Total gross pay = $517.25 Answer D © SHRM

$ Compensatory Time Overtime usually must be paid in cash. Public-sector employers may grant compensatory time off. Public employees can accumulate “comp” time. Must be earned at a rate of not less than 1 ½ hours for each hour for which OT is required. Presently, compensatory time is not allowed for private-sector nonexempt employees. © SHRM

FLSA Child Labor Provisions Restrict hours and conditions of employment for minors. © SHRM

Minimum Wage Provisions Fair Minimum Wage Act of 2007 Raised minimum wage to $7.25 per hour in three phases Provides $2.13 per hour cash wage if claiming a tip credit © SHRM

Minimum Wage Exceptions Employees younger than 20 years old during first 90 days of employment Tipped employees ($2.13/hour plus tips must equal minimum wage) Full time students employed in retail, service, agriculture or institutions of higher education (ER must obtain a DOL certificate under the Full-time student program) Student learners at least 16 years old and employed on a part-time basis pursuant to a bona fide vocational training program (ER must obtain student learner DOL certificate) Workers impaired by physical or mental disability (DOL certificate required) © SHRM

Penalties An employer who violated the FLSA’s overtime requirements is liable to an employee in the amount of the unpaid overtime compensation as well as an additional equal amount Statute of limitation is two years Employee entitled to recover reasonable attorney fees Criminal penalties of not more than $10,000 and 6 months imprisonment may be imposed for willful violations © SHRM

Discussion question When state and federal laws differ, which law takes precedence? © SHRM

Portal-to-Portal Act Amends FLSA and defines general rules for hours worked. Provides guidelines on: On-call/standby time. Preparatory/concluding activities. Waiting time. Meals and breaks. Training time (4 conditions). Travel time On call time – if employer restricts employees activities and does not allow any personal business, OT must be paid. OT does not have to be paid if EE off premises and asked to stay by phone or beeper. Prep/concluding activities – Is the activity performed solely for the employer’s benefit and is it an indispensable part of the employee’s job activities (putting on safety gear) Changing in and out of uniform – is employee required to change in and out of uniform at work? Or can employee wear uniform to and from work? Waiting time – Not paid if employee is early and waiting for workday to begin. If employee casually helps out while waiting , the time is compensable. Rest periods of 5-20 minutes are considered hours worked. Bona fide periods of 30 minutes or longer are not considered hours worked as long as employee is completely relieved. Training time - time spent at a meeting or conference not compensable if 4 conditions met – voluntary attendance, attendance outside of employee’s hours, not directly job-related, no productive work performed Travel time – From one work site to another is compensable. Out of town travel – On a single day trip, time spent travelling is compensable. Commute to and from airport may be considered the same as home/work travel and not compensable. Overnight travel – Outside of regular business hours not compensable unless employee is working. Any time on the weekend spent travelling will be paid if it cuts across regular business hours worked during the week. © SHRM

Travel Pay © SHRM

Equal Pay Act (EPA) Mandates equal pay for equal work. Skills Effort Responsibility Working Conditions Skills – experience, training, education and ability Effort – physical or mental exertion needed Responsibility – extent to which employer depends on employee to perform the job as expected Working conditions – Physical surroundings and hazards of a job(heat, fumes) © SHRM

Comparable worth Law does not address Deals with pay differentials between men and women who perform comparable –but not equal- work. Looks at different jobs that men and women hold that require comparable skills, effort, responsibility and working conditions. © SHRM

Exceptions to Equal Pay Act Seniority Merit System Difference in quality or quantity of work Geographic work differential Any factor other than gender © SHRM

Module 4 Reinforcement Activity Case 1: A tenured female associate professor in the industrial technology department is employed at a salary lower than male colleagues who are the same rank and teach similar courses at the same location. She is the second-lowest-paid professor in a department of close to 20, despite the fact that she has a higher rank and more seniority than four male colleagues. Does the scenario violate the Equal Pay Act? Instructions: Read the case and solicit student opinions. Press for the reasons behind their answers. Advance to the next slide for feedback. © SHRM

Module 4 Reinforcement Activity Case 1: Tenured female associate professor She will have a strong case if she alleges discrimination because of the substantial equality of work she is performing. Explain: Jobs must be substantially equal but need not be identical. Therefore, minor differences in job duties (such as teaching similar but not identical courses) do not make a job unequal. The professor’s job requires the same skill, effort, responsibility, and working conditions as the jobs of her male colleagues. The employer would have the burden of proof that her salary is less due to non-gender-related reasons. The employer would need to use other criteria, such as the number of publications and the quality of the journals in which they appear or the amount of grant money the professor has won compared to other faculty. History must support the consistent application of these criteria, however. © SHRM

Module 4 Reinforcement Activity Case 2: A female part-time employee is doing work equal to that of a male full-time employee. In exchange for the flexibility of a part-time position, she is paid a lower hourly rate. Does the scenario violate the Equal Pay Act? Instructions: Read the case and solicit student opinions. Press for the reasons behind their answers. Advance to the next slide for feedback. © SHRM

Module 4 Reinforcement Activity Case 2: Part-time female employee Unless the wage rate differs because of seniority or performance levels, the female employee will have a strong case if she alleges discrimination. Explain: Since she is doing equal work, this employee should receive the same hourly salary as her full-time male counterpart, prorated to reflect her part-time status. The employer would have the burden of proof that her salary is less due to non-gender-related reasons. © SHRM

Module 4 Reinforcement Activity Case 3: A male bartender in a restaurant is paid more than a female bartender for the same job. Under what circumstances would this be legal? Instructions: Read the case and solicit student opinions. Advance to the next slide for feedback. © SHRM

Module 4 Reinforcement Activity Case 3: Male bartender This would be legal if: The male bartender has more seniority. The male bartender works a different shift. The male bartender has more work experience. A bona fide merit system is in place. There is a system in place that measures earnings by production. There is a legitimate nondiscriminatory reason. Explain: This would be legal if: The male bartender has more seniority. The male bartender works a different shift. The male bartender has more previous work experience. There is a bona fide merit system in place that is administered uniformly and systematically. There is a system in place at the restaurant that measures earnings by the quantity or quality of production (for example, the amount of drinks served or the manner in which they are served). There is another legitimate nondiscriminatory reason for the disparity other than the gender of the workers. © SHRM

Which of the following is true under the Equal Pay Act? A. Seniority systems cannot result in pay disparity. B. Companies should provide all employees with the same working conditions. Employees doing equal work should receive the same pay. D. Jobs filled primarily by women should have the same salary as similar jobs filled by men. Answer is C © SHRM

Work Opportunity Tax Credit (WOTC) Federal tax credit to encourage employers to hire targeted groups of job seekers. Administered by the DOL’s Employment and Training Administration (ETA) and the IRS. Includes individuals from 9 categories. © SHRM

Additional Compensation Legislation States that the statute of limitations on pay discrimination lawsuits resets as each allegedly discriminatory paycheck is issued Lilly Ledbetter Fair Pay Act States required communications related to executive compensation at publicly traded companies Dodd-Frank Wall Street Reform and Consumer Protection Act Provides guidelines regarding the determination of reasonable compensation for executives of nonprofit organizations IRS Intermediate Sanctions Dodd-Frank – CLAWBACK PROVISION allows a publicly traded company to take back previous executive incentive-based compensation in certain situations. Misconduct is not the only trigger. A financial or accounting restatement due to noncompliance with financial reporting requirements may trigger also. © SHRM

Job Evaluation Determines the relative worth of each job by establishing a hierarchy. Follows job analysis, which focuses on job descriptions and specifications. © SHRM

Job Evaluation Methods Nonquantitative methods try to establish a relative order of jobs. Place jobs in hierarchical order without a numeric value. Not able to tell how much more one job valued than another. Quantitative methods try to establish how much more one job is worth compared to another job by using a scaling system. © SHRM

Nonquantitative (Whole-Job) Evaluation Establishes a relative order of jobs. Does not assign numeric values. Job ranking Paired comparison classification Job-to-job Job-to-predetermined-standard comparison JOB RANKING – compares one job to another and ranks from lowest to highest value to organization. Paired-comparison method compares each job against every other job being evaluated. Not feasible when evaluating a large number of jobs. JOB CLASSIFICATIONS – grouping jobs into a predetermined number of grades or classes. General schedule used by Federal Government. © SHRM

Quantitative Evaluation Uses a scaling system to evaluate the value of one job is as compared to another. Provides a score. Point-factor method Factor comparison Less complex, commonly used Most complex, used infrequently FACTOR COMPARISON METHOD – Involves the ranking of each job by each selected compensable factor and then identifying dollar values for each level of each factor to develop a pay rate. Best used when wages are steady over time and the organization uses a flat rate for each job. Complex. PAGE 61 © SHRM

Point-Factor Method Each job receives a total point value, and relative worth can be compared. Examples: Guide Chart-Profile (Hay Plan) and the U.S. government Factor Evaluation System (FES). Points often determine pay grade assignment. POINT FACTOR METHOD – Uses specific compensable factors to evaluate relative job worth. The compensable factors included in the Equal Pay Act and TITLE VII of the CIVIL RIGHTS ACT should be addressed – Skill, Responsibility, Effort, Working conditions and supervision of others. REVIEW PAGE 59 © SHRM

Market-Based Evaluation Not a true job evaluation system; can be used to develop a job-worth hierarchy. Prices jobs in the labor market(s) in which an organization competes. Uses prevailing rates as the relative “worth” of the jobs. When matching jobs with the competition focus on duties, scope and reporting relationships NOT titles © SHRM

Pay Surveys © SHRM

Data Analysis Salary data may need to be aged, leveled, and/or factored for geography. Aging uses movement in market rates to adjust outdated salary data. Leveling adjusts salaries when surveyed jobs are similar but not identical to jobs in the organization. Since wage rates will vary by location, the organization should factor for geography any national salary survey data. © SHRM

Sorting Salary Data Frequency distributions and tables sort salary data. Frequency distribution Lists the grouped data, from lowest to highest. Frequency table Shows the number of incumbents who receive a particular salary. Mean Salary Number of Incumbents $55,000 $60,000 $65,000 $70,000 $75,000 2 1 5 © SHRM

Salary Data: Measures of Central Tendency Unweighted average gives equal weight to every salary. Weighted average considers the number of people who receive each salary. Median is the middle number in the range. Mode is the most frequently occurring wage. Annual Salary # of Incumbents Total Salary $55,000 $60,000 $65,000 $70,000 $75,000 2 1 5 $110,000 60,000 130,000 350,000 75,000 Totals 11 $725,000 Another way to analyze pay survey data ASK ABOUT UNWEIGHTED AVERAGE ANSWER Unweighted Average = $65,000 Weighted Average = $65,909 © SHRM

Module 4 Reinforcement Activity Compensation Computation $20,000 $30,000 $50,000 $25,000 $35,000 $55,000 $40,000 $60,000 What is the mode of the salaries listed? What is the median salary? Instructions: Ask the students to identify the mode and median of the salaries listed in the table. Advance to the next slide for feedback. © SHRM

Module 4 Reinforcement Activity Compensation Computation What is the mode of the salaries listed? $30,000 $20,000 $25,000 $30,000 $35,000 $40,000 $50,000 $55,000 $60,000 What is the median salary? $20,000 $30,000 $50,000 $25,000 $35,000 $55,000 $40,000 $60,000 Feedback: The mode is the most frequently occurring wage, in this case, $30,000. The median is the middle number in the range. In this case, there is an even number of salaries. After the salaries are listed in order, the median is determined by adding the two middle numbers and dividing by 2: $35,000 + $40,000  2 = $37,500. © SHRM

Module 4 Reinforcement Activity Compensation Computation Position Salary Staff Grade 5 $26,000 5 Grade 6 $30,000 2 Grade 7 $40,000 3 What is the weighted average? What is the unweighted average of the salaries? Instructions: Ask the students to complete the calculations required to create the unweighted and weighted average salaries. Advance to the next slide for feedback. © SHRM

Module 4 Reinforcement Activity Compensation Computation Position Salary Staff Grade 5 $26,000 5 Grade 6 $30,000 2 Grade 7 $40,000 3 What is the unweighted average of the salaries? $26,000 $30,000 $40,000 $96,000/3 = $32,000 What is the weighted average? $26,000 * 5 = $130,000 $30,000 * 2 = $60,000 $40,000 * 3 = $120,000 $310,000/10 $31,000 Explain: The unweighted average salary is calculated by adding the three salaries and dividing the sum by 3, the number of grades. The weighted average is calculated by multiplying each salary by the number of staff at that grade, adding the numbers to arrive at a total salary number ($310,000), and then dividing that sum by the total number of staff (10). © SHRM

Quartiles and Percentiles Show how groups relate to each other. Show if an organization leads, lags, or matches the job market. Shows dispersion or how groups of data relate to each other. © SHRM

Creating a Pay Structure Establish pay grades. Group jobs that have the same relative internal or external worth. Pay the same rate or within the same pay range. Set pay ranges. Set upper/lower bounds of possible compensation for individuals whose jobs fall in a pay grade. Market data from surveys used to determine a midpoint. © SHRM

Range Spreads Subtract the range minimum from range maximum and then divide by the range minimum Typical range spread: Nonexempt positions 40% Exempt positions 50% Executive positions 60% Lower level jobs typically have a narrow range. This is because people in entry-level jobs have more promotion possibilities. Also, learning time to achieve competence is shorter for lower level jobs. © SHRM

Compa-ratios When pay ranges are based on the target market rate, compa-ratios are an indicator as to how actual wages match, lead or lag behind the target markets © SHRM

Compa-Ratios Divide the pay rate of an employee by the midpoint of the range. Given a range of $16 to $20 an hour, a midpoint of $18, and a salary of $16 an hour, the compa-ratio is: $16 ÷ $18 = .89 or 89%. Compa-ratios below 1.00 mean wages are below the midpoint; compa-ratios greater than 1.00 mean wages exceed the midpoint. © SHRM

Discussion question What are the reasons that might cause the compa-ratio to be below 100% New to the job or organization Poor performer Organization has a lag strategy © SHRM

An employee earns $9 an hour, and the pay range is $8 to $12 An employee earns $9 an hour, and the pay range is $8 to $12. What is the compa-ratio? A. 66% B. 80% C. 90% D. 111% Answer: C The midpoint is $10. Divide the pay rate by the midpoint ($9 ÷ $10 = .9 or 90%). © SHRM

Broadbanding Combines several salary grades or job classifications. © SHRM

Broadbanding Advantages and Disadvantages Provides wider ranges. Reduces the number of job grades. Supports de-layering. Provides more autonomy to line managers. Enhances employee mobility. Reduces the value of ranges. Affords less control. Creates overly broad ranges. Difficult to maintain perception of equity. Reduces the opportunity for promotion. Can lead to divergence from the market. © SHRM

Payroll Functions and Systems Completing paychecks Record keeping and retention Payroll systems Completing paychecks – calculate gross earnings, withholding federal and state taxes, calculating social security and medicare taxes, withholding voluntary and involuntary deductions RECORDS KEEPING – Personal data, hours worked, tax and payroll data including W4 and time cards. Payroll records have to be kept for 3 years. Seven years recommended by tax advisors. PAYROLL SYSTEMS – Manual system, in house server, payroll service provider © SHRM 4-64

Base-Pay Systems Develop a pay determination system that helps attract, motivate, and retain employees. Most employees receive base pay in the form of an hourly wage or salary. $ © SHRM

Single- or Flat-Rate System Employees receive the same rate of pay, regardless of performance or seniority. Typically used for elected jobs in the public sector or union hourly positions. Generally corresponds to target market survey data for the job. There may be a training wage in a flat-rate job. © SHRM

Time-Based Step-Rate System Rate is based on longevity. Pay increases occur on a predetermined schedule. Automatic step-rate Step-rate with variability-based performance Combination step-rate and performance 1 2 3 4 5 © SHRM

Performance-Based/Merit Pay System Individual performance is the basis for pay. Increases are tied to performance and job mastery. Employers must be able to defend performance appraisal methods and differences in salary increases. © SHRM

Productivity-Based System Pay is determined by employee’s output. Straight piece-rate Base wage rate plus additional compensation for output Differential piece-rate One piece rate up to the standard and a higher rate after the standard is exceeded Works best in assembly and manufacturing situations. © SHRM

Person-Based System Employee’s characteristics determine pay. Superior knowledge or skill mastery is rewarded. Knowledge-based (scientists whose pay is based on knowledge in a field or domain) Skill-based (machine operators cross-trained on a variety of production equipment) Competency-based (professionals who excel at defined competencies) © SHRM

A window manufacturer guarantees its installers a base wage plus an extra $25 for each job completed to specifications. The employer is using a A. merit pay system. B. productivity-based system. C. competency-based system. D. flat-rate system. Answer: B © SHRM

Pay Variations Red-circle rates Rates above the range maximum Green-circle rates Rates below the range maximum Pay compression Small differences in pay regardless of experience, skills, level, or seniority © SHRM

Discussion question When can red circle rates happen? What can cause green circled rates? When does a pay compression occur? Red circle rates can happen when long tern employees reach the maximum of their range and have not been promoted or when an employee is bumped down to a lower level job but salary is not reduced. Green Circle rates may occur when an organization is trying out an employee who does not possess all the KSAs for a job. Can also occur when an organization updates its pay ranges. A pay compression can occur when beginning salaries are raised due to an increase in the minimum wage or inflation. Labor market pay levels increase more rapidly than an employer’s pay adjustments. © SHRM

Market-based increases Pay Adjustments Pay adjustment matrix COLAs General pay increase Seniority Lump-sum increases Market-based increases © SHRM

Time-Based Differential Pay Based on when an employee works. Except for overtime, FLSA does not require differential pay. Examples: Shift pay Emergency-shift pay Premium pay Hazard pay On-call or call-back pay Reporting pay Travel pay © SHRM 4-75

Geographic Differential Pay Differentials for labor costs Differentials to attract workers to certain locations Differentials for foreign pay $ $ © SHRM

Incentive Pay Paying for performance beyond expectations. Motivates employees to perform at higher levels. May be a factor when determining overtime pay. 5 Research tax ramifications before implementing any incentive pay plan. © SHRM

Plan criteria Must be in concert with other organizational programs Must be in employee’s line of sight Must have a sunset clause Must incorporate short and long term perspectives An incentive plan to encourage retention of clients should not contradict sales compensation programs that reward the number of new customers Employee must be able to influence the attainment of the goal and see the direct results of their efforts. Should have a defined end © SHRM

Individual Incentive Plans Improve individual performance. Kept separate from base pay. Cash awards Provide extra cash compensation based on performance Examples: lump sum awards, piece rates, commissions Noncash award programs Merit awards used to recognize performance, special contributions, length of service Exampl es: gifts, awards, trips, prizes © SHRM

Group Incentive Plans Gainsharing Group performance Organization shares a portion of the gains realized from group effort. Scanlon, Rucker, and Improshare Group performance Group is rewarded for meeting or exceeding performance standards. Typically, each person receives the same amount as a percentage of pay or flat dollar award. Scanlon - If a suggestion is implemented and successful, all employees usually share in 75% of the savings. the Scanlon plan bonus was calculated on the historical ratio of labor cost to sales value of production. Rucker - A Rucker Plan is a type of gain-sharing plan. It works in this manner: a firm has costs for producing it's service or product. If a firm is able to keep those costs under control, it's profitability will increase. Employee input into how to better decrease costs/improve efficiency is actively encouraged. Resultant costs savings from employee input that increase profitability are shared with employees in some form of bonus. IMPROSHARE - Improved productivity through sharing. Group incentive plan aimed at reducing the cost of production. Workers share a fixed percentage of the savings resulting from production costs coming lower than a pre-established standard cost. © SHRM

Organization-Wide Incentive Pay Plans Profit-sharing plans Allow employees to share in profits. Include cash and deferred profit sharing. Performance-sharing plans Use predetermined criteria and standards to measure results. Create a fund for incentive awards. Can be based on factors such as customer satisfaction and quality. © SHRM

Stock-Based Plans Encourage employees to share in the success of the organization. Stock may be purchased or earned. Organization may facilitate stock purchase through payroll contributions. Organization may structure stock purchase as a form of ERISA-governed qualified retirement plan (ESOP). Nonleveraged ESOPs Leveraged ESOPs ESOP - EMPLOYEE STOCK OWNERSHIP PLANS Nonleveraged ESOP – the employer contributes stock or cash or provides employee discounts to buy stock Leveraged ESOP – the employer borrows money to finance the organization’s stock rather than contribute the cash or stock directly. The stock bought with the loan is allocated to the individual accounts of employees. Over time, the organization makes payments to repay the amount borrowed. © SHRM

Long-Term Executive Incentives SPHR only Stock option plans (ISOs and NQSOs) Stock purchase plans Phantom stock Restricted stock grants Restricted stock units Performance grants SPHR MATERIAL © SHRM

Direct Sales Compensation Straight salary Straight commission Salary plus commission Use when: More time is spent on service than sales. There is a long sales cycle. Goal is to increase volume and control costs. Organization needs to reward behaviors that support strategy. Plan needs to be adaptable. © SHRM

Compensation for Professionals Dual career ladder Allows senior technical personnel to earn as much as management personnel. Maturity curves Correlate pay with time spent in the field. Used for teachers, engineers, and technical personnel. Pay system must reward career progression. © SHRM

Controlling Costs Setting ranges Budgeting Auditing Setting upper and lower compensation bounds. Using compa-ratios to evaluate if policies are being implemented appropriately. Budgeting Top-down approach is best at controlling costs. Auditing Monitoring of expenditures. Controlling costs is a major concern for all organizations and is crucial to their longevity. Setting pay ranges is a way to contain and predict labor costs. © SHRM

Benefits of Qualified Deferred Compensation Plans Allow organizations to recruit and retain employees. Allow people to retire, creating opportunities for others. Provide tax deferrals for plan participants if plans comply with ERISA and IRS Code. Provides income to employees at some future time as compensation for work performed now. Earnings accumulate tax deferred until withdrawn Employees pay taxes on the funds at income tax rates when the benefits are received © SHRM

Characteristics of Qualified Plans Under ERISA, plans must: Be in writing and be communicated to employees. Be established for exclusive benefit of employees/beneficiaries. Satisfy rules concerning eligibility, vesting, and funding. Not favor officers, shareholders, or HCEs. © SHRM

Defined Benefit Plans Benefit amount is based on a formula. Flat-dollar formula Benefit amount is based on a formula. Employer funds the plan and bears the risk. Insured by the PBGC. Flat-dollar formula Career-average formula Final-pay formula Cash balance plan Benefit amount is based on a formula. Employer funds the plan and bears the risk. Insured by the PBGC. Career-average formula Final-pay formula PBGC – Pension Benefit Guaranty Corporation Flat dollar – Plan pays a set dollar amount for each year of service Career-average – Participants earn a percentage of their pay for each year they were plan participants Final pay formula – Benefits based on the average earnings during a specified number of years immediately prior to retirement Cash balance plan – expresses the promised benefit in terms of a hypothetical account balance. Cash balance plan © SHRM

Defined Contribution Plans Benefit amount is based on a formula. Employer funds the plan and bears the risk. Insured by the PBGC. Flat-dollar formula Career-average formula Final-pay formula Cash balance plan Profit-sharing plans Employees and/or employers pay a specific amount per person into the fund. Benefits are determined by amounts contributed and fund performance. Money purchase plans ESOPs Defined contribution are increasingly popular as employers attempt to lower the cost of retirement benefits. Profit sharing plans – Employers make contributions from current and accumulated profits. Money purchase plans – employer’s contribution is a fixed percentage of an eligible employee’s compensation Employee stock-ownership plans (ESOPs) – Provides shares of company stock 401k plans – employee may defer a portion of their compensation pretax. These contributions may or may not be matched by employer. Employee 100% vested in their money. 403b plans – Retirement savings plans for employees of certain tax-exempt organizations. Roth 401k or 403b plans – after tax contributions. Employer contribution must e allocated to a pre-tax account. 401(k) plans;403(b) plans; Roth 401(k)/403(b) plans © SHRM

Other Tax-Deferred Plans Individual retirement accounts (IRAs) Roth IRAs Simplified Employee Pensions (SEPs) Savings Incentive Match Plan for Employees (SIMPLE) 457 plans SEPS – for self employed and small organizations that do not want the administrative complexity of a 401k. SIMPLE – Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an Individual Retirement Account or Individual Retirement Annuity (IRA) set up for each employee (a SIMPLE IRA). 100 employees or less. The 457 plan is a type of non-qualified tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis. For the most part the plan operates similarly to a 401(k) or 403(b) plan most people are familiar with in the US. The key difference is that unlike with a 401(k) plan, there is no 10% penalty for withdrawal before the age of 59½ (although the withdrawal is subject to ordinary income taxation). Also 457 plans (both governmental and non-governmental) can allow independent contractors to participate in the plan where 401(k) and 403(b) plans cannot.[1] 457 plans – allows employees of states, political subdivisions or agencies of states and certain tax-exempt organizations to defer receipt of wages. © SHRM 4-91

529 Plans Referred to as qualified tuition programs (QTPs). Federal tax-free way to save money for college. College savings plan Establishes an account for a future student. May be used at any college. Prepaid tuition plan Locks in future tuition at current price. Used at participating in-state public colleges and universities. © SHRM

Nonqualified Deferred Compensation Plans Provide additional benefits to key executives. Do not qualify for favorable treatment under ERISA. Employees defer reporting income; not subject to the limits placed on qualified plans. Employer contributions are not deductible. Funds are not protected by ERISA or PBGC. Nonqualified plans are unsecured plans and any funds set aside for payment to executives remains subject to the claims of the employer’s creditors. Top hat plan – provides retirement benefits for a select group of management or highly paid employees 457 plan – available to certain tax-exempt nonprofit employers. The employer owns the contributions made until the money is paid to the executive at retirement. Excess deferral plans – Provide additional nonqualified benefit to executive employees whose ocntributions are limited due to limitations on qualified plan benefits. There is no non discrimination testing. Rabbi trusts - Once placed in the trust the money cannot be revoked by decisions of the employer. So as long as the employer's financial position is sound, the money is relatively protected. If, however, the employer goes into bankruptcy proceedings, the money may be subjected to the claims of the employer's general unsecured creditors. Examples: Top hat plans, 457(f) plans, excess deferral plans, rabbi trusts © SHRM

Qualified Domestic Relations Orders (QDROs) Create or recognize the right of an alternate payee to receive all or a portion of pension benefits. Orders must relate to child support, alimony, or marital property rights and must be made under state domestic relations law. Related case: Kennedy v. Plan Administrators for Dupont Savings © SHRM

Global Compensation and Benefits Considerations SPHR only Standardization versus localization Culture Competitive labor market Collective bargaining, employee representation, and government mandates Economic factors Taxation Laws and regulations SPHR ONLY © SHRM

International Compensation Approaches SPHR only Negotiation/ad hoc Pure localization Higher-of-home-or-host-country Home-country-based balance sheet Headquarters-based balance sheet Lump-sum Cafeteria Page 259 Ad hoc – negotiation evolves Pure localization – Pays assignee exactly what local nationals are paid Home-country based balance sheet – Employer pays differential between home-country costs and assignment costs Headquarters based balance sheet – Calculates compensation package for headquarters based employees © SHRM

SPHR only What is the advantage of paying an international assignee a differential between home-country costs and assignment costs? A. It preserves purchasing power regardless of country of origin. B. It requires minimal planning and is easy to administer. C. It is more tax-effective for the employee. D. It gives the international assignee a choice. Answer: A © SHRM

International Benefit Variations SPHR only Benefits that are government-provided Benefits that are government-mandated Benefits that are voluntary (discretionary) Benefits that are market practice Tax treatment of benefits © SHRM

Nonsalary International Benefits SPHR only Social security Paid time off Retirement Severance Health and welfare insurance (health care, disability, and life insurance) © SHRM

Totalization Agreements SPHR only International social security agreements. Eliminate dual social security coverage and taxes for employers and workers. Fill gaps in benefit protection for workers. © SHRM

Evaluating the Compensation and Benefits System Is it in compliance? Is it compatible with the organization’s mission and strategy? Does it fit the culture? Is it appropriate for the workforce? Is it internally equitable? Is it externally competitive? © SHRM

Required Communication ERISA requires: Summary plan description, summary annual report, and summary of material modifications. Filing Form 5500 with the DOL. Other required communications include: FMLA policy. COBRA continuation of benefits notice. Special HIPAA enrollment rights and privacy rights. Medicare Part D notification. PPA notice and disclosure requirements for retirement plans. Explanation of stock options (SEC regulations). Posting of all required federal, state, and local employment laws. © SHRM

Voluntary Communication Communication plans Direct communication © SHRM 4-103

Self-Service Technology Benefits Reduced administrative work for HR. Increased accuracy of employee data. Improved timeliness in information and employee transactions. Reduced dollars spent on other traditional HR delivery channels (e.g., paper-based transactions). Enhanced reputation as a “green,” environmentally conscious employer. © SHRM 4-104