1. Module 4: Compensation and Benefits 19% PHR 13% SPHR
NOTES
4-1: Key Compensation Legislation p. 4-41
4-2: Comp & Benefits – Strategic Focus of the Organization p
4-3: Compensation Structure p
4-4: Compensation Systems p
4-5: Intro to Benefits Programs & Key Benefits Legislations p
4-6: Government Mandated Benefits p
4-7: Deferred Compensation Plans p
4-8: Health Care Benefits p
4-9: Other Nonstatutory Benefits p
4-10: Comp & Benefit Programs for International Employees p
4-11: Evaluating & Communicating the Comp & Benefits System p
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.
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2. Indirect compensation Benefit and recognition programs
Types of Compensation
Compensation and benefits are two of the most visible elements of a total rewards system.
Types of Compensation +
Direct compensation
Indirect compensation
Pay systems
Benefit and recognition programs
NOTES p. 1
This module examines how to develop/select/implement/administer and evaluate comp & benefits programs in support of the organization’s goals, objectives & values.
Total Rewards refers to all forms of financial & nonfinancial returns that employees receive from their employers.
The total rewards system an organization offers goes beyond financial issues & incorporates all aspects of the work environment.
Sample Components of a Total Rewards System - Figure 1, p. 1
Direct Compensation = pay systems
Indirect Compensation = benefit & recognition programs
© SHRM

3. Compensation Legislation
Davis-Bacon Act
Requires prevailing wages/benefits on federal construction projects
Copeland “Anti-Kickback” Act
Precludes federal contractors from inducing employees to give up any part of compensation
Walsh-Healey Act
Extends prevailing wages to federal suppliers
Stipulates overtime pay
Service Contract Act
Requires prevailing wages/benefits on all federal contracts
NOTES p. 6-7
See list of federal legislation that establishes minimum standards related to pay
Davis-Bacon Act, 1931 and related acts. Requires prevailing wages/benefits on federal construction projects in excess of $2,000 each.
The Wage & Hour Division of the DOL issues 2 types of wage determinations:
A general determination defines wage rates & fringe benefits determined by the Wage & Hour Division to be prevailing standards in a specific geographic area for the type of construction described.
A project determination is a wage determination issued at the specific request of a contracting agency.
The law applies to laborers & mechanics who are employed on a particular project. Trainees & apprentices may be paid less than the predetermined rates under certain circumstances.
Copeland “Anti-Kickback” Act, precludes federal contractors from inducing employees to give up any part of compensation
Walsh-Healey Act , extends prevailing wages to federal suppliers & stipulates overtime pay
Service Contract Act, 1965 – extended prevailing wages/benefit requirements to employers providing services (other than construction services which are covered by Davis-Bacon) under federal government contracts in excess of $2500 each. According to the act, service employees include guards, watch persons, & people engaged in a recognized trade or craft.
© SHRM

4. 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.
NOTES p. 7
Fair Labor Standards Act (FLSA), 1938 established a national minimum wage, guaranteed time and a half for overtime in certain jobs, & prohibited employment of minors in “oppressive child labor”.
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
KEY POINT p. 7
FLSA Compliance Requirements applies to organizations with employees who
Engage in interstate commerce
Produce goods for interstate commerce
Handle, sell, or work on goods or materials that have been moved in or produced for interstate commerce
KEY POINT p. 8
Employee Status vs. Independent Contractor Status
An employer has no ongoing obligations under FLSA to self-employed independent contractors. Therefore, it is critical that the organization clearly identify which of its workers are employees (covered by FLSA regulations) and which are independent contractors (not covered by FLSA regulations).
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5. 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
NOTES p. 9
Answer: A
The distinction between employees (who received Form W-2 for tax reporting purposes) & independent contractors (who receive Form 1099 for tax reporting purposes) is not philosophical or always apparent. Titles or labels affixed to particular workers are often misleading & should not be relied upon to determine a worker’s classification. The following are some critical tests for an independent contractor:
Having the ability to set own hours & determine sequence of work
Working off-site
Working by the project rather than having a continuous relationship with the employer
Being paid by the job (rather than by the hour or pay period)
Having the opportunity for profit & loss
Furnishing own tools & training
Being self-employed and holding oneself out as such
In a Wage & Hour Division Opinion Letter, the DOL considered the following factors when determining a contractor relationship:
The nature & degree of control retained or exercised by the alleged employer
The amount of the alleged contractor’s investment in facilities & equipment
The permanency of the relationship
Opportunities for profit & loss by the alleged contractor
The extent to which the services in question are an integral part of the alleged employer’s business
The degree of independent initiative, judgment, & skill required to perform the work
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6. IRS Independent Contractor Test
Behavioral control
Financial control
Type of relationship
NOTES p. 9
In determining contractor status, the IRS uses the 20 Factor test which can be characterized in 3 main groups:
Behavioral Control – facts that show if the organization ahs the right to direct & control how the worker does the task for which the worker is hired include the type & degree of the following
Instructions the organization gives the worker
When & where to do the work, What tools/equipment to use
What workers to hire/assist with the work, Where to purchase supplies & services
What work must be performed by a specific individual, What order or sequence to follow
Training that the organization gives the worker
Financial Control
Extent to which the worker has unreimbursed business expenses
Extent of the worker’s investment
Extent to which the worker makes services available to the relevant market
How the organization pays the worker
Extent to which the worker can realize profit or loss
Type of Relationship
Written contracts describing the relationship the parties intended to create
Whether the organization provides the worker with employee type benefits (insurance, pension, vacation/sick pay)
Permanency of the relationship
Extent to which services performed by the worker are a key aspect of the regular business of the organization
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7. 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.
NOTES p. 12
Exempt vs. Nonexempt Employees - once the employer has determined that a worker is an employee & is covered by the FLSA, the next step is to determine if the employee is exempt or nonexempt as defined by FLSA
KEY POINT p. 12
The exempt/nonexempt distinction is important. Under FLSA:
Exempt employees are excluded from the minimum wage & overtime pay requirements of the law.
To qualify for exemption, these employees must work in a bona fide manner in, for example, executive, administrative, professional, and outside sales positions.
In general they must meet certain tests regarding their job duties & must be paid on a salary basis at not less than $455 per week ($23,660 per year)
Nonexempt employees are not excluded from minimum wage pay requirements & are entitled to overtime pay
Most workers who are paid less than $23,660 are guaranteed minimum wage & overtime protection
Any worker compensated on an hourly basis is automatically considered a nonexempt employee under the FLSA, except for certain computer employees
Before determining an employee’s exemption status, employers should also refer to the applicable state law as many states have their own differing versions of the federal FLSA
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8. FLSA Exemptions An exempt employee must meet three requirements.
Minimum salary
Paid on a salary basis without improper deductions
Exempt duties
NOTES p. 13
KEY POINT p. 13
FLSA Exemptions – generally in order for an employee to be exempt, three requirements must be met:
Minimum salary
Paid on a salary basis (without improper deductions)
Exempt duties
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9. 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.
NOTES p. 13
Primary duty is the main or most important duty of the position and is an important part of the FLSA exemption.
Although no particular % of exempt duties is required under FLSA, the lower the total % of exempt duties, the greater the legal risk to the employer if challenged by the DOL.
If more than 50% of time is spent performing exempt work, the employee is more likely to be considered exempt.
White Collar Exemptions issued by the DOL in 2004 and include the following categories of employees which may be considered exempt from overtime pay if they meet the requirements of the associated exemption test
Executive
Administrative
Professional
Computer
Outside sales
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10. 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.
NOTES p. 14
To qualify for the executive exemption, the employee must
Have a primary duty involving management of an organization or a customarily recognized department or subdivision of the organization
Customarily & regularly direct the work of at least 2 or more other full-time employees or their equivalent
Have the authority of the employer to hire or fire other employees, or the employer gives the employee’s suggestions & recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees particular weight
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11. 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.”
NOTES p. 14
To qualify for the administrative exemption, an employee must have a primary duty involving performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.
It must include the exercise of discretion & independent judgment
The regulations also attempt to clarify “matters of significance”, noting that the phrase refers to the level of importance or consequence of the work performed.
Example: internal auditor of a firm who rune s one person department & reports directly to the board of directors
KEY POINT p. 14
An employee does not exercise discretion & independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly or because the employee operates very expensive equipment.
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12. 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.
NOTES p
The professional exemption is divided into 2 categories: learned professionals & creative professional
Learned professional exemption encompasses jobs with a primary duty of the performance of work requiring advanced knowledge, defined as work predominantly intellectual in character & including work requiring the consistent exercise of discretion & judgment.
The advanced knowledge must also be in a field of science or learning & is customarily acquired by a prolonged course of specialized intellectual instruction.
Specialized Intellectual Instruction requirement restricts the exemption to professions where specialized academic training is a standard pre-req for entrance into a profession
The min salary & salary basis requirements for this exemption do not apply to doctors, lawyers, & teachers
KEY POINT p. 15
The exemption is not available for occupations that are usually performed with general knowledge acquired by an academic degree in any field or knowledge acquired through an apprenticeship or for occupations in which most employees acquire their skill by experience. Doctors, lawyers, teachers, engineers, scientists, pharmacists, dental hygienists, accountants, architects, theologians & registered or certified medical technologists are among the occupations that will usually meet the requirements of the learned professional exemption.
The creative exemption requires an employee meet min salary requirements & must have a primary duty performing work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor
KEY POINT p. 16
This exemption includes fields such as music, writing, acting & graphic arts. Journalists may qualify for this exemption if their primary duty is work requiring invention, imagination, originality or talent. This may include investigative interviews, writing editorials, opinion columns, or other commentary, analyzing or interpreting public events, & performing on the air in radio television or other electronic media.
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13. 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.
NOTES p. 16
The regulations also provide a special exemption for highly compensated employees
KEY POINT p. 16
Highly compensated employees performing office or non manual work & paid total annual compensation of $100,000 or more (which must include at least $455 per week aid on a salary or fee basis) are exempt from the FLSA if they customarily & regularly perform at least one of the duties of an exempt executive, administrative, or professional employee identified in the standard tests for exemption
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14. 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.
NOTES p. 16
KEY POINT p. 16
Computer employees must meet the salary minimum but may do so with either a $455 per week salary or $27.63 per hour. If the employee is paid salary rather than hourly basis, the employee’s pay cannot be subject to deductions inconsistent with the salary basis requirement. Additionally, the employees primary duties must fall into 1 of 4 categories.
Application of systems analysis techniques & procedures
Design, development, documentation, analysis, creation, testing, or modification of computer systems or programs
Design documentation, testing, creation, or modification of computer programs related to machine operating systems
A combination of these duties
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15. 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.
NOTES p. 17
To qualify for the outside sales exemption, an employee must:
Have a primary duty involving making sales (as defined by FLSA) or obtaining orders or contracts for services or for the use of facilities for which consideration will be paid by the client or customer
Customarily & regularly engaged away from the employer’s place or places of business
KEY POINT p. 17
Outside sales employees are not subject to the minimum salary & salary basis requirements needed to qualify for other exemptions
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16. 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.)
NOTES p. 17
Employers that make improper deductions from an otherwise exempt employee’s salary will lose the exemption if facts demonstrate that employer did not intend to pay employees on a salary basis
The regulations list a number of factors to consider for purposes of making improper deductions.
For example, an exempt employee’s pay cannot be subject to deduction for illness or disability in less than full-day increments.
The only narrow exemption to this is absence due to a serious health condition or other qualifying event covered by FMLA
If facts demonstrate that the employer has an actual practice of making improper deductions, then the employer loses the overtime exemption for all employees in the same job classification working under individuals responsible for the improper deductions during the time period in which the improper deductions were made.
© SHRM
4-16

17. 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.
NOTES p
KEY POINT p. 18
A safe harbor provision prevents an employer from losing an overtime exemption for improper pay deductions-regardless of the reason-where the employer:
Has a “clearly communicated policy” that prohibits improper pay deductions & includes a complaint mechanism (a written policy is not required)
This standard could be met by providing a copy of the policy to all newly hired employees, by publishing the policy in an org handbook or
Reimburses employees for any improper deductions
Makes a good-faith effort to comply in the future
Blue-collar workers are defined as those who perform work involving repetitive operations with their hands, physical skill & energy. The DOL has stated that individuals in these positions will not be exempt no matter how highly they are compensated.
DOL has stated that military training is generally not sufficient to meet the requirements of the professional exemption. This is because the learned professional exemption applies only to employees in occupations that have attained recognized professional status.
Specific Jobs The regulations provide several examples of positions that qualify for overtime & those that are exempt. See list on p. 19
KEY POINT p. 19
Each of these provisions states that exemptions are based not on job titles but on job duties, so while the specific jobs listed are likely to fall into the category suggested by DOL, case-by-case assessment is still necessary. The job description is a key document for determining FLSA status & must be kept up to date to ensure accurate reflection of job duties.
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18. 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).
NOTES p. 20
A workweek is any fixed, recurring period of 168 consecutive hours (7 days x 24 hours=168 hours). An employer’s work week may begin on any day of the week & must be consistent from week to week. An employer may have different workweeks for differetn locations and/or classifications of employees.
© SHRM
4-18

19. 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
NOTES p. 21
Answer: D
To calculate the total pay for the week, you must add the bonus to the hours worked at base pay (45  $10/hour = $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
Time worked as it applies to overtime. Since overtime covers only time actually worked, a key question is when the work day actually begins & ends. If the employee is preparing to work but not doing anything productive, do these hours need to be included in the overtime calculation?
Portal-to-Portal Act – addendum to FLSA which defines general rules around “hours worked”.
Employers “shall not permit” employees to work overtime without payment of an OT premium. Employer cannot use as defense that employee volunteered to work overtime & should require management approval prior to working overtime. If a nonexempt employee works unauthorized OT, they must be paid for that time and may be subject to discipline.
KEY POINT p. 21
FLSA also stipulates that nonexempt employees are fully relieved of duties during lunch/other breaks & that they must also be of the length of time required under federal & state law. For example, nonexempt employees who answer business s during lunch may be owed compensation for not only the time worked but for the entire break period. While owed compensation, the employee may be also subject to discipline.
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20. $ Compensatory Time Overtime usually must be paid in cash.
Public-sector employers may grant compensatory time off.
Public employees can accumulate “comp” time.
NOTES p. 22
KEY POINT
Compensatory time as it applies to OT In general, OT must be paid in cash. Presently, compensatory time is not allowed for nonexempt employees in the private sector. However, public sector employers may grant compensatory time off (comp time) instead of cash in certain circumstances.
Public safety employees (police/firefighters) individuals engaged in certain emergency response activities & certain seasonal employees can accumulate up to 480 hours of compensatory time. Other public employees can accumulate up to 240 hours of compensatory time.
Presently, compensatory time is not allowed for private-sector nonexempt employees.
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21. FLSA Child Labor Provisions
Restrict hours and conditions of employment for minors.
NOTES p. 22
Child Labor Provisions FLSA restricts the hours & conditions of employment for minors. It protects children under 18 years of age from “oppressive” conditions of employment.
Employers should obtain a proof-of-age certificate approved by the Wage & Hour Division of the DOL (usually issued by appropriate state agency). The general rule is that minors are not allowed to perform tasks that may be detrimental to their health or physical or mental safety.
In all cases, when state & FLSA regulations differ, the regulation that most benefits the employee takes precedence.
2010, DOL published a final rule on nonagricultural child labor. See bullets on p.23
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22. 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
NOTES p. 24
Fair Minimum Wage Act signed into law in In three phases, raised the minimum wage to $7.25 per hour by July Min wage applies to all employees who meet criteria set by FLSA. FLSA also requires employers to pay covered nonexempt employees at least the federal minimum wage for all hours worked up to 40 in a work week. Exceptions:
Employees younger than 20 years old, during their first 90 consecutive calendar days of employment
Tipped employees
Full-time students employed in retail or service establishments, agriculture, or higher ed institutions
Student learners who are at an accredited school, college or university, at least 16 years old & employed part-time to a bona-fide vocational training program, but only if employer obtains a student learner certificate from the appropriate regional office of the DOL Wage & Hour Division
Workers whose earning or productive capacity is impaired by physical or mental ability
Employers need to display the DOL’s “Federal Minimum Wage” poster.
KEY POINT p. 26
Penalties An employer who violates FLSA’s requirements to pay overtime is liable to an employee in the amount of the unpaid OT as well as an additional, equal amount as liquidated damages. The statue of limitations under FLSA is generally 2 years but can be expanded to 3 years if there has been willful violation by the employer.
Employee also entitled to recover reasonable attorney’s fees, etc.
Employee may not bring suit if he or she has been paid back wages or if the secretary of labor has already filed suit to recover the wages
Criminal penalties of not more than $10,000 & 6 months imprisonment ay also be imposed for certain willful violations
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23. 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.
Travel time.
Training time.
NOTES p. 27
The Portal-to-Portal Act amended the FLSA & defined general rules for hours worked. Frequent claims for OT arise from periods before and after work as well as work taken home by nonexempt personnel. Many of these situations continue to be determined case by case in the courts.
KEY POINT p. 28
On-call/Standby Time If the employer restricts employee’s activities & does not allow any personal business, then the hours are included in overtime. The FLSA does not require employers to pay overtime when an employee is off the premises and on call as long as the employee generally is not otherwise restricted.
Federal district courts may differ in their interpretation. Generally, the more restricted an employee’s freedom is, the more likely the time will be considered compensable working time.
Preparatory/concluding activities
Waiting Time
Meals & Breaks
Travel Time
KEY POINT p. 30
Employee Commuting Flexibility Act of 1996 clarifies that commuting time is not paid work time, even when the employee is using an organization vehicle. However, nonexempt employees who drive vehicles that contain essential tools or equipment of the employer from their homes to work sites may be working while traveling & should receive travel pay. Travel from home to a customer’s site in response to an emergency call after the regular workday is work time.
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24. Travel Pay
NOTES p. 30
Travel to work related meetings is compensable & travel out of town may also comprise work. For out of town travel, time spent traveling to and from the airport or other transportation in the morning & evening may be the equivalent of the home-to-work commute
KEY POINT p. 30
Training Time is generally included in the calculation of hours worked. However, time spent at a conference, meeting, or seminar does not have to be compensated if 4 conditions are met
Attendance is voluntary
Attendance is outside of employee’s regular work hours
The event is not directly job related
The employee performs no productivity work during this period
Example: non-English speaking employees who do not need to communicate in English to do their jobs voluntarily take English as a second language during non work hours & perform no productive work during that time – not compensable under FLSA
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25. Equal Pay Act (EPA) Mandates equal pay for equal work. NOTES p. 31
Skills
Effort
Responsibility
Working Conditions
NOTES p. 31
KEY POINT
The Equal Pay Act of 1963, technically is an amendment to FLSA. Prohibits unequal pay for equal or “substantially equal” work performed by men and women. Once a pay disparity is established between a male worker & female worker performing substantially equal jobs, the burden of proof shifts to the employer to justify its actions.
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26. 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.
NOTES p. 32
Answer: C
Equal Work is defined by the following factors that must be equal:
Skills
Effort
Responsibility
Similar working conditions in the same establishment
KEY POINT
The law does not address comparable worth, a theory that goes beyond pay equity. Comparable worth deals with pay differentials between men & women who perform comparable – but not equal- work.
Looks at different jobs that women & men hold that require comparable skills, effort, responsibility, & working conditions
For example, according to the theory of comparable worth, clerical workers (who are primarily female) should be in the same salary range as parking lot attendants (who are primarily male)
Although Equal Pay Act does not require consideration of comparable worth, some states require all public jurisdictions such as school districts to eliminate any gender-based wage inequities.
KEY POINT p. 33
Exceptions – the employer can defend its pay disparity by showing that it was based on:
Seniority system
Merit system
Difference in the quality or quantity of work
Geographic work differentials
Any factor other than gender
Age Discrimination in Employment Act – as with the Equal Pay Act, seniority systems that use factors other than age are permissible means for differentiating pay among employees. However, a pay for performance system must not be discriminatory against older workers.
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27. 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 12 categories.
NOTES p
The Work Opportunity Tax Credit is a federal tax credit that encourages employers to hire people from targeted groups of job seekers
Tax Relief & Health Care Act of was combined into the WOTC & eliminated the Welfare-to-Work Tax Credit (encourages employers to hire long-term welfare recipients). It also updated the target group categories.
WOTC is federally administered by the DOL’s Employment & Training Administration (ETA) and the IRS
12 categories
Long-term TANF
Other TANF recipients
Qualified veterans
Qualified food stamp recipients
Designated community residents
Summer youth employees
Vocational rehabilitation referrals
Qualified ex-felons
Supplemental Security Income (SSI)
Hurricane Katrina employees
Unemployed veterans
Disconnected youths
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28. Additional Compensation Legislation
Lilly Ledbetter Fair Pay Act
States that the statute of limitations on pay discrimination lawsuits resets as each allegedly discriminatory paycheck is issued
Dodd-Frank Wall Street Reform and Consumer Protection Act
States required communications related to executive compensation at publicly traded companies
IRS Intermediate Sanctions
Provides guidelines regarding the determination of reasonable compensation for executives of nonprofit organizations
NOTES p. 35
Additional Compensation Legislation
Lilly Ledbetter Fair Pay Act - states that the statute of limitations on pay discrimination lawsuits resets as each allegedly discriminatory paycheck is issued
Dodd-Frank Wall Street Reform and Consumer Protection Act - states required communications related to executive compensation at publicly traded companies
Clawback Provision - recouping incentives paid to executive officers in the event of any financial restatement based on executive misconduct.
The Sarbanes-Oxley Act introduced the concept of 'clawbacks,' which are designed to accomplish recouping incentives paid to executive officers in the event of any financial restatement based on executive misconduct.
Dodd-Frank essentially has required companies to both adopt and disclose the company 'clawback' policies. 
IRS Intermediate Sanctions - provides guidelines regarding the determination of reasonable compensation for executives of nonprofit organizations
Severe penalties include
An initial penalty as high as 25% of the “excess benefit”
Further penalties equal to 200% of the excess benefit may be assessed if the transaction is not corrected in a timely manner
Additional penalties may be assessed by the IRS
See Figure 7, Key Legislation Affecting Compensation p. 37
8 Progress Check Questions p. 39
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29. Objectives of a Compensation and Benefits System
Compatible with mission and strategy
Compatible with organizational culture
Appropriate for the workforce
Externally and internally equitable
Effective for recruiting and retention
4-2: Comp & Benefits – Strategic Focus of the Organization p
Compensation & benefits play a critical role in every organization.
A well designed system helps attract, motivate & retain the best employees
Must be legal & affordable with an approach for compensating employees that is
Compatible with the organization’s mission & strategy
Compatible with the organizational culture
2 basic approaches toward employees
Entitlement-oriented
Contribution orients
Appropriate for the workforce
Organization with primarily entry-level/unskilled workers vs. experienced, highly educated employees
Externally & internally equitable
Effective in the recruitment & retention of employees
KEY POINT p. 47
For pay purposes, there are at least 3 primary factors that define the relevant labor markets. Organizations compete for employees with other organizations who share their
Industry – have similar products or services
Occupation – employ workers with the same experience or skills
Location – employ workers in the same geographical area
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30. External Equity
Compares an organization to other organizations that share its industry, occupation, or location.
Organizations may decide to:
Lag Match Lead
NOTES p. 47
Compares an organization to other organizations that share its industry, occupation, or location.
Organizations may decide to:
Match the market – most common approach & typically equates to the 50th percentile of the market
Lead the market – when using salary data, typically equates to 75th percentile of the market
Lag the market – out of economic necessity or to control labor costs. Typically equates to the 25th percentile of the market
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31. Internal Equity NOTES p. 48 4 Progress Check Questions p. 50
Meets employees’ needs for a fair wage and adequate benefits.
Recognizes employees’ contributions to the organization.
Rewards equal work with equal pay.
Does not discriminate against protected classes.
NOTES p. 48
Internal Equity An organization cannot effectively recruit new employees or retain without internal equity.
Employees need to see a basic correlation between what they bring to the organization in the way of education, experience, productivity & other skills & how the organization rewards them or what the organization provides to them.
Internal Equity means that unique jobs are appropriately compensated by the organization as performances or job differences result in corresponding differences in pay rates. Having internal equity helps the employer:
Meet employees’ needs for a fair wage & adequate benefits
Recognize employees’ contributions to the organizations
Reward equal work with equal pay
Not discriminate against protected classes
4 Progress Check Questions p. 50
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32. Job Evaluation
Determines the relative worth of each job by establishing a hierarchy.
Follows job analysis, which focuses on job descriptions and specifications.
4-3: Compensation Structure p
Job Evaluation is a systematic determination of the relative worth of jobs within the organization. The job evaluation process determines the relative worth of each job by establishing a hierarchy of jobs. Job evaluations are done after job analysis, which focuses on job descriptions & specifications.
Job evaluation supports the need for the comp & benefits system to further the organization’s strategic objectives & is intertwined with concern for equity pay
Understanding the markets in which they operate & using data gained through surveys help organizations maintain external equity
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33. Job Evaluation Methods
NOTES p. 54
Job Evaluation Methods
KEY POINT p. 54
Job evaluation methods can be either nonquantitative or quantitative:
Nonquantitative methods try to establish a relative order of jobs
Job-to-job comparison – job ranking
Job-to-predetermines standard comparison – job classification
Quantitative methods try to establish how much more one job is worth compared to another job by using a scaling system
Job-to-job comparison – Factor comparison method
Job-to-predetermines standard comparison – point factor method
KEY POINT p. 55
Nonquantitative methods are often referred to as whole-job methods, as they evaluate the entire job & place different jobs in hierarchical order without a numeric value being assigned to each job. As a result, one can tell that Job A is valued more the Job B but not how much more it is valued
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34. 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
NOTES p. 55
Nonquantitative (Whole-Job) Evaluation - two common methods are job ranking & job classification
KEY POINT p. 55 Job Ranking involves establishing a hierarchy of jobs from lowest to highest based on each job’s overall value to the organization. Ranking evaluates the whole job rather than parts of it & compares one job to another.
Paired-comparison method may be used in which each job is compared with every other job being evaluated. The job with the largest number of “greater than” rankings is the highest ranked job, and so on. A matrix is used to compare all possible pairs of jobs. To make the comparison, you would:
Select the jobs to be rated
Compare each job to the other jobs & indicate the favorable comparison
Total the favorable comparisons
Rank jobs
Compare rankings
Job ranking is a fairly quick, inexpensive job evaluation method & is easily explained to managers & employees.
May not be clear why one job is valued over another & there may not be much differential between jobs making the ranking ineffective
Not usually feasible when evaluating a large # of positions
KEY POINT p Figure 9 ,Job Class Descriptions for the General Schedule
Job Classification involves grouping jobs into a predetermined # of grades, each having a class description to use for job comparisons. The best known classification system is the General Schedule (GS) system used by the federal government.
KEY POINT p. 57 Benchmark Jobs have the following characteristics:
Essential functions, KSAs are well known, relatively stable & agreed to by employer
They represent the entire range of jobs in the hierarchy to be evaluated
Sizable portion of the workforce is employed in these jobs
The jobs are common across o number of different employers
External pay rate for the jobs are an acceptable basis for setting wages
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35. 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
NOTES p. 57
KEY POINT
Quantitative job evaluation methods
Evaluate specific factors on a scale
Provide a score that indicates how valuable one job is compared to another
Examples of quantitative methods include
Point Factor Method – less complex, most commonly used
Factor comparison method – most complex, less commonly used
KEY POINT p. 61
The Factor Comparison Method is more complex than ranking, classification or point factor method & is rarely used. It involves the ranking of each job by each selected compensable factor & then identifying dollar values for each level of each factor to develop a pay rate for an evaluated job.
Factor Comparison Method is best used in the limited instances when wages are steady over time & the organization uses a flat rate for each job.
It is sometimes used as part of a labor contract
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36. 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.
NOTES p. 57
Point Factor Method – less complex, most commonly used
Uses specific compensable factors to evaluate relative job worth
Compensable factors reflect dimensions along which jobs are perceived to add value to the organization. They flow from the work itself & the strategic direction & culture of the organization
Two examples of systems used to identify compensable factors:
Hay Plan (Guide Chart Profile Method) – uses a standardized set of compensable factors such as know-how, problem solving & accountability
Factor Evaluation System – developed by the US govt. in the 1970s. Includes such factors as knowledge required, supervisory controls, guidelines, complexity, scope & effect, personal contacts, purpose of contacts, physical demands & the work environment
KEY POINT p. 58 Although the factors selected for point–factor job evaluation vary among organizations, the compensable factors included in Equal Pay Act & Title VII of Civil Rights Act should be addressed:
Skill
Responsibility
Effort
Working conditions
Supervision of others
The compensable factors should:
Reflect the actual work being done
Be supported by documentation such as job descriptions
Reinforce the organization’s strategic plan & culture
Be valued by all affected parties (stakeholders)
Be reviewed annually
Figure 10, Analysis of Skill Factor, p. 59
Figure 11, Points Related to All Compensable Factors, p. 59 (example of analysis results)
Figure 12, Points Assigned to Job C, p. 60 (example of job factors for one job)
Figure 13, Final Results of Point-Factor Analysis, p. 60
Figure 15, Job Evaluation Methods Comparison, p. 62
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37. 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.
NOTES p. 63
Market Based Evaluation evaluating jobs on the basis of their external market value
Not a true job evaluation system, but market rates can be used to develop a job-worth hierarchy
Jobs are priced in the labor market in which the organization wants to be competitive
Prevailing rates are used to represent the value/worth of the jobs
Once a hierarchy is developed around benchmark rates, the remaining jobs are typically placed into the whole-job comparisons to benchmark jobs
Important that job titles not be used for point of reference when matching jobs, instead should compare duties, scope, & reporting relationships because job titles can be misleading. Job matches can be
Focused on the industry or on the specific job
Within markets of the same size, profitability, sales/assets, geographic area, or industry
Local, regional, or national
Matches often derive from the markets to or from which an org attracts or loses talent
Figure 16, Advantages & Disadvantages of Market-Based Evaluations, p. 63
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38. Pay Surveys
NOTES p. 65
Figure 17 shown on slide, Continuum of Pay Surveys p. 65
Pay Surveys - to be competitive & affordable, pay structures must be designed & priced properly. Many organizations rely on surveys as systematic way to collect information to help them evaluate/classify positions, adjust pay structures to remain competitive & present salary info to top management.
Pay surveys collect info on prevailing market pay rates & often include topics such as starting wage rates, base pay, pay ranges, overtime pay, shift differentials
Internal vs. External Surveys p once an organization decides there is a need for a market pay survey, must also make a decision as to how the survey should be designed & conducted. It may develop & conduct an internal survey or it may look to an external source.
Internal Surveys – when an org has available resources & expertise & wants maximum control over the survey technique & data analysis, they may choose to sponsor a custom survey. Advantage is ability to tailor the design, administration, data analysis & reporting to the specific needs of the organization
Should contract with an outside/independent consultant to design the survey and process confidential data.
Also ensures compliance with the Dept of Justice anti-trust guidelines
External Surveys – many options available if using an external pay survey that is already available. National surveys of many jobs & industries are widely available through the US DOL & the BLS. If using externally published data, must understand how the data was generated & when.
Choosing between internal & external surveys – key considerations
Internal time & expertise required
Relevance/match of external surveyed jobs to the organization’s jobs
How current the external survey data is
The need for independent, credible findings
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39. 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.
NOTES p. 65
Data Analysis – organizations analyze survey data based on the circumstances of their market, product, & employees.
Survey data must first be verified & 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
KEY POINT p. 66
When salary data is aged, movement trends in market rates are used to adjust outdated salary data.
EXAMPLE - if pay increases are averaging 3% per year, & we use a salary data point from one year ago, we would increase that number by 3% to account for movement of salaries through time.
If a job on survey is similar but not identical to a job in the organization, the data can be weighted/leveled for a better match.
EXAMPLE - if an organization’s benchmark job is at a supervisory level and it has less responsibility than the survey’s manager level benchmark, the organization may adjust the surveyed wage by a percentage to accommodate the differences
Some salary surveys do not provide data for a specific geographic area. Since wage rates typically will vary by location, an organization should factor for geography any national survey data for the local recruiting area to approximate local wages.
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40. 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
NOTES p. 66
Sorting Salary Data
Frequency Distribution & Tables – are used to sort salary data gathered from several salary surveys.
Frequency distribution is simply a listing of grouped data, from lowest to highest
Frequency table shows the number of incumbents who receive a particular survey
Figure 18 Frequency Distribution & Table (for a set of data) p. 67
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41. 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
NOTES p. 67
Salary Data: Measures of Central Tendency - measures of central tendency are another way to analyze pay survey data
Unweighted/raw average gives equal weight to every salary in the survey with no regard for other factors (such as the # of incumbents)
Is used when participants provide only the average salary data for a particular job rather than actual incumbent salaries
Weighted average/weighted mean considers the number of people (incumbents) who receive each salary
Figure 19 Salary Data for Unweighted & Weighted Average Figures p. 68
Median - is the middle number in the range – 50th percentile
Mode - is the most frequently occurring wage
Unweighted Average = $65,000
Weighted Average = $65,909
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42. Quartiles and Percentiles
Show how groups relate to each other.
Show if an organization leads, lags, or matches the job market.
NOTES p. 69
Quartiles & Percentiles
Show dispersion, or how groups of data relate to each other
Organizations use quartiles & percentiles to determine if they lead, lag or match the external market.
See example in Figure 18, Quartiles p. 69
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43. 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.
NOTES p. 69
Creating Pay Structures
Once survey data is gathered & relative internal job values are established, the pay structure for an organization can be developed. This involves establishing pay grades & then calculating pay ranges
KEY POINT p. 69
Pay grades are used to group jobs that have approximately the same relative internal or external worth, i.e. all jobs within a particular grade are paid the same rate or within the same pay range
There are no fixed rules, the # of pay grades varies in response to
Size of the organization
Vertical distance between the highest & lowest level job
How finely the organization defines jobs & differentiates between them
Pay increase & promotion policy of the organization
Slope of the pay policy line
Admin efficiency concerns
KEY POINT p. 70
Pay Ranges set the upper & lower bounds of possible compensation for individuals whose jobs fall in a pay grade & pay ranges are created for each grade
Market data is used to establish the midpoint of the pay range
The midpoint will vary depending on admin considerations such as promotion & pay increase policy
The org then creates pay range minimums & maximums that reflect both organizational philosophy & the market data used to create the range midpoint
Range Spreads – to calculate the range spread for the job, subtract the range minimum from the range max & then divide by the range minimum. Typical range spreads:
Nonexempt positions – 40%
Exempt Positions – 50%
Exec positions – 60%
Figure 22 Sample Exempt Pay Structure p. 71
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44. 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.
NOTES p. 71
KEY POINT
Compa-Ratios – when pay ranges are based on target market rate, compa ratios are an indicator as to how actual wages match, lead, or lag behind the target market.
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%.
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45. 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%
NOTES p. 72
Answer: C
The midpoint is $10. Divide the pay rate by the midpoint ($9 ÷ $10 = .9 or 90%).
KEY POINT p. 72
Compa-Ratios below 100% (expressed as a compa-ratio of less than 1.00) mean that employees are paid less than the midpoint. This may occur when an employee is
New to the organization
A poor performer
Working for an organization that adopts a lag strategy with regard to pay
Compa-Ratios above 100% (1.00) means that wages exceed the midpoint. This is likely to occur when
An org adopts a lead pay strategy
Managers are not following salary increase policies
Employees are long-tenured and/or high performers
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46. Broadbanding Combines several salary grades or job classifications.
NOTES p. 73
KEY POINT p. 73
Broadbanding
Some organizations have found that when too many grades (with small midpoint differences between them) are established, the compensation system becomes overly complex & increasingly unmanageable.
Broadbanding is a way to combine several salary grades or job classifications with narrow pay ranges into one band with a wider range spread.
Has been successfully implemented in large, hierarchical organizations that want to flatten the organization & remove levels of management
Example – an org with 8 levels of management could eliminate 4 levels, widen the salary ranges f the remaining 4 levels and simply slot each manager into one of those ranges
This means the market data is driving the salary ranges but the organization has collapsed the levels for sake of simplicity & manageability
Figure 23 Broadbanding p. 73
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47. 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.
NOTES p. 74
Broadbanding Advantages & Disadvantages
Despite the advantages, many organizations have trouble aligning Broadbanding with their compensation philosophy.
Example – orgs with large # of professionals often have career ladders with many levels & it can be unwise to collapse if they serve as a way to acknowledge & reward employee growth
Figure 24 Advantages 7 Disadvantages of Broadbanding p. 74
8 Progress Check Questions p. 75
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