1

Compensation, Benefits,
and Work Experience
2

Table of Content
Introduction ................................................................................................................. 3
Table of Content ......................................................................................................... 4
Part One: Total Rewards ................................................................................................. 8
1. Compensation Design ...................................................................................... 8
1.1. Total Rewards ............................................................................................ 9
1.2. Administration and Optimization........................................................... 10
1.3. Strategic Reward ..................................................................................... 11
1.4. Individual Differentiation ....................................................................... 12
1.5. Market Conformity (Competitiveness) .................................................. 13
1.6. Internal Consistency (Equity) ............................................................... 14
2. Total Reward Approach .................................................................................. 15
2.1. Fixed Pay ..................................................................................................... 16
2.2. Variable Pay ................................................................................................ 17
2.3. Benefits ................................................................................................ 18
2.4. Work-Life Balance ................................................................................ 20
2.5. Other Elements of Total Rewards ........................................................... 20
3. Compensation Administration ........................................................................ 21
4. Job Evaluation ............................................................................................... 23
4.1. Objectives of Job Evaluation ................................................................ 23
4.2. Aspects of Job Evaluation .................................................................... 24
4.3. Job Evaluation Methods ....................................................................... 24
5. Remuneration Surveys .................................................................................. 28
5.1. Purposes of Remuneration Surveys..................................................... 28
5.2. Market Select ....................................................................................... 29
5.3. Data Collect ......................................................................................... 29
5.4. Data Analysis ....................................................................................... 31
6. Pay Structure ................................................................................................. 32
6.1. Terms and Definitions........................................................................... 32
6.2. Global Salary Grades ........................................................................... 35
6.3. Global Pay Structure ............................................................................ 35
7. Strategic Rewards.............................................................................................. 37
8. Individual Differentiation ................................................................................. 39
8.1. Entitlement Orientation......................................................................... 39
8.2. Performance Orientation ...................................................................... 40
9. Market conformity .......................................................................................... 41
10. Internal Consistency..................................................................................... 41
10.1. Red-Circled Employees ...................................................................... 42
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10.2. Green-Circled Employees .................................................................. 43

10.3. Pay Compression ............................................................................... 44
10.4. Pay Increases ..................................................................................... 44
11. Job vs. Person Based Pay.................................................................................. 46
11.1. Paying for the job ............................................................................... 47
11.2. Paying the person .............................................................................. 49
12. Compensation Communications .................................................................. 50
12.1. Goal of Compensation Communication .............................................. 50
12.2. Timing of Compensation Communication ........................................... 51
12.3. Information of Compensation Communication ................................... 51
12.4. Total Reward Statement ..................................................................... 52
Part Two: Incentive Programs ................................................................................... 53
1. Incentive Compensation ................................................................................ 53
1.1. Principle of Incentive Plan .................................................................... 53
1.2. Line of sight .......................................................................................... 54
1.3. Individual Incentives ............................................................................. 54
1.4. Group Incentives .................................................................................. 55
2. Individual Performance Pay Plans ................................................................. 56
2.1. Merit Pay...................................................................................................... 56
2.2. Piecework ............................................................................................ 57
2.3. Sales compensation ............................................................................. 58
2.4. Cash Award ......................................................................................... 59
2.5. Recognition Programs.......................................................................... 59
3. Group Performance Pay Plans....................................................................... 61
3.1. Gainsharing .......................................................................................... 61
3.2. Profit Sharing ....................................................................................... 62
3.3. Risk-Sharing Plans............................................................................... 63
3.4. Employee Stock Ownership Plans (ESOPs) ........................................ 63
3.5. Performance-Sharing Plan ................................................................... 63
Part Three: Payroll and Benefits ............................................................................... 65
1. Employee Benefits ......................................................................................... 65
1.1. Objectives of Benefits .......................................................................... 65
1.2. Benefits for Workforce Recruitment and Retention ............................... 65
1.3. Global Employee Benefits .................................................................... 65
2. Benefits Design .............................................................................................. 66
2.1. Statutory Benefits ................................................................................. 67
2.2. Industry Standards ............................................................................... 67
2.3. Additional Benefits ............................................................................... 67
2.4. Flexible Benefits ................................................................................... 67

2.5. Part-Time Employee Benefits .............................................................. 68

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3. Flexible Employee Benefits ............................................................................ 68

3.1. Flexible Spending Accounts ................................................................. 69
3.2. Transportation Plans ............................................................................ 69
3.3. Cafeteria Plans..................................................................................... 69
4. Benefits Administration .................................................................................. 69
4.1. Benefits and HR Technology ................................................................... 70
4.2. Benefits and HR Outsourcing ............................................................... 70
4.3. Benefits and HR Metrics ...................................................................... 70
4.4. Benefits and Cost Control .................................................................... 71
4.5. Benefits and Communication ............................................................... 71
5. Type of Benefits ............................................................................................. 71
5.1. Legally required payments ................................................................... 72
5.2. Retirement and Savings Plan Payments .............................................. 73
5.3. Life Insurance and Death Benefits ....................................................... 74
5.4. Health care and medical-related benefit payments .............................. 74
5.5. Paid Rest Periods, Meal Break, Coffee breaks .................................... 75
5.6. Pay for Time Not Worked ........................................................................... 75
5.7. Miscellaneous Benefits ........................................................................ 76
6. Payroll Administration..................................................................................... 76
6.1. Element of Payroll.................................................................................... 77
6.2. Payroll Process .................................................................................... 78
6.3. Payroll Audit ......................................................................................... 79
6.4. Payroll System ..................................................................................... 80
6.5. Payroll Outsourcing .............................................................................. 81
Part Four: Employee Value Proposition .................................................................... 83
1. Employee Value Proposition .......................................................................... 83
1.1. Tactical ..................................................................................................... 83
1.2. Integrated ............................................................................................. 83
1.3. Communicating and Delivering ............................................................ 83
1.4. Segmenting and Differentiating ............................................................ 84
2. Employer Branding ........................................................................................ 84
2.1. Definition of Employer Branding ........................................................... 84
2.2. Branding Techniques ............................................................................... 84
2.3. Employee Value Proposition (EVP) is the Foundation of Employer Branding 85
2.4. Employer Brand Framework ................................................................ 85
2.5. Manage the Employer Brand for the Long Term........................................86
3. Employee Engagement .................................................................................. 87

3.1. Brand ................................................................................................... 88

3.2. Leadership ........................................................................................... 88
3.3. Performance ........................................................................................ 89
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3.4. The Basics ........................................................................................... 89

3.5. The Work.................................................................................................. 89
3.6. Company Practices .............................................................................. 89
4. Employee Retention....................................................................................... 90
4.1. Retention Matrix ................................................................................... 91
4.2. Employee Surveys ............................................................................... 95
4.3. Exit Interviews ...................................................................................... 96
4.4. First-Year Turnover Evaluations............................................................ 96
4.5. Retention Evaluation and Follow-Up .................................................... 97
4.6. Job Embeddedness ............................................................................. 97
Reference ................................................................................................................. 99
6

Part One: Total Rewards

1. Compensation Design
Compensation refers to all forms of financial returns and tangible services and benefits
employees receive as part of an employment relationship. Also, compensation
refers to a form of monetary payment provided to a person who has suffered
damage, harm, or injury. Many HR authors use the term Remuneration rather than
Compensation. This is because Remuneration is used to connote something broad,
like a package, essentially implying that it is not only a salary, but many other
benefits that are included in this “package.” In
general, Remuneration is referred to as the payment made to an employee for his/her
services or work. Typically, this is the payment of a salary or wage. However,
Remuneration is much broader and encompasses not only the periodic payment
given to an employee but also other payments and non-monetary benefits. It is the
whole package offered to an employee during his/her term of employment with the
employer. Monetary benefits
include salary, overtime pay, vacation pay, bonuses and performance-related
payments. Non-monetary payments refer to benefits such as the provision of a
company vehicle,
medical and/or hospital insurance, food and shelter, pension or retirement schemes,
family support schemes, child care, subscriptions and any other benefits.
Remuneration is an important factor affecting how and why people choose to work
at one organization over others. Employers must be reasonably competitive with
several types of compensation in order to hire, keep, and reward performance of
individuals in the organization. There are several important concepts about
compensation designing as follows:

WorldatWork (2015). The WorldatWork Handbook of Compensation, Benefits

and Total Rewards: A Comprehensive Guide for HR Professionals. Hoboken,
New Jersey: Wiley.
 7

1.1. Total Rewards

Total Reward relate to all aspects of the employment offering, including the
remuneration package (base pay, variable pay and benefits) as well as the
intangible aspects of the psychological contract such as career development,
employment security and working environment. It is a key component of any
Employer Brand
through which an organization establishes its competitive position in the labor
market and hence determines its ability to attract, recruit, retain and motivate
employees of the required caliber.
Formerly referred to as simply compensation and benefits, total rewards
takes on a more creative and broad definition of the ways employees
receive compensation,
benefits, perks and other valuable options. WorldatWork defines this new term:
"Total rewards include everything the employee perceives to be of value
resulting from the
employment relationship." According to Aon Hewitt, there are four factors that
can help employers think about the value total rewards deliver for employees,
rather than an ever-growing list of programs that are given equal importance.
This new model is
intended to serve as a catalyst to stimulate new thinking around where to
focus energy, effort and expense in total rewards.
1.1.1.Access
Access refers to those rewards to which the organization provides access
only—the rewards themselves are paid for by the employee or (in some
cases) perhaps a third party. These could include things like group legal
insurance, critical illness insurance and discount programs.
1.1.2.Basic
Basic rewards are those “table stakes” reward elements that the organization feels it
must provide to be in the game, things like health and welfare and retirement benefits.
1.1.3.Contingent rewards
Contingent rewards are those elements of the package that are delivered
based on some level of performance or behavior by the employee. Wellness
incentives are an example of these types of rewards.
1.1.4.Differentiators
Differentiators are the one, two or—at most—three reward elements that are
going to set your company apart, the elements for which you want to be
famous.
Thinking about benefits within this total rewards framework provides focus to
how you design, deliver and communicate. With this framework, the emphasis
shifts from
providing access to rewards as well as basic rewards to using rewards to drive
behavior (contingent rewards) and those rewards that are going to set you apart
(differentiators). In the end, these are the rewards that will create the greatest
return on your investment.
8

1.2. Administration and Optimization

In addition to overseeing the total reward framework, HR professionals must
assure administrative efficiency and costs optimization for designing total
rewards. Optimizing your investment in total rewards begins with a core set of
guiding principles and
continues with understanding what employees value most. The following texts
describe key steps in the development of a total rewards strategy.
1.2.1.Define your differentiator
For years, communication efforts have centered on benefits, due in large part
to open enrollment and legal requirements. With this primary focus, employers
miss the opportunity to truly differentiate the employment experience. In
addition to helping
inform your overall total rewards strategy and programs, identifying what it is you
want to be famous for can guide your key communication messages. Your
differentiator should support your business and what it is that motivates your
employees, and can fall into any one of the four quadrants described earlier.
Keep in mind, many leading companies are shifting more of their total rewards
in the areas of career opportunities, learning and development, and coaching.
They are doing so, in part, because those programs are harder for competitors
to replicate.
1.2.2.Learn what motivates your employees
Knowing what motivates employees can help you develop a comprehensive,
yet targeted, communication strategy. One approach that is gaining traction
within HR, total rewards and benefits is segmentation—the process of
breaking down large
populations into similar groups of employees to understand what is important to
them and how they might behave in certain circumstances. The more data you
can gather and leverage (demographics, attitudes, behaviors and preferences),
the more successful and targeted your communication strategy will be.
1.2.3.Develop a total rewards brand
Consumer marketers have always known the power of a strong brand (i.e., a
clear voice, compelling message, and consistent visual identity). Employers
are starting to get the picture, too. An effective total rewards brand tells a
compelling story—what’s expected of employees and what they can expect in
return when it comes to
maximizing their total rewards. An effective total rewards brand articulates the
value of not only the collection of programs you offer but things like culture and
work experience. And, most importantly from a talent perspective, an effective
total rewards brand inspires action by making it clear to employees what it takes
to meet both business and personal needs. Once a total rewards brand is
established, you’re able to communicate consistently, using the same language,
tone and style each time you
reach to employees. Repeating the message on a regular basis so that it
becomes familiar and recognizable is critical.
1.2.4.Personalize the experience
When it comes to total rewards, it’s all personal. Employees want to know how
they’re rewarded, how they’re protected and what they need to do to be
successful. And as outlined earlier in this article, employees generally think in
terms of total rewards vs.
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benefits. So the best way to address those needs is to get personal. That’s one
of the reasons personalized statements—both print and online—remain one of
the most popular and effective communication tools. (According to the Aon
Hewitt database of total rewards statement customers, nearly 90% of
employees who received a total
rewards statement say that the statement provides value.) And in today’s world,
we have the ability to provide employees with even greater access to real-time
information on total rewards through total rewards statements and portals.
1.2.5.Reach people through multiple communication channels
When it comes to communication, one size definitely doesn’t fit all. Employers
that deliver communication through multiple vehicles are more successful at
reaching their people and thereby creating greater perceived value. Using a
variety of channels— social media, direct mail, electronic solutions—signals
that total rewards messages are important and require attention/action.
1.2.6.Project cost and risk profile of rewards
In addition to achieving alignment and delivering employee value, successful
reward plans strike a balance between effectiveness and cost. With health
care costs
continuing to increase, optimizing reward programs may be critical to success.
HR must use operating income growth as a metric in determining funding for
short term
incentive plans.
1.3. Strategic Reward
Compensation decisions must be viewed strategically. Because so many
organizational funds are spent on compensation-related activities, it is critical
for top management and HR executives to view the “strategic” fit of
compensation with the strategies and objectives of the organization. The
changes in the global marketplace for products and services have led to
organizational changes in business philosophies, strategies, and objectives.
Increasingly, organizations are recognizing that compensation philosophies
must change also. For example, if a firm wishes to create an innovative,
entrepreneurial culture, it may offer bonuses and stock equity programs so that
employees can participate in the growth and success of the company, but set
its base pay and benefits at relatively modest levels. However, for a large, stable
organization, highly structured pay and benefit programs may be more
common.
Strategic reward management involves the formulation and implementation of an
equitable reward system that is congruent with the organization’s strategic
objectives. A strategic reward system is a type of human resource management
tool that is used to reward hardworking employees in an organization. It
operates on two main principles; the best-fit perspective and the best practice
advocates claim. The objectives of a
strategic reward system are; attract and retain employees, motivate
performance, promote skill development, encourage corporate culture and
determine pay costs. Rewards can be either intrinsic or extrinsic. However, it
is important when designing, implementing and using a reward strategy, that it
meets both individual and organizational needs.
A total reward management process consists of four building blocks: fixed pay, variable
10

pay, employee benefits and non-financial rewards such as work-life balance.

With enormous change in the labor markets and employment contracts,
reward systems
today have also evolved. Contemporary reward strategies include
employability pay, person-based pay, market-determined pay and team-
based rewards. Reward
management is a vital part of the total strategic human resource management
process as it supports the achievement of strategic objectives through the
communication of desired behaviors to employees. It also elicits a clear link
between individual performance and organizational performance and thereby
acts as a catalyst for positive organizational cultural change.
1.4. Individual Differentiation
Differentiation of rewards is supported where there are differences in the scope
of the position within an organizational context, and/or due to superior individual
or team contributions. For example, a reward program for an organization might
look very
different from a compensation program for the manufacturing group or the sales
team, with varying incentives based on cash compensation and non-cash
compensation
options. The goal is to attract, develop, and retain a high performing staff, as well
as to differentiate the highest performers so you can properly reward them. To
achieve this type of compensation structure, follow these four basic steps.
1.4.1.Step 1: Segment the Workforce
Every organization has critical skill sets. To find the value of various employees
and roles, first determine how people contribute to the well being of the
organization, then tie their value to a meaningful compensation plan. Identify
critical roles within your organization and critical skills that impact its success.
Based on this understanding you can segment your rewards programs to
properly compensate those roles and skill sets that are most important to the
company. Once compensation has been awarded,
survey employees to learn about what they like and dislike, and whether there
are other types of compensation they would value more. This information
provides valuable insights for setting compensation budgets in the future, and
provides
employees an opportunity to have their preferences heard.
1.4.2.Step 2: Create Flexible Compensation and Incentive Plans
As you design your incentive plan, establish clear links between incentives and
corporate goals, divisional goals, departmental goals, and individual goals.
Each
employee should know how their actions impact the company. Executives and
senior directors should be incented based on their impact on their respective
regions and divisions. Line-of-business professionals often share team-based
goals. They should be incented based on how they support critical objectives
and by how their individual achievements influence results. Variable
compensation plans are most effective if they are structured to pay out over
time, based on performance. Don’t give away all the
money up front. Spend wisely and reward people as they make valuable
contributions. As the labor market improves many companies will see increased
turnover among their staffs. To retain top employees, consider offering them
three-year compensation plans tied to agreed-upon performance metrics.
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1.4.3.Step 3: Enforce Equitable Policies with Complete Transparency

12

Compensation policies must be fair and equitable to everyone, not just to the
high- performing segment of the workforce. There can’t be any perception of
favoritism— not just in the cash compensation plans, but also in non-cash
based rewards such as the projects to which they are assigned, opportunities
for training, etc.
Even the best planned compensation strategies will fail if employees think they
are being treated unfairly. Fostering an environment of fairness requires
transparency: you must be able to convey the total rewards philosophy to each
employee. HCM systems
include employee portals and online compensation statements that paint a
complete picture of each employee’s pay, benefits, and incentives.
It’s also important to facilitate extensive communication between management
and staff as well as total transparency into performance and goals. It helps to
have good development plans and performance plans and highly engaged
managers who can facilitate goal setting and career planning. HR can support
these efforts: first by
acquiring the right e-HR solutions to summarize and communicate total
compensation plans, second by instituting top-down policies governing effective
communication with employees.
1.4.4.Step 4: Use Technology to Simplify Administration
Modern IT applications enable managers to allocate budgets for incentives,
manage the salary review process, and generate compensation statements.
They typically
incorporate business intelligence tools that let authorized users examine salary
trends, market developments, salary structures, and distribution scenarios.
Utilizing these platforms can streamline market analysis, program design, and
administration of total rewards programs. These platforms also simplify key
activities for the compensation team such as defining and editing business
rules, verifying
employee eligibility, and creating a performance-driven culture with
transparency into compensation policies and practices. Additionally, total
rewards professionals will be freed up and empowered to add strategic value to
the business by consulting with
managers, rather than being mired in the tactics of the process.
1.5. Market Conformity (Competitiveness)
In order for a business to operate effectively, the company needs to develop
a compensation strategy that achieves the two goals of rewarding
considered fair to
employees, while providing a financial return on the investment for the employer.
Pay equity has two approaches. The first is externally driven by market forces.
The second is an internal focus, driven by the employer’s valuation of the job.
Using market pricing to establish wages and salaries is called market
conformity or competitiveness. Achieving external competitiveness in the area
of compensation
means balancing the need to keep operating costs (including labor costs) low
with the need to attract and retain quality workers. External competitiveness is
how a company's rates of pay compare to those of its competitors.
Market based pay systems benefit from being inherently empirical, built from
 13

research, through surveys, reporting what similar jobs are paid in the
organizations that one competes with in the labor market. Committing to a
market base pay compensation
14

structure means that employees will be paid at a competitive salary when

compared with rates offered to people in similar positions in peer
organizations. The labor
market, ruled by supply and demand, drives this approach.
Establishing the pay level balances a company's profit requirements with
competition for competent employees. Factors determining pay level include:
1.5.1.Competition in the labor market: the supply and demand for
employees with various qualifications.
1.5.2.Product market conditions: the degree of demand for specific products
and the level of industry competition.
1.5.3.Organizational characteristics: industry, management philosophy,
size, and technology.
Weighing all these considerations, firms can choose to pay more than the
industry average, and therefore favor attracting and retaining quality
employees, or pay less
than their competitors' average hoping to attract and retain employees through
non- compensation means such as recognition events, achievement
celebrations, and working in a pleasant environment. A competitive pay
level—one that balances all considerations—can help contain labor costs,
enlarge the pool of qualified applicants, increase quality and experience,
reduce voluntary turnover, discourage unionization, and abate pay-related
work stoppages. Once a company has determined its pay level relative to its
competitors, compensation managers must determine the best compensation
package for each occupation.
1.6. Internal Consistency (Equity)
External equity is one side of the coin. There is also the employer’s perception
of fairness called internal equity. Where external equity is a measure of market
competitiveness forming its basis on job functions and duties, internal equity is
a
measure of internal worth with a basis in job autonomy and responsibility. If you
have multiple incumbents in the same job title who are paid differently, the
differences in pay are an expression of internal equity.
Arriving at fair compensation is not always easy. Aside from the fact that each
position has a unique value to an organization and not all jobs are created
equal, employers also face the challenge of recognizing and rewarding
exemplary performance in a given role. There are a variety of definitions for
internal equity.
“Internal equity is a situation that results when people feel that performance
fairly determines the pay for each individual with a certain job or that relative
difficulty
results in appropriate differences in pay rates between jobs.”
This and other definitions of internal equity have one fact in common: in order
to achieve internal equity, it’s not enough that compensation be fair according
to the
employer, compensation must be seen as fair by employees. Employees will
have their own ideas about how their jobs should be valued relative to other
roles in the company—and they may not agree with the company’s perspective.
 15

One way to achieve a sense of internal equity is by following a consistent set

of principles when designing and applying compensation structures and by
avoiding ad
hoc negotiations. If you’re concerned about internal equity in your organization
or you hear rumblings of discontent on the topic, you may choose to conduct an
internal
equity study to help determine whether concerns are justified.
The number of levels and the degree of pay differentials are based on three general
criteria: the value of a job and a job's responsibilities, the skills and knowledge
needed, and job performance and productivity. Employers can use these criteria
to modify
employee behavior by indicating what kinds of responsibilities, performance,
productivity, skills, and knowledge employees need to move into a different
level and receive a higher pay rate. More specifically, six primary but
interrelated factors can shape a company's pay structure:
1.6.1.Social Customs
Beginning in the thirteenth century, employees began demanding a "just"
wage. This idea evolved into the current notion of a federally mandated
minimum wage. Hence, economic forces do not determine wages alone.
1.6.2.Economic Conditions
Demand for labor influences employee wages. Employers pay wages based
on the relative contributions employees make to production goals. In addition,
supply and demand for knowledge and skills helps determine wages.
1.6.3.Company Factors
Pay structures depend on the kind of technology a company has and on
whether a company uses pay as an incentive to motivate employees to
improve job performance and to accept more responsibilities.
1.6.4.Job Requirements
Some jobs may require greater skills, knowledge, or experience than others and
hence fetch a higher pay rate.
1.6.5.Employee Knowledge and Skills
Likewise, employees bring different levels of skills and knowledge to companies
and hence they are qualified to work at different levels of a company hierarchy
and receive different rates of pay as a result.
1.6.6.Employee Acceptance
Employees expect fair pay rates and determine if they receive fair wages by
comparing their wages with their coworkers' and supervisors' rates of pay. If
employees consider their pay rates unfair, they may seek employment
elsewhere, put forth little effort in
their jobs, or file lawsuits.
2. Total Reward Approach
Throughout the history, employers have been challenged with attracting, motivating and
16

retaining employees. During the past decade, the Compensation topic has
continued mature. Increasingly, it has become clear that the battle for talent
involves much more than highly effective, strategically designed compensation
and benefits programs.

• Base Pay • Bonus or Incentives

• Types of Base • Commissions
Pay • Profit-Sharing Plans
• Performance Sharing
• Plans

Fixed Pay Variabl

e
Pay

Work-
Benefits Life
Balance
• Healthcare • Caring for Dependants
• Welfare • Supporting Health
• Retirement and and Wellness
Investment Plans • Creating a
• Other Benefits Workplace
Flexibility
• Financial Support

Source: Burguillos, B. & López, M. (2013). How to develop a Global Total

Compensation Model. HR Strategy: Gamification & Engagement.

The most successful companies have realized that they must take a total rewards
approach, emphasizing attraction, motivation and retention. It is undoubtedly
crucial to design, develop and implement a Total Compensation plan successfully.
We should consider this as the previous step before to develop the whole Total
Rewards Model,
including concepts as “Performance & Recognition” and “Development & Career
Opportunities”.
2.1. Fixed Pay
Fixed pay, also known as base pay, is nondiscretionary compensation that does
not vary according to performance or results achieved. It’s usually determined by
the
organization’s philosophy and pay structure.
2.1.1.Base Pay
Fixed or base pay is the compensation paid to an employee for performing specific job:
 The definition of base pay can vary by country.
 Base pay levels need to take into account variations in equivalent monthly
 17

salaries vary by country.

18

 The bottom line to fixed pay practices need to be based on a competitive

strategy for each country.
2.1.2.Types of Base pay
Once pay structures are built, the organization must determine how employees
will be paid:
 Salary: paid on a weekly, biweekly or monthly basis rather than by
the hour, generally to higher level positions.
 Nonexempt / hourly rates: paid by the hour for a job being performed. An
individual’s annual pay is dependent on the number of hours worked
during the course of the year.
 Piece rate: payment is based on an individual’s rates production. A
payment is received for each piece or unit work produced.
2.2. Variable Pay
Incentive or Variable pay, also known as pay at risk, is compensation that is
contingent on discretion, performance or results achieved. Much of the
innovation in
compensation is occurring in the variable pay element. Companies are making
greater use of variable pay programs by expanding them to a significantly
broader portion of
the workforce that they have in the past. These schemes are adopted by many
corporations in order to improve the employee morale and increase the
motivation to work for the employees. Based on performance measures and
metrics defined by the human resources of the specific organization incentive
plans are devised and the specific mode of incentive is decided.
2.2.1.Bonus or Incentives
Bonuses or Incentives are delivered through plans that predetermine a
performance and reward schedule. The incentive can be paid in an accounting
period (month, quarter, year, multi-year) or upon an event (reaching an
objective, completing a project, etc). Organizations that seek to create a closer
link between employee compensation and the risks of doing business have
increased the prevalence of
group/team incentives.
2.2.2.Commissions
Commission is a sum of money that is paid to an employee upon completion of
a task, usually selling a certain amount of goods or services. Commission may
be paid as percentage of the sale or as a flat dollar amount based on sales
volume. Employers often use sales commissions as incentives to increase
worker productivity. A commission may be paid in addition to a salary or instead
of a salary. Commissions are cash payments, based on predetermined
performance and reward schedule. They are typically based on sales or profit
margin on those sales. Commissions are usually for sales employees. Sales
incentive plans matched to type of responsibilities: Customer
identification, customer service or customer persuasion.
2.2.3.Profit-Sharing Plans
 19

Profit- Sharing is a form of variable pay provided to all employees based on the
profits of the company. Companies usually have predetermined goals and
formulas for
determining the amount that will be allocated to employees. Profit- Sharing is
typically implemented to achieve employee participation and identification with
the
organization’s success.
2.2.4.Performance-Sharing Plans
A variable pay plan bases rewards on the performance of a combination of
quantitative and/or qualitative measures. The objective increase employee
identification with the organization’s success and increase employee
understanding of what is important to
the organization and communicate the basis upon which success is measure.
2.3. Benefits
Benefits are a core element of the Total Rewards Model. Benefits include Health
and Welfare plans, Retirement plans and programs providing pay for time not
worked. Over time, employee benefits have evolved from basic fringe benefits of
insurance coverage and a few perquisites to wide a range of benefits designed
to strike a balance between an employee’s personal and professional life.
2.3.1.Healthcare
Healthcare systems are influenced by the beliefs, values, culture and
perceptions in different regions regarding the role of government in providing
health care to its
citizens. The employers commonly supplement the government health
programs with health care plans influenced by corporate objectives, competitive
practices and the
limitations of government programs. Limitations government-sponsored
programs may include restricted access, limits on services/facilities, payments,
reimbursement and gaps in coverage.
2.3.2.Welfare
The factors that influence health and retirement benefits may also affect other
benefits such as life insurance, disability and time off. Depending on the type of
benefit,
statutory requirements, coordination with government programs, collective
bargaining agreements and other influences may shape or define the final
program, limiting
employer flexibility in plan design. In addition, offer wellness programs to
employees are very useful to increase the satisfaction and healthy life.
2.3.3.Retirement and Investment Plans
Qualified retirement plans include both the traditional defined benefit pension
plans and defined contribution plans:
Defined benefit plan is based on a formula that considers pay and service (i.e.
one percent of compensation for each year of continuing service). Provide
better benefits to employees with long service.
Defined contribution plan is characterized by employee and employer
contributions made to individual participant accounts.
20

Hybrid plans; combine elements of defined benefits and defined contribution plans.

Relative Advantages of Different Pension Alternative

Defined Benefit Plan Defined Contribution Plan

1. Provides an explicit benefit which is easily 1. Unknown benefit level

is difficult to
communicated communicate
2. Company absorbs risk 2. employees assume these
associated with risks
changes in inflation and interest
rates which affect cost 3. More favorable to short-
3. More favorable to long service term employees
employees 4. Employer cost known up
4. employer cost front
unknown

2.3.4.Other benefits
 Housing Allowance
 Transportation Allowance
 Meal Allowance
 Phone Allowance
 Training Allowance
2.3.5.Flexible benefits
Flexible benefits are the approach to benefits in an increasing number of
American organizations. In essence, employees are typically given choices, up
to a certain dollar limit, among a series of options for their benefits, including
such things as pension contributions, health insurance options, dental
insurance, life insurance, etc. MNEs are beginning to examine flex benefits for
their global operations.
Issues such as tax treatment of benefits, private versus state health care,
employee expectations and culture, non-standardized social benefits from
country to country, and varying company structures will need to be addressed
in order to design flexible benefit packages that might be used throughout an
MNE. Nevertheless, such an approach may help simplify worldwide complete
compensation systems for
multinational firms.
2.3.6.Voluntary Benefits
The cost of providing employee benefits is expensive. Controlling costs is high on the
employee-benefits agenda at most companies. But many employers are also
looking to enhance their benefits programs to advance basic business objectives
such as
attracting and retaining good employees. One increasingly popular approach is to
 21

supplement existing employer-paid benefits with so-called voluntary benefits --

those for which employees pay at least half, or more typically all, of the costs.
Group-rate supplemental life insurance is an old standby in this domain, but
employers today also are giving their employees access to additional voluntary
benefits such as auto and homeowner's insurance, long-term care insurance,
dental insurance, retiree dental
insurance and legal services. These programs are attractive to employees
because they typically can get institutional pricing when they buy these
products through their
employer, and, in the case of insurance policies, group underwriting rules that
provide some level of guaranteed issuance. Plus, they can pay for it through the
convenience of payroll deductions, which employees like a lot. Beyond offering
employees access to potentially cheaper group rates and convenient enrollment
procedures, giving them access to voluntary benefits can help them plug
important gaps in their financial plans, too.
2.4. Work-Life Balance
Work-Life Balance (WLB) is an umbrella term used to describe a variety of benefit-
related initiatives to help employees effectively manage work, family, and
personal life without extreme stress or negative impact. Many organizations
report that balancing work and family has overtaken other benefit and
compensation items as a key factor in employee satisfaction surveys. WLB is
composed of offerings in the Total rewards package that address the unique
individual needs of the employee. These offerings are important to the
employee but may be less tangible than compensation and benefits. Categories
which support work – life could be:
2.4.1.Caring for depends
2.4.2.Supporting health and wellness
2.4.3.Creating a workplace flexibility
2.4.4.Flexible Work Hours
2.4.5.Financial support programs
The intent of work/life programs and services is to support the well-being of
employees and help them achieve a balance between their jobs, families, and
personal lives. Some organizations couch work/life programs in terms of
diversity and corporate social responsibility (CSR) initiatives. Others feature
WLB as part of the organization's brand. There are many compelling reasons
for WLB. However, as with the success of other organizational and global HR
strategies, commitment and communication can
make or break success. Having work/life programs means little if employees
are unaware of them or the culture does not support the initiatives.
2.5. Other Elements of Total Rewards
There are five elements of total rewards, each of which includes programs,
practices, elements and dimensions that collectively define an organization's
strategy to attract, motivate and retain employees. These elements are
compensation, benefit, work-life, performance & recognition, and “development
& career opportunities”.
After we have our Global Total Compensation model (including compensation, benefit,
22

and work-life as discussed at previous text) successfully implemented in our

company, it´s time to think about “Performance & Recognition” and
“Development & Career Opportunities” thus completing the corporative Total
Rewards Model is required to get business goals.
2.5.1.Performance & Recognition
Performance: The alignment and assessment of organizational, team and
individual efforts towards the achievement of business goals.
Recognition: Acknowledges or gives special attention to employee efforts or
positive performance. It meets an intrinsic psychological need for appreciation
and can support business strategy by reinforcing certain behaviors that
contribute to organizational success. Awards can be cash or non-cash (e.g.,
verbal recognition, trophies, certificates, plaques, dinners, tickets, etc.).
2.5.2.Development & Career Opportunities
Development: A set of learning experiences designed to enhance employees'
applied skills and competencies; development engages employees to perform
better and
leaders to advance their organizations' people strategies.
Career Opportunities: A plan for an employee to advance their own career
goals and may include advancement into a more responsible position in an
organization. The organization supports career opportunities internally so that
talented employees are deployed in positions that enable them to deliver their
greatest value to their organization.
Development and career opportunities can be in the form of learning opportunities,
coaching/mentoring opportunities, and advancement opportunities.
The elements represent the "tool kit" from which an organization chooses to offer
and align a value for both the organization and the employee. The elements are
not mutually exclusive. Total rewards strategy involves the art of combining the
five key elements into tailored packages designed to achieve optimal
engagement. An effective total rewards
strategy results in satisfied, engaged and productive employees, who create
desired business performance and results.
3. Compensation Administration
A general principle of compensation administration encompasses the creation and
management of a pay system based on four basic, interrelated policy decisions:
internal consistency, external competitiveness, employee contributions, and
administration of the compensation program. Compensation professionals work
with these policy decisions according to individual corporations' needs, keeping in
mind the ultimate objectives of compensation administration—efficiency, equity,
and compliance. Companies develop
their individual pay policies by placing varying degrees of emphasis on these four
policy decisions.
Once pay policies have been determined, the actual development of a base pay
system begins. Because most organizations use task-based systems focusing on
work done in specific jobs, which is the emphasis of this discussion. If skill-based
or team pay systems
 23

are used, then many of the activities discussed here must be modified.
As the below figure shows, the development of a wage and salary system assumes
that accurate job descriptions and job specifications are available. The job
descriptions then are used in two activities: job evaluation and pay surveys. These
activities are designed to
ensure that the pay system is both internally equitable and externally competitive.
The data compiled in these two activities are used to design pay structures,
including pay
grades and minimum-to-maximum pay ranges. After the pay structures have been
developed, individual jobs must be placed in the appropriate pay grades and
employees’ pay adjusted based on length of service and performance. Finally, the
pay system must be monitored and updated.

(Job Descriptions, Job

Specifications)

Evaluatio
n

Pay
Policies Structure
s

Individua
l
Appraisal

Implementation
,
Communicatio
n, Monitoring
Source: Burguillos, B. & López, M. (2013). How to develop a Global Total
Compensation Model. HR Strategy: Gamification & Engagement.

The administrative policy refers to the tasks of compensation managers in

designing and implementing a pay program. Taking into consideration the three
policies, compensation managers must choose the components that they will
include in a company's compensation program—that is, which kinds of base pay,
wage and salary add-ons,
incentives, and benefits they will offer employees with different jobs and skill levels.
Administration also involves determining whether the pay program will attract and
retain needed employees successfully, whether employees consider the pay
program fair, how competitors pay their employees and if competitors are more or
less productive.
Companies adopt different approaches to compensation administration
responsibilities. Some rely on a centralized approach where the design and
administration of compensation programs are performed by a single company
department. Others opt for a decentralized approach where multiple company
departments have these responsibilities. The drawback to the centralized approach
is that a compensation program may suit general corporate needs, but not individual
department needs. Creating compensation task forces with
24

members drawn from various departments helps avoid this problem. Likewise, the
decentralized approach also can lead to problems. This approach may make it
difficult to transfer employees from one department to another and may bring
about a lack of
internal consistency.
Consequently, compensation administrators frequently adopt general guidelines
that all departmental compensation policies must follow, but allow departments to
develop their own policies, such as those for incentives, as long as they adhere to
the general guidelines.
A compensation program must" be flexible enough to reflect the different needs of the
individual and the organization; joint investments in ongoing training; the ebb and
flow of an employee's contributions without creating expectations of permanence,
and each
employee's changing needs over time."
4. Job Evaluation
Employees receive remuneration for the services specified in their contract of
employment. The legislator classes as remuneration any financial means and
benefits provided by the employer which can be understood as being a
consideration for the services performed by the employee. It includes wages
(manual workers) and salaries (white-collar workers).
Some people use the terms wages and salary interchangeably. Wages is best
associated with employee compensation based on the number of hours worked
multiplied by an hourly rate of pay. Base wage tends to reflect the value of work
or skills and generally
ignores differences attributable to individual employees. Salary refers to pay for
those workers who are exempt from the U.S. labor regulations, and hence do
not receive
overtime pay. In contract, non-exempts calculated at an hourly rate referred to as a
wage. Generally, salary is best associated with employee compensation quoted on
an annual basis.
Wages or salary is generally provided by organizations following structured
methods. These methods are more than identifying the wage incentive plans for
employees. Wages or salary should be based on identifying the characteristics of
various job activities and its value and importance to the organization.
Organizations consider job evaluation methods that are structured methods of
determining wages or salary for employees and play a significant role especially
when planning for new business ventures. Thus, we can say that global job
valuation can determine the value and price of a job in order to attract and retain
employees in a competitive global environment.
4.1. Objectives of Job Evaluation
Job evaluation techniques are required to develop a suitable compensation /
remuneration plan based on the above mentioned factors. Job evaluation is a
process of determining the relative worth of a job within an organization and
accordingly aims at:
4.1.1.Reducing inequalities in salary structure by bringing about external and
internal consistency in salary further motivating employees within an
organization.
 25

4.1.2.Enabling structured approach to division of labor or specialization by

defining specific jobs and salary levels.
4.1.3.Helping in selecting employees by defining jobs and responsibilities.
4.1.4.Developing harmonious relationship between employer and employees to
avoid any conflicts on salaries.
4.1.5.Creating standardization by determining salary differentials for
different jobs further helping to bring about uniformity into salary
structure.
4.1.6.Generating relevance and relative value to new jobs.
4.2. Aspects of Job Evaluation
The most important aspects of job evaluation concern ensuring that the
methodology is understood by both managers and employees and that
evaluation and qualification standards are determined through a process that
involves employee participation:
4.2.1.A measure of job content: content has innate value outside of external market.
4.2.2.A measure of relative value: relevant groups can consensus on relative value.
4.2.3.Link with external market: job worth cannot be specified without external
market information.
4.2.4.Measure device: honing instruments will provide objective measures.
4.2.5.Negotiation: put face of rationality to a social/political process.
4.3. Job Evaluation Methods
Generally, job evaluations methods are of two types, analytical and non-
analytical, where in analytical schemes are designed on the basis of the
requirements and
elements of a job and non-analytical schemes are designed on the basis of
jobs as a whole. Analytical and non-analytical methods are further divided into
different sub- types which will be explained in the following sections.
 Non-Analytical Schemes: These schemes involve assigning wages in terms of
whole jobs and then compared in terms of rank or order. This implies that
jobs are compared with one another and then decided whether it should be
valued more, less or the same. There will be only two kinds of non-
analytical schemes studied during this course – 1.Ranking Method and
2.Classification Method.
 Non-Analytical Schemes: These schemes involve assigning wages in terms of
whole jobs and then compared in terms of rank or order. This implies that
jobs are compared with one another and then decided whether it should be
valued more, less or the same. Non-analytical schemes, for example,
include Ranking Method and Classification Method.
 Analytical Schemes: These schemes are designed on the basis of the
requirements and elements of the jobs. Grades are also generated under
these schemes but
these grades are developed on the basis of certain elements and factors of a job
26

and not the whole job as seen in non-analytical methods. Analytical

schemes, for example, include Factor Comparison Method and Point
Method.

Job Evaluation Methods

Non-Analytical Analytical
Methods Methods

Classificati Factor
Ranking Point Method
on Comparis
Method
Quick and inexpensive Benchmark job
Method Point+Ranking
on Compensation factors
Job guide chart
Market Pricing?

Methods designed on the Methods designed on the

basis of the jobs as a basis of the requirements
whole and elements of the jobs

Types of Job Evaluation Methods

Armstrong, M., Cummins, A., Hastings, S., & Wood, (2003). The Job
Evaluation Handbook: A Guide to Achieving Equal Pay. Kogan Page Business
Books.

4.3.1.Ranking Method:
Ranking is the process of comparing jobs with one another and arranging them
in order of their importance, their difficulty, or their value to the organization.
Accordingly, the first step is to create benchmark jobs like producers,
maintenance, administrators, etc. For example, benchmark jobs in a firm can be
categorized as accounting, purchase department, operations and administration.
The second step would be to list down the jobs that are perceived to be of the
highest and lowest value; selecting a job mid-way between the two and finally
choosing others at lower or higher intermediate points. For example, the firm’s
most important job is
that of an accountant and the least is that of the office boy. The job/s mid-way
between the two could of a purchase assistant / machine-operator. The
intermediate jobs could be the job of an accounts clerk below and above the
accountant job and the purchase assistant respectively and typist job below and
above the machine operator and the office boy respectively.
The third and the last step are to divide the ranked jobs into grades. An initial
estimate should be identified depending upon the number of grades or levels
that may be
required. Grade boundaries may be drawn between groups of jobs with
common features with the aim of being able to separate the benchmark jobs in
terms of
content, activity and levels of jobs. For example, if the accountant in the
accounting department is the highest position in the firm in the accounting
 27

department, then the

28

head of purchase in the purchase department under whom the purchase

assistant works could also be considered as the highest grade despite of
different job
descriptions and activities. Correspondingly, the accountant and the head of
purchase could more or less come under the same wage bracket. Please refer
to the slides for
this method’s advantages and limitations.
4.3.2.Classification Method
Job Classification (or grading) is a simple, widely used method in which you
categorize jobs into groups.The groups are called classes or benchmark jobs
if they contain similar jobs or grades if they contain jobs that are similar in
difficulty but otherwise different.
Classification method is a revised version of the ranking method that
considers one whole job of an organization and divides the job into different
grades and levels.
Accordingly, grades/levels are defined in terms of certain factors such as the
key tasks carried out, skill, competence, experience, initiative and responsibility.
The number of grades is usually limited between 4 and 8 and between each
grades there are
differences in demands made by any job in its respective grade.
Like ranking method, classification method is simple and easily understood but
cannot be considered for jobs that are divided more than 8 grades. Further
grade definitions tend to be generalized and they may not help in evaluating
border-line cases especially at more senior levels. It often fails to deal with the
problem of evaluating and grading jobs in dissimilar occupational or job families
where demands made on job holders are widely different. For example,
technical and administrative jobs may be graded at the same levels but the
demands from each job category are different. Grade definitions also tend to be
inflexible and unresponsive to technological and organizational changes that
affect roles and job content.
4.3.3.Factor Comparison Method:
Factor Comparison is a quantitative technique, which is a refinement of the
ranking method. It entails deciding which jobs have more of the chosen
compensable factors. Factor comparison method as the name suggests
compares factors of a job on whose basis the grades and levels are identified.
First step is to identify all key jobs in a business unit followed by analyzing
them into more than 4 factors that describe the requirements of a job and are
also known as “critical” or “compensation” factors. The compensation factors
can be different for different key jobs and activities across firms and
businesses. For example, in our class 5 critical factors were identified – Mental
Requirement; Physical Requirements; Skill requirements; Working conditions
and;
Responsibility. These factors are requirements in a manufacturing unit
that need mental and physical work, feasible working conditions, skills
and responsibility. Additional characteristics of this manufacturing unit
could include that the tools manufacturing unit produces tools like saw,
hammers, sickle, etc. The relative
importance of each of these critical factors will be different for different types of
employees and the jobs they perform. For example, the jobs in the
manufacturing unit example were identified to be – Tool maker; Craft worker;
 29

Process Operator and

Maintenance assistant. The employees with relevant jobs are ranked in
accordance to the compensation factors between 1 and 4 wherein 1 indicates
most important and 4
30

indicating least important. Each rank will be different for different factors for
each job as seen in the example discussed in class. Following assigning ranks,
assign benchmark wages to each of the factor.
Finally, total wage for each key job is calculated by adding wages assigned
across each factor. These wages for key jobs act as benchmark or threshold
wages in accordance to which newer jobs and their wages can be compared
depending upon the critical factors. The newer jobs are non-benchmark jobs
whose wages will be more or less the same as the benchmark jobs depending
upon the future employees knowledge, skill
etc. across each compensation factor.
Among all advantages and disadvantages the striking disadvantage of factor
comparison method is the presence of subjective judgment in deciding wages
across critical factors as seen in the example above. The basis of deciding
wages across each critical factor is subjective and could be held
discriminatory.
4.3.4.Point Methods
The point method is a more quantitative technique, involves identifying several
compensable factors, each having several degrees numerically scaled, as well
as the degree to which each of these factors is present in the job.
Point method is believed to be more objective and analytical than factor
comparison and all other methods. The first step in the point-method is similar
to that of factor comparison method that involves selecting key jobs. However,
the point-method considers key jobs into job clusters and the specific jobs
within the job clusters for
evaluation. For example, ‘Accounting’ is a job cluster and the jobs under this
category could be of an accountant, accounting assistant, data-entry, book-
keeping and filing. The point-method’s most important characteristic is to list
out and define specific compensation factors for each job within the job cluster.
The number of compensation factors used in point- method can be more than
8 depending upon the size of the organization, jobs in different companies.
Computerized job Evaluations use structured questionnaires and statistical models.
They can simplify job analysis, help keep job descriptions up to date, increase
evaluation objectivity, reduce the time spent in committee meetings, and ease
the burden of system maintenance.
Evaluating jobs on the basis of their external market values (market-based
evaluation) is 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(s) in which
the organization wants to be competitive.
Market pricing approach emphasizes external competitiveness and de-
emphasizes internal consistency. “Rank to market”, it involves first
determining the competitive
rates for positions for which external market data are available and then
blending the remaining (non-benchmark) jobs into the pay hierarchy.
These prevailing rates are used to represent the relative "worth" of the jobs.
Once a hierarchy is developed around benchmark market rates, the remaining
jobs are
 31

typically placed into the hierarchy based on whole-job comparisons to benchmark jobs.
5. Remuneration Surveys
As discussed earlier, Job evaluation which is considered to determine the relative
worth of a job within an organization focuses on internal equity of compensation.
Now we would
then talk about external competitiveness which can be analyzed by up-to date
Remuneration survey.
Remuneration surveys collect information on prevailing market compensation and
benefit practices, including base pay, other cash payments (statutory and market),
variable compensation (e.g., short- and long-term incentive plans), and time off.
Remuneration surveys allow organizations to recognize and relate their
remuneration structures to global and local trends. many organizations use various
remuneration surveys to benchmark or measure themselves against what the
industry is paying employees with similar skill sets and experience in that
occupation. Most of the remuneration surveys have to be bought from the company
directly.

Org Labor Produc

Facto Marke t
r t Market

Market Benchmark
Select

Job Matching
Market Data
Free hand approach
Pay Collec
Regression Analysis
Line t
(Least-squares)

Number of incumbents (%) Statistic Aging

Mean, median, mode al Cost of living
Percentiles and SD Analysi
s

Milkovich, G., Newman, J., & Gerhart, B. (2013). Compensation, 11th edition.
New York City, NY: McGraw-Hill Education.

5.1. Purposes of Remuneration Surveys

5.1.1.Adjust the pay level in response to changing rates paid by competitors.
5.1.2.Set the mix of pay forms relative to that paid by competitors.
32

5.1.3.Establish or price a pay structure.

 33

5.1.4.Analyze pay-related problems.

5.1.5.Estimate the labor costs of product/service market competitors
5.2. Market Select
To determine the prevailing rate for a job, companies can "benchmark" jobs
against compensation surveys that are detailed and specific to the companies'
industries and regions. A good compensation survey uses standard, proven
methods of data gathering and statistical analysis to determine how much
companies pay for a specific job in a specific industry. Match your job
descriptions to the descriptions in the salary survey.
Only match those which strongly resemble the survey description. Not all
positions in your organization will match descriptions in the survey. Relevant
labor market includes employers who compete:
5.2.1.For same occupations or skills.
5.2.2.For employees in same geographic area.
5.2.3.With same products and services
5.3. Data Collect
Once an organization decides that it needs a remuneration survey, it must
decide how the survey should be designed and conducted. The organization
has two choices: It
may develop and conduct an internal survey, or it may look to an external
source. In the global environment, the use of external third-party data
prevails.
There are many sources for global and country-specific compensation and
benefits data. Typical sources include:
5.3.1.Government sources (e.g., ministries of labor or government statistical offices.
5.3.2.International organizations (e.g., the International Labor Organization).
5.3.3.Private firms (e.g., consulting organizations around the world that
provide current global and local information for a fee).
5.3.4.Membership-based business organizations (e.g., employer federations
and local chambers of commerce).
5.3.5.Professional, trade, and industrial associations.
Here are some considerations to weigh for a company who is deciding whether
to purchase a compensation survey.
 The background of the survey research firm and cosponsors, if any. Look for
reputable firms that follow proven methods to gather and analyze
compensation data.
 The scope of the survey. Look for studies that cover industries, jobs, and
regions that are most applicable to your purposes; and that provide data on
enough jobs to be cost-effective.
34

 The survey methodology. Review the summary of the methodology to

make sure it's consistent with standards set forth by reputable industry
associations. Be
especially sure the research organization is surveying human resource
professionals or other people knowledgeable about compensation
information within a company, rather than individuals.
 The number of participants in the survey. A good survey should cover a
representative number of companies for its target population. A survey
doesn't have to cover the entire industry or region to be robust; even a few
dozen
responding employers in some industries can provide enough data for a
valid survey.
 The names of participants. Look for your competitors and peers. For
many jobs, you may be competing for candidates with companies in
different industries but the same geographic area. Some firms reveal a list
of participants, or at least
those well known within the industry. The surveying company may
disclose big- name participants to draw more interest from smaller
companies. A list of major
employers can also add credibility to the survey. An important exception to
note is that if a compensation analyst or compensation consulting firm is
using multiple surveys to produce their own derivative market numbers,
they will aggregate the data by combining the surveys, placing differing
weight on different sources and sometimes even making a qualitative
adjustment. When the data has been
aggregated in this manner, it is not customary to report numbers or names
of participants. The usefulness and relevance of a salary survey depends
largely on the survey participants.
 The number of incumbents covered by the survey; and the sample
size for each salary. Make sure the participants are a good sample of the
recruiting market.
Generally, eight to ten participating companies is a good sample for
positions below the management level. The sample size should increase
the more senior the positions being surveyed, both to get a good
representation and to allow for more job matches, since each company is
organized differently. There could be
limited pay data in some industries, or the available data might not be
representative of the industry because of a low participation rate in the survey.
 The relevance of the job descriptions to the positions being
benchmarked. Look for a good match between the survey and your
company. Be sure to compare job descriptions, not just job titles.
 The effective date of the survey data. The date a survey is published
is always later than the effective date of the data within the survey. If
necessary, age the data from the effective date to the current month.
As with any form of research, it is important to use multiple data sources to
narrow in on the "true" answer. Relying on a single source can be misleading if
that source doesn't perfectly reflect the market in question. World at Work
suggests that compensation analysts should use multiple data sources
wherever possible; consulting firms and academics agree. The exceptions
come when there is only one data source, or when there is a spot-on data
 35

source, such as a custom survey, that truly describes a

36

precise market.
5.4. Data Analysis
5.4.1.Effective Date
For those surveys conducted on a regular basis, such as annual surveys, the
effective date will be until the next survey is released in the following year.
Otherwise, knowing the effective date of the survey can prevent companies
from using outdated salary figures and causing error in pay budget forecasts.
If the survey is not current, the person using it should age the salaries to the
current date. If a survey was conducted in September, the salaries are likely to
be as of
September or even August. If you are using the survey in December to
benchmark for a new position in the company, you will have to age the number.
A simple way to do this is to take the annual rate at which salaries are moving
for this job and prorate it, salary increases overall this year are around 3.5% but
this may vary by job title.
A similar approach is used in setting pay levels across a company. Sometimes
these figures are set at the beginning, middle, or end of the company's payroll
year by aging the appropriate compensation data to those dates. When salary
data is aged,
movement in market rates is used to adjust outdated data.
5.4.2.Job Description
If a job on a survey is similar but not identical to one in the organization, the
data can be weighted or leveled for a better match. Therefore conduct job
analysis or review job descriptions is important for job matching.
When consulting a compensation survey, match the job descriptions rather than
the job titles, even if the survey uses generic or widely used job titles. For
example, an associate could be an entry-level position at one consulting firm, or
it could be the title for someone with an MBA at another. Companies are
structured differently, and
different companies use different names for the same jobs, so job descriptions
are the best way to match positions. Beware of surveys that use only job titles,
as it is unlikely the data will be a reasonable representation of the jobs you're
interested in.
A survey job description should list the primary job function in one or two
sentences, followed by key responsibilities. While the descriptions should be
generic and not specific to any one company, they should contain enough
information for participants to match appropriately to ensure the data is
accurate. It is also important to match the organizational level of the positions
be surveyed. A position that is at the group level at one company may be at the
subgroup or the sector level at another.
Job titles are broken down differently in different surveys. Some surveys
break them down by levels within the organizations, i.e., senior management,
middle
management, and entry level. Positions may also be broken down by job
families or the types of responsibilities, i.e., business development, marketing,
product management, and sales.
5.4.3.Geographic area
 37

Some salary surveys do not provide data for a specific geographic area since
wage rates will vary by location, and organization should factor for geography
any national salary survey data for the local or regional recruiting area to
approximate local wage rates.
5.4.4.Compensation data.
There are many things to consider when analyzing the compensation
components of a salary survey. Because companies have different pay
structures, compensation data is collected in ranges as well as actual pay. Salary
surveys can provide employers more
information on the marketplace and how to set competitive pay without
overpaying or underpaying employees. Surveys should ask for the minimum,
midpoint, and maximum for the surveyed positions, in addition to the actual base
salary paid.
Usually, the prevailing practice for any one job is to pay a range of incomes. As
a result, although the median pay for a job is likely to be a definable number, the
range is just as important. Companies pay employees differently for various
reasons. It could be the company's pay philosophy; or it could be the geographic
location or the industry
practice; or it could be the incumbent's length of service or proficiency in the
job. Whatever the reason, it is unlikely that two companies will pay an employee
doing the same job exactly the same amount.
When reading the base pay figures, it's important to check how the numbers
are calculated. The surveying parties can dictate to the participants how the
numbers should be reported. Salaries can be on an annual, monthly, or hourly
basis. For example, if the incumbent is a contract employee, hourly salaries
are more relevant than an annual figure. The survey may request pay data for
individual incumbents or averages for all incumbents matching a specific job
description, depending on the
types of surveys and their objectives.
6. Pay Structure
When a company has planned to expand into new countries, it is necessary to
establish a pay (salary) structure. With all the different economic situation, cultures
and exchange rates, it is difficult to come up with one structure that works
everywhere. In the following, we will introduce more details with regard to pay
structure. There are several terms and definitions to acknowledge first:
6.1. Terms and Definitions
6.1.1.Policy Line
A job structure orders jobs on the basis of internal organizational factors. The pay
structure, on the other hand, is anchored by the organization’s external
competitive position, reflected n its pay policy line.
The pay level that a company sets its pay at compared to the market pay line,
typically the midpoint of the pay structure is set to judge the going market rate.
In building pay structure scientifically, the line is a statistically computed least-
squares-regression line.
6.1.2.Pay Grades
Pay grades are used to group jobs that have approximately the same relative internal or
38

external worth; in other words, all jobs within a particular grade are paid the same
rate or within the same pay range. Grades enhance an organization's ability to
move people among jobs with no change in pay.
6.1.3.Pay Range
Pay range typically means high to low or minimum to maximum pay for a
certain job grade. The range midpoints, minimums, and maximums reflect
career paths,
promotions, and other management systems and philosophy within the
organization. The differential must be large enough to induce employees to
seek and/or accept the promotion or to undertake the necessary training
required.
Range spread subtracts the minimum amount from the range maximum and
then divides that figure by the minimum. In general, lower-level jobs typically
have a narrow range between mil1imumand maximum salaries, while the salary
ranges for higher-
level jobs will be wider. People in entry-level jobs have more promotion
possibilities and tend to stay at the entry level for shorter periods of time, while
people in higher- level jobs tend to stay in their range for a longer period of
time.
Range overlap in salary ranges that will allow career development and pay
increases without promotion at each level and the percentage of increase the
organization will offer an employee for a promotion.
Overlap=(max rate of lower grade – min rate of higher grade)/(max rate of
higher grade-min rate of higher grade)
6.1.4.Compa-ratios (CP)
CP is a salary expressed as a percentage of or indexed to the salary range
midpoint/market rate (salary/midpoint or market rate = CP). The CP may be
used as an indicator of how an individual is doing against plan.
6.1.5.Broadbanding
Broadbanding, which uses fewer pay grades having broader ranges than
traditional compensation systems, is increasingly being used. Broadbanding,
called fat grades, means collapsing pay grades and ranges into just a few wide
levels or a band, which
includes one minimum and one maximum range, while midpoint often not used.
The purposes of using broad banding as follow:
 Provide flexibility to define job responsibilities more broadly.
 Foster cross-functional growth and development.
 Ease mergers and acquisitions.
The most important difference between grades and broad banding is where
the controls are located. There are several reasons why it is beneficial to
reduce the number of pay grades and broaden pay ranges. First and
foremost, broadbanding is
more consistent with the flattening of organizational levels and the growing use
of jobs that are multidimensional. With fewer bands and broader ranges,
employees can shift responsibilities as market conditions and organizational
needs change. Traditional
 39

questions from employees about when a promotion to a new grade occurs,

and what pay adjustments will be made for temporarily performing some new
job
responsibilities, are unnecessary.
Another advantage of broadbanding is that employee career development can
be enhanced when the artificial barriers of numerous pay grades are removed.
With broadbanding, many of the control mechanisms traditionally enforced by
HR departments also are removed, and authority for more compensation
decisions is
decentralized to the operating managers. By allowing employees to move into
other job areas and broaden their knowledge, skills, and abilities without having
to deal with a large number of constraints imposed by a compensation program,
the organization
encourages employees to move between departments, divisions, and
locations. In firms that have adopted broadbanding, employees are
encouraged to move across business units and apply for openings in areas of
the company other than where they have been working. This cross-functional
development is beneficial because it creates more employees who have
greater flexibility and broader sets of capabilities.
However, broadbanding is not appropriate for every organization. Many
organizations still operate in a relatively structured manner, and the flexibility
associated with broadbanding is not consistent with the traditional hierarchical
culture in which
executives and managers have been operating.
Another problem with broadbanding is that many employees have
become ”conditioned” to the idea that a promotion is accompanied by a pay
raise and movement to a new pay grade. As a result of removing this grade
progression, the organization may be seen as having fewer upward promotion
opportunities.
Furthermore, a number of individuals do not want to move across the
organization into other areas.

Pay Level

Broadband
Policy Line

Max 2

Max
Spread
O verlap Max-Min
2
Pay Range

Max-Min Mid Max 2-Min 2

Min 2
Min

Min Grade Level

Grade 1 Grade 2 Grade 3 Grade 4

Pay Structure
40

Heaps, W. (2011). Global Salary Grades or Global Salary Structure? Retrieved from
 41

internationalhrforum.com.

6.2. Global Salary Grades

Global Salary Grades refers to a standardized method of classifying positions
across a global enterprise. Alternative titles would be global bands or global
job evaluation.
Employers often adopt global salary grades to enable internal comparisons
and standardize certain elements of compensation and benefits, such as
short- and long- term incentives. For example, global salary grades helps
answer the question “is the Brand Manager position in Greece equivalent to
the Associate Brand Manager in France or the Marketing Manager in
Kenya?” Or, all staff in band C or higher
are
eligible for equity compensation awards.
Salary Structure is the term used to refer to the salary ranges associated with
salary grades. A Global Salary Structure, by it’s very name, would imply a
single structure for all locations globally. Sometimes you may also see this
referenced as an
international salary range. Some companies use a global salary structure to
manage a cadre of international assignees (usually based on the headquarters
market).
International organizations such as the World Bank and the United Nations, and
many international NGOs, use international salary structures in managing their
international (expatriate) staff as well. But it would be very unusual to have a
global salary structure applicable to all staff in an organization.
If you are managing a global enterprise, global grades can be very useful in
several respects. In addition to the examples above allowing
comparison of equivalent
positions across different markets with varying titles, and standardization of
executive compensation programs, global grades allow the organization to
establish leading talent management processes. The global grades will
help establish competencies and career tracks, and the related training and
development that is required to train future leaders. Global grades also help
companies manage succession planning more easily, by providing a common
language to describe the challenges and complexities of an individual position.
6.3. Global Pay Structure
Salary structures are a very useful tool for all organizations. They help
ensure consistency and avoid discrimination, control costs, and together
with a strong
performance management process, allow managers to differentiate between
different positions and varying levels of performance amongst the team.
Each country is a
different market, however, and therefore, you need to build your structure
separately for each one. Market data plays a key role here, since the structure
must be anchored to the market in which you are competing for talent.
In the end, if you design a global grading system with local pay structures,
you’ll get it right. The grades will give you global consistency while the
structures will be tailored to the local market, guided by your global
compensation philosophy, which provides standards for each country to meet.
42

A salary structure is commonly used by employers to set out the range of pay, from
 43

minimum to maximum, associated with each salary grade or band. By

associating each position with a grade or band, employers can use a salary
structure to help manage compensation in an optimal way.
Here are ten steps to develop a salary structure for your organization, with
some special considerations for international developing markets:
6.3.1.Establish your compensation philosophy
Each employer needs a policy which outlines their desired market position.
What percentile of the market is your target? Which comparators are
appropriate? Is the target the same for all grades? A well-articulated
compensation policy provides valuable guidance for the development of a pay
structure. In large organizations, there is often a corporate policy which forms
the basis for local policies.
6.3.2.Gather market data
Identify surveys with your desired comparators (as specified in your company
policy). Most employers prefer at least two survey sources. In international
markets this can be challenging, especially in developing countries and smaller
markets. Consider sector- specific surveys as well as multi-sector options –
certain jobs are found across many
employers, not just your sector. In smaller international markets, leading
employers often provide a better proxy for the most competitive market than do
sector surveys with many less sophisticated employers. Don’t overlook
international organizations;
they pay very competitively and are often well-established in the smallest of countries.
6.3.3.Identify benchmark jobs
Benchmark jobs are those that are representative of roles found across many
organizations – standard roles such as Manager, Accountant, Payroll
Administrator, Secretary, Clerk and Driver. Benchmark jobs are easy to
understand and match to, and will appear in multiple surveys, enabling the use
of multiple sources. For professional roles specific to your sector, sector
surveys could be a good source. In other cases, and with multi-sector survey
sources, look for those that utilize well-developed career
ladders, enabling easy cross-occupational job matching. As an example, such
an approach would examine Analyst positions across different functional areas
(e.g., finance, HR, procurement, marketing, etc.).
6.3.4.Measure your market position
There are several ways to do this. If you have a lot of benchmark jobs,
tabulate the average of all of the roles in the same internal level or grade.
Weighted averages
incorporating number of incumbents associated with each survey data point
is a common approach. Select the market reference from the survey most
appropriate under your policy. In developing countries market data is more
volatile. A good approach is to use minimum and maximum values to
“bookend” the data in these
markets. This helps eliminate outliers and capture more realistic market survey values.
6.3.5.Calculate the compa-ratio
Calculate the compa-ratio. This is the ratio of your data to the market — 100
means fully comparable, while a ratio under 100 indicates a below market
44

position, and over

 45

100, above market. There are different approaches to summarizing the data —
by position, by grade, etc. Whatever approach you use, the compa-ratio
analysis will
illustrate which parts of the organization are competitive against the market and
which ones require some attention!
6.3.6.Check your budget
This is a critical step. You can calculate the average difference between your
current scale and the market. This indicates about how much of an increase
would be required to make your scales fully comparable to the market. Your
internal budget constraints,
though, will dictate how close to this ideal you can achieve. In addition to
internal budgets, consider the average market movement in your surveys,
and the general
inflation rates (never use inflation to determine how much more to pay staff –
this is determined by cost of labor, not cost of living).
6.3.7.Start allocating
This is the start of an exercise which will repeat many times, until you get the
desired result. Build a model of your organization, ideally with the number of
incumbents in each grade. Using your overall percentage of market and
budget number, start
increasing your scale (use Mid points, or the Mins and Maxs). See how close
you can get to fully comparable to the market, and how much it will cost. Does
it jive? If not,
tweak the data a bit. You can adjust the percentage each grade is increased,
as well as examine the spans (range from min to max) and inter-grade
differentials, in order to gain better market alignment. Obviously, the incumbent
count of each grade will
impact the overall costing model.
6.3.8.Final adjustments
Once you have built your new scale and matched it to the market as closely as
possible, and within your budget, give it a once over. Does it make sense? Are
the increase amounts distributed in a pattern which will cause unrest amongst
your staff? Strive to achieve a scale which will reflect your comp policy and
enhance internal cohesion in
the organization. This step is the art of compensation, not the science.
6.3.9.Management approval
Review your proposed scale with management, presenting your rationale,
budget and overall market comparisons. Discuss concerns you may have
uncovered about specific positions or grades, and educate your management
about the process used. Outline your implementation plans.
6.3.10. Communicate
Develop appropriate communications for managers and staff. Let them know all
of the work that went in to the exercise, and how the organization compares to
the market. Be careful here — you need to obviously put on a positive spin —
that’s why statistics are so flexible!
7. Strategic Rewards
The design process is started by identifying desired outcomes and goals for your
46

organization. This is often referred to as developing your compensation philosophy.

Your philosophy is formed by considering a number of factors. The balance of direct
and indirect rewards, the complexity and responsibility of a role and the candidate
or employee filling
it, as well as your focus on internal versus external equity are just few factors
explored in this section. It is the ability to achieve results that is critical to
organizational success.
Compensation can be defined as all of the rewards earned by employees in return
for their labor. This includes:
 Direct financial compensation consisting of pay received in the form of
wages, salaries, bonuses and commissions provided at regular and
consistent intervals.
 Indirect financial compensation including all financial rewards that are not
included in direct compensation and can be understood to form part of the
social contract
between the employer and employee such as benefits, leaves, retirement
plans, education, and employee services.
 Non-financial compensation referring to topics such as career
development and advancement opportunities, opportunities for
recognition, as well as work
environment and conditions

FINANCIAL NON-FINANCIAL

DIRECT INDIRECT THE WORK

JOB/POSITI ENVIRONME
ON NT

and
Responsibilities

Educational
services,
Achievemen
t

Burguillos, B. & López, M. (2013). How to develop a Global Total Compensation

Model. HR Strategy: Gamification & Engagement.
It is critical that organizations align their compensation practices with their
organizational cultures, especially if efforts are made to change the cultures
because of competitive
pressures. For instance, a telecommunications firm faced major changes in the
industry after government restrictions on pricing were removed and cable
television firms were allowed to provide telephone service. The firm could not
continue to offer the wages it had paid when government agencies allowed the
 47

pricing of services to obtain full cost

48

recovery and a set level of profits. When changing organizational culture,

organizations must change their compensation systems if they are to avoid
sending mixed signals to employees.
Another strategic design consideration for compensation systems is to balance the
costs of attracting and retaining employees with the competitive pressures in its
industry.
Considering these pressures is particularly important when the organization faces
a very tight labor market for workers with specific skills. The cost pressures of
industry
competition with organizations in lower-wage countries such as China or Mexico
must also be addressed, while maintaining competitive pricing for the firm’s
products and services.
Some organizations have specifically stated policies about where they wish to be
positioned in the labor market. Most employers position themselves in the second
quartile (P50), in the middle of the market, based on pay survey data of other
employers’ compensation plans. Choosing this level attempts to balance employer
cost pressures and the need to attract and retain employees by mid-level
compensation plans.
An employer using a first-quartile (P25) approach is choosing to pay below market
compensation. This may be done for several reasons. One is because of a shortage
of funds and the inability to pay more and still meet strategic objectives. Also, if
there is an abundance of workers, particularly those with lower skills, then a below-
market approach can be used to attract sufficient workers at a lesser cost. The
downside of this strategy is
that higher turnover of workers is more likely. If the labor market supply
tightens, then difficulty in attracting and retaining workers will probably result.
A third-quartile (P75) approach is an aggressive, above-market emphasis. This
strategy may be chosen to ensure that sufficient workers with the required capabilities
are attracted and retained. It also may allow the organization to be more selective
when hiring workers.
However, because it is a higher-cost approach, it is crucial that those paid above-
market wages be more productive.
In determining effective rewards, however, the uniqueness of each employee must
also be considered. People have different needs or reasons for working. The most
appropriate compensation will meet these individual needs. To a large degree,
adequate or fair compensation is in the mind of the employee.
8. Individual Differentiation
There are two basic compensation philosophies, which should be seen as opposite
ends of a continuum. At one end of the continuum in the below figure is the
entitlement philosophy; at the other end, the performance-oriented philosophy:
8.1. Entitlement Orientation
The entitlement philosophy can be seen in many organizations that
traditionally have given automatic increases to their employees every year.
Further, most of those
employees receive the same or nearly the same percentage increase each year.
Employees and managers who subscribe to the entitlement philosophy believe that
individuals who have worked another year are entitled to a raise in base pay,
and that all incentives and benefit programs should continue and be increased,
regardless of
 49

changing industry or economic conditions. Commonly, in organizations following an

50

entitlement philosophy, pay increases are referred to as cost-of-living raises,

whether or not they are tied specifically to economic indicators. Following an
entitlement philosophy ultimately means that as employees continue their
employment lives,
employer costs increase, regardless of employee performance or other
organizational competitive pressures. Market comparisons tend to be made
within an industry, rather than more broadly considering compensation in firms
of all types. Bonuses in many
entitlement-oriented organizations are determined very paternalistically and
often do not reflect operating results. Instead, the CEO or owner acts as Santa
Claus at the end of the year, passing out bonus checks that generally do not
vary from year to year.
Therefore employees “expect” to receive the bonuses as another form of entitlement.

Entitleme Performan
nt ce
• Senior – based pay • No raises for length of
• Across - the – board raises service
• Pay scales raised annually • No raises for longer-
• Industry comparisons service poor performers
of compensation only • Market adjusted
• “Santa Claus” bonuses pay structures
• Broader industry comparison
• Bonus tied to performance
results

Berger, L. & Berger, D. (2015). The Compensation Handbook: A State-of-the-Art

Guide to Compensation Strategy and Design (6th Edition). Columbus, OH:
McGraw-Hill Education.

8.2. Performance Orientation

Where a performance-oriented philosophy is followed, no one is guaranteed
compensation just for adding another year to organizational service. Instead,
pay and incentives are based on performance differences among employees.
Employees who perform well get larger compensation increases; those who do
not perform
satisfactorily receive little or no increase in compensation. Thus, employees
who perform satisfactorily should keep up or advance in relation to a broad
view of the
labor market for their jobs, whereas poor or marginal performers should fall behind.
Bonuses are paid based on individual, group, and/or organizational
performance results. Few organizations are totally performance-oriented
in all facets of their compensation practices. However, breaking the
entitlement mode is increasingly
occurring in the organizational restructuring common throughout many
industries. A study of public-sector HR managers found that there is a desire
and need to shift toward more performance-oriented compensation practices
in many public-sector organizations. How fast that occurs, given the historical
traditions and the strength of public-sector unions, remains to be seen.
 51

9. Market conformity
An organization may choose to match the market and pay approximately the
same wages and offer a benefits package similar to that of the competition.
Some organizations strive to lead the market and recruit and retain the most
desirable talent from the labor pool by offering higher salaries and/or better
benefits. When using salary survey data, leading the market typically equates to
the 75th percentile of the
market.
Other organizations deliberately, out of economic necessity or to control labor
costs, lag the market and establish their pay rates or benefits levels below those
offered by other employers. Reduced labor rates may enable the organization to
offset other higher costs
such as purchasing, distribution, or sales expenses. When using salary survey data,
lagging the market typically equates to the 25th percentile of the market.
P75
Pay Level

Benchmarking: lead, match, or Actual Data

lag?
Policy Line (P50)

P25

Max Pay
Compa-Ratio =
Pay Mid
Mid

Min Grade Level

Grade 1 Grade 2 Grade 3 Grade 4

Berger, L. & Berger, D. (2015). The Compensation Handbook: A State-of-the-Art

Guide to Compensation Strategy and Design (6th Edition). Columbus, OH:
McGraw-Hill Education.

10. Internal Consistency

Once managers have determined pay ranges, they can set the specific pay for individuals.
Setting a range for each pay grade gives flexibility by allowing individuals to
progress within a grade instead of having to be moved to a new grade each time
they receive a
raise. A pay range also allows managers to reward the better-performing
employees while maintaining the integrity of the pay system.
Regardless of how well constructed a pay structure is, there usually are a few
individuals whose pay is lower than the minimum or higher than the maximum.
These situations occur most frequently when firms that have had an informal pay
system develop a new, more formalized one. Red circles green circles refers to
salary of employees either above or below the salary range associated with the
job which the employee is the job
52

incumbent. If the overall staff compensation is well managed, both green-circle

and red- circle rates would be fairly uncommon within the organization.
10.1. Red-Circled Employees
A red-circled job is shown on the graph in the below figure. A red-circled
employee is an incumbent who is paid above the range set for the job. For
example, assume that an employee’s current pay is $10.92 per hour but the
pay range for that grade is
between $6.94 and $10.06. The person would be red circled, and attempts
would be made over a period of time to bring the employee’s rate into grade.
Typically, the
red-circled job is filled by a longer service employee who has declined
promotions or has been viewed as unpromotable due to insufficient education
or other capabilities. Yet the individual may have continued to receive large pay
increases.
Several approaches can be used to bring a red-circled person’s pay into line.
Although the fastest way would be to cut the employee’s pay, that approach is
not
recommended and is seldom used. Instead, the employee’s pay may be
frozen until the pay range can be adjusted upward to get the employee’s pay
rate back into the grade. The employee can also be transferred to a job with
a higher grade or given more responsibilities. This method will result in
greater job evaluation worth, thus
justifying the job’s being upgraded. Another approach is to give the employee
a small lump-sum payment but not adjust the pay rate when others are given
raises. There are some solutions for red circled employees:
10.1.1. Regular increase. In this approach a red-circle employee
receives the same increase as if he or she were not at or above the
maximum.
10.1.2. No increase. No merit-based or seniority pay raise beyond the
maximum is allowed with this approach. The “no increase” strategy
ensures that the company pays only what the job is worth and makes
the most sense in the context of a wage/salary structure. This
approach may result in the loss of valued personnel, but such
turnover can be minimized if the institution provides employees with
the encouragement, training, and development opportunities
necessary to qualify for higher positions.
10.1.3. Freeze salaries until cost of living adjustments to a revised salary range
catches up with the employee. This may take years or may never be
possible because employees are too far above the new pay range.
10.1.4. Limited or minimal increase. Under this policy, only less-
than-regular increases are permitted for red-circle personnel.
10.1.5. Lump-sum bonus. With this approach eligible employees
receive a cash payment “up front” when a rate change is due.
10.1.6. Allow employees to train for and transfer into higher paying jobs.
10.1.7. No established policy. Red-circle situations are handled on a
case-by-case basis, with no set approach. Some red-circle
employees receive regular
increases; others are given limited pay raises or none at all.
 53

10.2. Green-Circled Employees

An individual whose pay is below the range is a green-circled employee.
Promotion is a major cause of this situation. Assume someone receives a
promotion that significantly increases his or her responsibilities and pay grade.
Typical promotion adjustments are 8% to 15%, but such an adjustment may
still leave the individual below the minimum of the new pay range. Because
the promotion represents such a significant increase in responsibilities, the
employer may not work to increase the person’s pay to the minimum until all
facets of the new job are being fully performed. Generally, it is recommended
that the green-circled individual receive pay increases to get to the pay grade
minimum fairly rapidly. More frequent increases can be given if the increase to
minimum would be large.
In the situation where green-circled employees are members of a protected
group, such as union members, when salary ranges had been agreed in the
collective agreement, the green circle status could look like discrimination
and subject the
organization to litigation, especially if other employees in the same job are all
paid in the range. There are some solutions for green circled employees:

Pay Level

Policy Line

Red Circle

Max Green Circle

Mid Pay compression?

Min Grade Level

Grade 1 Grade 2 Grade 3 Grade 4

Berger, L. & Berger, D. (2015). The Compensation Handbook: A State-of-the-

Art Guide to Compensation Strategy and Design (6th Edition). Columbus, OH:
McGraw-Hill Education.

10.2.1. Immediate increase. With this approach immediately raise the

employee’s pay to match the adjusted range in accordance with that
individual’s seniority and performance. This would be the preferred
method for an organization whose budget is large enough to allow such
immediate action.
10.2.2. Gradual Increase. With this approach gradually raise the
individual’s wages to the appropriate level, starting first with an
adjustment to bring the employee’s
54

pay to the minimum of the range. This would most likely be the
preferred method for an organization whose budget is small.
10.3. Pay Compression
One major problem many employers face is pay compression, which occurs
when the range of pay differences among individuals with different levels of
experience and performance becomes small. Pay compression occurs for a
number of reasons, but
the major one involves the situation in which labor market pay levels increase
more rapidly than an employee’s pay adjustments. Such situations have
become prevalent in many occupational areas, particularly those in the
information technology field.
Occasionally, in response to competitive market shortages of particular job
skills, managers may have to deviate from the priced grades to hire people
with scarce
skills. For example, suppose the worth of a specialized information systems
analyst’s job is evaluated at $38,000 to $48,000 annual salary in a company,
but qualified
individuals are in short supply and other employers are paying $60,000. The firm
must pay the higher rate. But suppose several analysts who have been with
the firm for several years started at $38,000 and have received 6% increases
each year. These current employees may still be making less than salaries
paid to attract and retain new analysts from outside with lesser experience.
One solution to pay compression is to have employees follow a step
progression based on length of service, assuming performance is satisfactory
or better.
10.4. Pay Increases
Once pay ranges have been developed and individuals’ placements within the
ranges identified, managers must look at adjustment to individual pay.
Decisions about pay increases often are critical ones in the relationships
among employees, their
managers, and the organization. Individuals have expectations about their
pay and about how much increase is “fair,” especially in comparison with the
increases
received by other employees. There are several ways to determine pay increases:
10.4.1. Pay for Performance Systems
Many employers profess to have a pay system based on performance. But
relying on performance-appraisal information for making pay adjustments
assumes that the appraisals are done well, and this is not always the case,
especially for employees
whose work cannot be measured easily. Consequently, some system for
integrating appraisals and pay changes must be developed and applied
equally. Often, this
integration is done through the use of a pay adjustment matrix, or salary guide chart.
Pay adjustment matrices base adjustments in part on a person’s compa-ratio,
which is the pay level divided by the midpoint of the pay range.
In many organizations, pay-for-performance systems are becoming a popular
way to change the way pay increases are distributed. In a truly performance
oriented
system, no pay raises are given except for increases in performance. Giving pay
 55

increases to people because they have 10 to 15 years’ experience, even

though they are mediocre employees, defeats the approach. Further, unless
the performance- based portion of a pay increase is fairly significant,
employees may feel it is not worth
56

the extra effort. Giving an outstanding industrial designer making $40,000 a

year the “standard raise” of 4% plus 1% for merit means only $400 for merit
versus $1,600 for “hanging around another year.”
10.4.2. Seniority
Seniority, or time spent in the organization or on a particular job, can be used
as the basis for pay increases. Many employers have policies requiring that
persons be
employed for a certain length of time before they are eligible for pay increases.
Pay adjustments based on seniority often are set as automatic steps once a
person has been employed the required length of time, although performance
must be at least satisfactory in many nonunion systems. A closely related
approach uses a maturity
curve, which depicts the relationship between experience and pay rates. Pay
rises as an employee’s experience increases, which is especially useful for
professionals and skilled craft employees. Unlike a true seniority system, in
which a pay raise occurs automatically once someone has put in the required
time, a system using maturity
curves is built on the assumption that as experience increases, proficiency
and performance also increase, so pay raises are appropriate. If proficiency
does not
increase, theoretically pay adjustments are reduced, although that seldom happens
in practice. Once a person plateaus in proficiency, then the pay progression is
limited to following the overall movement of the pay structure.
10.4.3. Cost-Of-Living Adjustment (COLA)
A common pay-raise practice is the use of a standard raise or cost-of-living
adjustment (COLA). Giving all employees a standard percentage increase enables
them to maintain the same real wages in a period of economic inflation. Often,
these adjustments are tied to changes in the Consumer Price Index (CPI) or
some other
general economic measure. However, numerous studies have revealed that
the CPI overstates the actual cost of living. Unfortunately, some employers
give across-the- board raises and call them merit raises, which they are not. If
all employees get a pay increase, it is legitimately viewed as a cost-of-living
adjustment having little to do
with merit or good performance. For this reason, employers should reserve
the term merit for any amount above the standard raise, and they should state
clearly which amount is for performance and which is the “automatic” COLA
adjustment.
10.4.4. Lump-Sum Increase (LSI)
Most employees who receive pay increases, either for merit or seniority,
first have their base pay adjusted or then receive an increase in the amount
of their regular
monthly or weekly paycheck. For example, an employee who makes $12.00
per hour and then receives a 3% increase will move to $12.36 per hour. In
contrast, a lump- sum increase (LSI) is a one-time payment of all or part of a
yearly pay increase. The pure LSI approach does not increase the base pay.
Therefore, in this example the person’s base pay remains at $12.00 per hour.
If an LSI of 3% is granted, then the person received $748.80 (computed as
36¢ per hour * 2080 working hours in the
year.) However, the base rate remains at $12.00 per hour. It is that base rate
 57

upon which overtime is figured, and keeping the base rate static slows down
the progression of the base wages. It also allows for the amount of the “lump”
to be
varied, without having to continually raise the base rate. Some organizations place a
58

limit on how much of a merit increase can be taken as a lump-sum payment.

Other organizations split the lump sum into two checks, each representing
one-half of the year’s pay raise.
As with any plan, there are advantages and disadvantages. The major
advantage of an LSI plan is that it heightens employees’ awareness of what
their performance
“merited.” A lump-sum check also gives employees some flexibility in their
spending patterns so that they can buy big-ticket items without having to take
out a loan. In addition, the firm can slow down the increase of base pay, so
that the compounding effect of succeeding raises is reduced. Unionized
employers have negotiated LSI plans as a way to hold down base wages,
which also holds down the rates paid for
overtime work. Pension costs and some other benefits, often tied to base
wages, can be reduced as well.
One disadvantage of LSI plans is administrative tracking, including a system
to handle income tax and Social Security deductions from the lump-sum
check. Also, workers who take a lump-sum payment may become
discouraged because their base pay has not changed. Unions generally resist
LSI programs because of this and because of the impact on pensions and
benefits. To some extent, this problem can be reduced if the pay increase is
split to include some in the base pay and the rest in the lump-sum payment.
11. Job vs. Person Based Pay
Pay scales have traditionally been defined by the qualifications, experience and
knowledge required to perform job duties at a certain level. In other words, pay is
centered on the job, not the person. Skill-based pay, also referred to as
knowledge-based pay, is person-focused. Workers are compensated for each
new skill that allows them to perform new tasks on the job. As workers gain each
additional skill, their pay rate goes up. Some companies believe that learning a
certain sets of skills leads to higher productivity and, therefore, embrace the idea
of skill-based pay.
The underlying objectives of any compensation system are to attract, motivate and
retain good staff. But which compensation system is most likely to achieve that
goal? The answer, not surprisingly, is that it depends.
There is no “magic bullet” — only a choice about what's right for your particular
practice. There are literally hundreds of variations to choose from, but they are all
derived from just a few theoretical models, which can be categorized as either
base pay or performance pay. Most practices use some combination of the two
categories to leverage the strengths of each. This article will examine two models
of base pay — paying for the job and paying the person — as well as models that
involve extra pay for performance — merit pay and practice-effectiveness pay.
 59

Job- Person-Based
Based
Employee focus Seek promotions to earn more pay Seek skills/competencies

Procedures Job analysis Skill/competence analysis

Job Certification
evaluation
Advantages Clear Continuous learning
expectations Flexibility
Sense of Reduced work force
progress Lateral movement
Pay based on value of work performed
Limitations Potential Potential
bureaucracy bureaucracy
Potential inflexibility Requires cost
controls

Berger, L. & Berger, D. (2015). The Compensation Handbook: A State-of-the-Art

Guide to Compensation Strategy and Design (6th Edition). Columbus, OH:
McGraw-Hill Education.

Although no single model is right for everyone, the practice-effectiveness model

does offer a number of advantages. Because this formula combines base salaries
with variable bonus payments that depend on the performance of the practice, it
helps control
operating costs; rewards the right behaviors and builds unity; works with a
variety of payment structures; encourages self-management and innovation;
and breaks down bureaucracy. But before we analyze it, let's look at its rivals.
11.1. Paying for the job
Paying for the job is the “traditional” model that most people know. Each
position is slotted into a grade level and weighted based on the education
and experience the job requires and the number of staff who report directly to
the person in the
position. Pay raises are scheduled as an employee's tenure with the practice
increases. The traditional model is designed to serve as a cost-control tool
and to establish each job's relative worth in a practice.
The traditional model has a number of advantages:
 It facilitates centralized control. It gives an organization criteria with
which to evaluate whether individual physicians or managers are paying
their staff too much. It also makes budgeting relatively easy and makes
salary expenditures predictable.
 It's a useful tool for evaluating internal pay equity. Because compensation
for all jobs in the practice is based on one system, you can easily
compare what staff across the practice are earning.
 It facilitates market testing of your pay scale's competitiveness. It allows a
job in one practice to be scored using measures that are comparable
with those used in other practices. With some of the widely used
systems, extensive survey data are available to help practices set their
pay levels based on what similar
60

practices are paying.

 61

 It has the appearance of objectivity. Although quantification doesn't

ensure fairness, it does make a pay system consistent. Staff members
may not be completely satisfied with their compensation, but at least
they won't see the pay system as arbitrary.
In short, the traditional pay model can be appropriate if your practice needs high
levels of internal equity and centralized control of compensation. But the
traditional model has several disadvantages:
 It can inflate the pay system's operating costs. After implementing a
traditional base-pay system, a practice may need to hire a consulting firm
to provide ongoing compensation audits and survey data. In addition, the
traditional model is a high producer of records and administrative
overhead because it requires
that each job be evaluated (with supporting documentation) and that the
pay grades be revised annually.
 It encourages point grabbing and inefficiency. Staff members become
quite sophisticated in how to get their jobs scored highly in
compensation reviews. The traditional model rewards people for
creating overhead and higher costs because overseeing larger budgets
and more subordinates leads to higher pay.
 It compromises honesty in job descriptions. People quickly realize that
the way to beat the system is to create flamboyant and overly inclusive
job descriptions. Over time, the practice can end up paying everyone
excessively.
 It rewards the wrong behavior. Giving a person more money simply for
taking on new responsibilities rewards job changes rather than
outstanding performance or development of needed skills.
 It doesn't accurately reward the performance of talented staff.
Because compensation is determined by an employee's level and the
job's rating, the model limits your flexibility to reward people based on
their individual
performance. For example, no matter how well a first-year billing clerk
performs, he or she will earn less than someone who has been doing an
average job for
the last four years. This can hurt the motivation of your best performers
and encourage them to look for jobs elsewhere.
 It reinforces a vertical career orientation. More responsibilities, especially
supervisory and managerial, lead to more money. This drives your best
technical and clinical staff into roles where they may not be as effective,
and it does little to encourage the development of technical and clinical
skills. This is especially counterproductive in practices that are
implementing total quality management (TQM), continuous quality
improvement (CQI) or other team approaches to
improving problem solving, operational efficiency and clinical outcomes.
 It reinforces hierarchy and bureaucracy. By assigning value to jobs in
terms of their hierarchical position and level of control, the traditional
model fosters unnecessary and undesirable pecking orders and power
relationships.
In short, the traditional model offers consistency and the perception of fairness in a
62

practice's compensation system. But be careful: Once implemented, it can

become a dominant part of a practice's culture and have unintended,
counterproductive
results.
11.2. Paying the person
The alternative to job-based pay is to compensate staff according to the value
of their skills in the market. The most common approach is competency-based
pay. This
model is designed to motivate staff to develop the competencies — knowledge
and skills for performing specific work — that the practice needs to accomplish
its objectives. This model is most appropriate for practices that need high
levels of intra- group teamwork, intergroup collaboration and adaptability to
change.
Advantages of the competency-based model include these:
 It can lead to a broader perspective for staff. When this model is
combined with a participatory management style, it encourages and
rewards cross-training,
learning and the assignment of responsibilities based on the skills that
staff possess (rather than their “positions”). In turn, staff learn more
about how the practice works, resulting in a big-picture understanding of
what improvements are needed. This broader perspective allows staff
members to be more
innovative in making the practice more efficient.
 It reinforces a culture of improvement. The model delivers a tangible
reward to staff for growing, learning and developing new areas of
competency. It is compatible with TQM, CQI and similar approaches to
improvement.
 It facilitates self-management and enables leaner staffing. Because the
model rewards staff members for developing new skills, it prepares
them to be more productive, take on greater responsibility and work
more collaboratively with other staff. It also reduces the need for
physician oversight. Maximizing the staff's potential can lead to leaner,
flatter staffing configurations — and substantial overhead savings.
 It improves staff retention. Because they can develop skills continuously, staff
members have more control over their pay. They are unlikely to find
comparable jobs elsewhere because most organizations still use the
traditional model.
 It builds acceptance for change. This model helps staff become more
accepting of change because in it change represents the potential for
professional growth
— and better pay. As staff learn to accept change, the practice becomes
better able to react to staff turnover, expansions, mergers or changes in
the health care environment.
There are several disadvantages of the competency-based model as well:
 It produces high pay rates. As staff become more valuable to the
practice and their tenure increases, individual salaries will increase. This
doesn't necessarily mean that total payroll costs will rise. In fact, they
 63

can be lower than those

generated in a traditional model, if the practice can use its fewer, but
more competent, staff more effectively.
64

 It requires a large investment in training. Because peers train each

other, productivity will decline initially. Physicians must be committed to
staff training as the means of competency acquisition, and they must be
patient early in the implementation process, giving the model a chance
to produce the expected results.
 Market comparisons can be more difficult. Since most survey data relate
to the traditional pay model, staff-salary comparisons may not be
straightforward. You can overcome this challenge by examining data
about what others pay for
certain competency mixes rather than direct job-by-job comparisons.
 Individuals can “top out.” Practices generally establish an income ceiling
for staff who master all competencies, but employees in the traditional
model can also reach this kind of limit. In a competency-based model,
this is less of an issue since staff have higher pay scales than traditional
models offer.
 Administrative involvement can increase. Keeping track of each
person's competency assessments, competency mix and pay rate
requires time and effort. A computerized record-keeping system can
help you deal with this. A competency-based pay model requires
practices to commit to ongoing staff
training and to developing an administrative infrastructure that will support
the system. It may also require some mental effort to step outside the box
of
traditional thinking.
12. Compensation Communications
Managing a company’s compensation program is a balancing act, with your
company’s needs on one hand and your employees’ needs on the other. Your
company needs to offer a budget-passing yet competitive salary and benefits
package because it translates into better individual, team, and company
performance. Your employees want to earn what
they’re worth and feel valued for their time and talents. You need to create a win-
win, and engaging employees in the compensation conversation is a step in the
right direction.
If HR stop and think about it, it’s really all about managing employee expectations:
if they believe they are being compensated fairly and can look forward to future
rewards, they are likely to remain loyal employees; if they perceive their
compensation as “less than,”
they will seek greener pastures. And the lynchpin to managing expectations with
respect to compensation is – you guessed it – effective communications.
12.1. Goal of Compensation Communication
For your employees (present and future) to see their compensation package
as the tremendous offering that it truly is, they need to understand it. This
starts with
grasping your company’s compensation philosophy, your base pay system,
and the role your culture plays in promoting and supporting career growth. If
your compensation communications don’t connect the dots between their
pay, performance, and career development, maybe now is the time to
evaluate your communications plan.
 65

12.2. Timing of Compensation Communication

If you’re simply informing employees of their pay when they complete new
hire documentation and sign-off on their annual reviews, challenge your HR
team and management to make it a regular topic of group or individual
discussion. Motivate employees at different points throughout the year.
Monthly or quarterly in general
terms (promoting a bonus program or employee awards luncheon) and two or
three times during face-to-face meetings (formal and semi-formal employee
reviews). And take the opportunity to reassure employees during periods of
change, such as
expansion, downsizing or restructuring, and remind them of your company’s
goals and how their work contributes to it.
12.3. Information of Compensation Communication
Be as clear, straightforward, and explicit about your compensation up to the
level of transparency your company is comfortable with. Remember, you’re
“selling” this
information to employees to help them see the value in all you offer, helping to
manage their expectations, and encouraging them to buy-in to your
programs. You’ll want to include details about:
 How base pay is calculated — pay grade and pay range structures,
relative to experience and education levels
 Explanation on any pay changes — increases/decreases and how
they’re connected to the job market, performance, and cost of living
trends; criteria for raises and bonuses (especially in a pay-for-
performance system), timing for awards and payments
 Learning and career development opportunities — next steps,
performance markers, criteria for advancement
 How benefits such as health insurance, stock options, or tuition
reimbursements factor into their total compensation

 Relevant source material such as market data to back-up pay

adjustments And, don’t forget to promote your “feel-good” programs or
extras that are not
necessarily reflected in paychecks. These might include an employee of the
week program, free lunch Fridays for top performers, gold star award
ceremonies, etc.
Information about compensation should always come from HR or management.
Ideally, messages will get shared and reinforced by both. In fact, you may
want to develop a separate communications plan and training program for
managers to help
them understand your company’s compensation programs and encourage their
buy-in so they can effectively talk to employees about them.
All forms of media can support employee understanding and acceptance of the
total compensation package, so conform to your employees’ preferences.
Outside of one- on-one employee review meetings, you can share
personalized compensation-related information with employees through total
rewards statements or pay raise letters
66

mailed to their homes. More general, guideline-specific information can be given in

 67

educational meetings held by benefits company representatives, through e-

mail newsletters, or on the company intranet.
12.4. Total Reward Statement
Communicating the value of your total rewards program is critical for
engaging and motivating employees. If employees are not aware of the full
value of their total
rewards package, then your organization's return on investment is significantly
lower than it should be.
A Total reward statement provides employees with a personalized document
that communicates the overall value of their financial rewards such as base
pay, incentives and employee benefits. Total reward statements can also be
used to reinforce the communication of less tangible benefits such as work/life
programs, learning and development and flexible work arrangements.
Organizations who strive to be the best in their field, with an emphasis on
attracting and retaining top talent with a total rewards package that
distinguishes them from other organizations. Employees who are educated
and informed about their rewards package and have the tools to assist them
with their own financial planning.
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Part Two: Incentive Programs

1. Incentive Compensation
Internationalization or increased global reach is creating pressure for greater
consistency in compensation strategies. One might expect just the opposite given
the need to be sensitive to culture and local market differences between countries
and regions.
However, the convergence toward consistency is primarily at the philosophical or core
levels. Performance incentive programs are rapidly being deployed in many parts
of the world. There is increasing evidence that the strategies to deliver pay are
becoming more uniform from one country to the next.
Incentive pay is paying for performance beyond normal expectations, which is
designed to motivate employees to perform at higher levels. Traditionally, all
incentive plans are pay- for-performance plans. They all tie employees’ pay to the
employees’ performance.
Variable pay is more specific: It is usually an incentive plan that ties a group or
team’s pay to some measure of the firm’s overall profitability. Please refer to the
below figure:

Individual performance

• Merit pay
Line of sight
• Piecework
• Sales compensation
• Cash awards Individual
• Recognition programs
incentives

Group performance Group

• Gain-Sharing incentives
• The Scanlon plan
• The Rucker Plan
• Improshare plan
• Profit-sharing
• Deferred profit-sharing
• Risk-sharing plans
• Employee stock ownership plans (ESOP)
• Performance-sharing plans

Incentive Plan
Source: Milkovich, G.T. & Newman, J. (2013). Compensation. (11th Edition). New
York (USA): McGraw-Hill/Irwin.

1.1. Principle of Incentive Plan

1.1.1.The plan must be in concert with other organizational programs.
1.1.2.The plan must be in the line of sight-employees must be able to influence the
 69

attainment of the goal and see the direct results of their efforts.
1.1.3. The plan must have a sunset clause-all identified time period and
have a defined end.
1.1.4. The plan must incorporate short- and long-term perspectives. An
overlapping perspective may make it difficult for a key performer to
leave the organization without significant loss of money (sometimes
called the golden handcuffs approach).
1.2. Line of sight
Line of sight is a favorite phrase of compensation professionals and an
important concept in designing incentive plans (assuming you expect them
to actually impact performance). But where did it come from
and what does it mean? Line of sight is an expression that has its origins in
the military. In this context, it means "distance to target".
When we use the phrase in relation to employee motivation and rewards, it is
defined as an employee's perceived ability to affect a particular performance
metric. Why does this matter? Because the whole point
of most incentive plans is to focus employee attention and effort on making
some type of improvement happen -- more revenues, greater profits, more
satisfied customers, etc. If you choose a
measure of improvement and base incentive awards on it, but the typical
employee doesn't believe that there is anything he/she can do to influence
that measure, what outcome can you expect?
So how do you shorten line of sight and engage employees in making a
difference? It usually has less to do with finding that one magical measure
and more to do with communication and education. You say that your
organization needs to generate
more profit, but most employees don't understand how the business makes money?
When your employees show up each day knowing exactly what they need to
do in their particular niche of the organization to drive profits up, then you can
hang that carrot in front of them and expect things to happen.
1.3. Individual Incentives
Incentive plans are used to encourage a particular behavior or performance
standard for staffers through the use of monetary or other rewards. Individual
plans may
encourage top performers to excel, but they also have the potential
disadvantage of intimidating and discouraging lower-performing staffers.
1.3.1.Encouraging Maximum Effort
If you’ve got a superstar performer for whom the sky is the limit, an
individual incentive plan can encourage her to reach her maximum
potential. This can be especially effective in the sales arena when a
monetary incentive increases
incrementally based on the individual’s performance. The staffer knows her
income is dependent on her performance and that the more revenue she
generates, the larger her paycheck will be. As a business owner, you get the
advantage of only paying out bonuses when staffers excel.
70

1.3.2.Motivating Other Staffers

Individual incentive plans can create a sense of healthy competition within
an organization, as employees push themselves to excel to keep pace with
or surpass top-performing colleagues. There's no blame game with
individualized incentive plans. Employees succeed or fail based on their
own merit, with staffers understanding that they are in control of their own
earning potential.
1.3.3.Lack of Teamwork
An environment where it's every man for himself diminishes the propensity
for teamwork and collaboration. Staffers may not want to support one another
in
incentive-related endeavors, for fear the colleague will get a leg up or get
credit for another individual's work. This can create an uncomfortable or even
high-stress work environment that leads to infighting and potentially low
morale. The problem can become exacerbated if the incentive plan is
accompanied by a feeling that leads or support are not fairly distributed
among all staffers.
1.3.4.High Turnover Potential
Individual incentive plans often are utilized in commission-based learning structures.
In other words, if you don't perform, your earnings are significantly
diminished. An inability to generate a regular paycheck can discourage
staffers and result in high
turnover as employees leave to seek other jobs with more stable compensation
structures. Turnover can be bad for business, as you incur the costs of
advertising, recruiting, screening and retraining new hires.
1.4. Group Incentives
Employee incentive plans can help encourage staffers to work toward
particular objectives. Knowing they will be rewarded for above-and-beyond
efforts -- such as reaching earning goals -- can motivate staffers to push their
limits. To be effective, group incentive plans should be clearly defined, easily
measured and achievable.
Plans should also take into consideration the personalities, skill sets and interpersonal
communication skills of each member of the team that will be participating.
1.4.1.Group Incentive Pros
Creating a group incentive plan can help foster relationships between staff
members, encouraging them to find ways to work together in a collective
environment in order to achieve group goals. The approach can build a
stronger team, encourage brainstorming and create a vested sense of project
ownership across the board.
Staffers know they each must pull their own weight in order for the team to be
successful, which can prevent slacking or underperformance.
Encouragement and
even some degree of positive peer pressure can help ensure everyone's
strengths are utilized toward achieving stated objectives.
1.4.2.Group Incentive Cons
If team members perform at vastly different levels, creating a group incentive
can set the stage for drama in the workplace, particularly if some staff
 71

members feel compelled to work harder than others to carry the workload.
This can lead to
72

resentment, infighting and even a hostile work environment. Low-performing

employees may feel pressure from both the boss and their colleagues to
perform at levels above their comfort zone, whereas high performers may feel
they're doing all the work for the same amount of reward as their less-
motivated colleagues.
1.4.3.Making it Work
To make a group incentive plan work without creating tension or infighting,
clearly outlined objectives and individual work parameters should be set within
the group. If all individuals understand the specific roles they are expected to
play in the group’s performance, you’re less likely to create an environment in
which 10 percent of the
group does 90 percent of the work. Request both individual and group
progress reports during the duration of incentive projects and troubleshoot
potential underperformance issues before they get out of hand.
1.4.4.Other Considerations
Consider creating a hybrid approach to incentive plans that includes an
overarching group incentive as well as individual bonuses for exceptional
performance by
individual staffers. This will help ensure that your top performers will give it
their all, resulting in high-level group performance, while simultaneously
rewarding stellar
individual work. This can help encourage friendly competition and increase
productivity and motivation without creating resentment.
2. Individual Performance Pay Plans
Pay for performance is typically a financial incentive employees receive for meeting a
certain performance objective or target. Companies use this type of system to
motivate employees to achieve results that increase profits or improve service.
Examples of
incentives might include bonuses for perfect attendance, meeting a certain service
quality target, and achieving a specific sales growth target. Incentive payments are
usually added on to an employee's regular salary or hourly pay, but may comprise
the majority of
earnings in certain professions.
Compensation for sales representatives usually falls under the pay for
performance concept. Commissions earned are directly related to the amount of
sales volume that a
representative is able to achieve. While not all sales positions pay the same way,
some pay structures in this profession are primarily based on sales results. In
addition, there may be additional bonuses for achieving a certain level of sales
volume within a specified period.
The main idea behind this payment concept is to create a direct link between an
employee's job performance and the amount of pay he earns. In short, the more he
produces, the more financial reward he reaps. In addition to cash bonuses and
commissions, there are other types of pay for performance incentives that
companies use, such as extra vacation or personal time off.
Individual Incentive Plans are established standard against which employee
performance is compared to determine magnitude of incentive pay.
2.1. Merit Pay
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A merit pay system links increases in base pay to how highly employees are rated on a
74

subjective performance evaluation. However, just a small pay increase ranges

will hinder performance. Merit pay involves giving employees a permanent
pay raise based on past performance. Often the company’s performance
appraisal system is used to determine performance levels and the employees
are awarded a raise, such as a 2% increase in pay. One potential problem
with merit pay is that employees come to expect pay increases. In companies
that give annual merit raises without a different raise for increases in cost of
living, merit pay ends up serving as a cost-of-
living adjustment and creates a sense of entitlement on the part of
employees, with even low performers expecting them. Thus, making merit pay
more effective depends on making it truly dependent on performance and
designing a relatively objective appraisal system.
To motivate employees effectively, the size of the merit increase must be
significant enough to make a noticeable difference to employees. Generally
speaking, any merit
increase of 2% or less is regarded as being inconsequential. Some studies
show that a merit increase of less than 7% is unlikely to have ANY IMPACT on
employee performance…yikes! One alternative more and more companies are
turning to in today’s tight economic times is the use of lump sum payments in
lieu of a merit
increase to base pay. As a result, the employee receives the pay increase in
one payment, hopefully motivating him/her, and the company continues to pay
the same base salary, while controlling salary budget costs in the long-run.
Ultimately, to be successful, the merit pay program must ensure that awards
provided to the best performers will be substantially greater than increases
awarded to
average, or below-average performers. Furthermore, especially in today’s
economic climate, it is advisable to NOT reward below-average performers at
all. A well- designed system will give the employee a personal stake in seeing
that their efforts
result in increased productivity and success for the organization as a whole.
2.2. Piecework
Piecework is the oldest and still most popular individual incentive plan. Here
the worker is paid a sum (called a piece rate) for each unit he or she
produces. In per- piece pay structures, payment is based on the number of
“pieces” of work that a worker completes. The worker is paid a monetary rate
of a certain number of cents or dollars for each piece of work. What
constitutes a “piece” worthy of the set rate is defined in advance. The hourly
wage of a worker engaged in piece work will vary based on how skilled she is
in completing the work and how time-consuming each piece of work is.
Piece work, particularly when done from home, may have no set time frame
for completion, but some jobs may have hourly or daily quotas. Piece work
has been used in manufacturing goods but can also be used in jobs with
non-tangible work outputs, such as data entry.
The concept of piece work has been around a long time--long before Internet,
online jobs and data entry. It has been used in garment factories and other
manufacturing jobs to pay workers based on production since the time of the
Industrial Revolution. In today’s economy, it is still used that way, especially in
developing nations.
However, piece work is also used in fields such as data entry, translation, writing,
 75

editing and call centers. In these lines of work, the “pieces” may be clearly
defined and incorporated in the rate, such as per-minute talk time, per call,
per word, per page or on a project basis.
However, it is very important to note that only employees are protected by
minimum wage laws, not independent contractors, and per-piece pay structures
are very often used as pay rates for freelancers, or independent contractors.
2.3. Sales
compensation
Both bonus and commission plans are common sales incentive compensation
approaches to attract, motivate and retain salespeople, but how should firms
decide which is the most suitable? Several aspects of a firm’s selling process
and
environment influence the plan structure – bonus, commission or mixed –
that is appropriate.
2.3.1.Bonus Plans
With a bonus plan, each salesperson is typically given a quota for a territory, and
incentive payments are tied to performance relative to defined quota gates,
targets or thresholds. For example, the salesperson might receive a first
bonus payment at 90% of quota, a second payment at 100% attainment, and
a third at 110%. Bonus plans typically include a sizeable salary component, so
that if salespeople do not sell enough to earn the bonus, they can still earn a
decent living.
Because most bonus plans have a large salary component, such plans are often
attractive to salespeople with a longer-term focus who want to stay with a firm
and build a career. They also attract salespeople who in addition to selling,
are interested in problem solving, consulting and servicing customers.
2.3.2.Commission Plans
Commission plans pay continuously for every sale. A commission rate is
multiplied by a performance measure, such as sales or gross profits, to
determine payout.
Sometimes the commission rate varies by product or customer. Often, the rate
varies depending upon the level of performance attained by the salesperson.
For example, a salesperson might earn 3% on sales up to a territory goal and
5% on sales beyond the goal. Many commission plans include a salary
component, but usually the variable component is larger than it is in a bonus
plan. With most commission plans, a salesperson relies on commission
earnings, in addition to salary, as an important part of income.
Commission plans that pay mostly variable pay with little or no salary tend to
attract result-oriented salespeople who believe they can sell anything to
anyone. Such plans also encourage poor performers to leave the firm, as they
will not make enough
money to earn a decent living. However, sometimes such plans generate little firm
loyalty from salespeople. A salesperson paid mostly on commission is likely to
jump ship if a competitor makes a better offer, and may take many of the firm’s
customers.
By adapting the sales incentive compensation plan to the selling process and
environment, firms can establish an incentive compensation design that will drive
76

sales by attracting, motivating and retaining salespeople consistent with the

desired salesforce culture.
2.4. Cash Award
A performance-based cash award (commonly known as a rating-based award)
recognizes an employee's performance over an entire rating period. The
award must be based on a rating of record of "fully successful" or equivalent
or higher. Agencies must design their performance-based cash award
programs to reflect meaningful distinctions based on levels of performance to
ensure employees with higher ratings of record receive larger cash awards.
Employees within the same awards pool should receive awards reflecting
meaningful distinctions based on the employee's individual rating of record.
(For agencies
electing not to use awards pools, this would correspond to the organizational
level that controls an awards budget and has authority for approving awards.)
However this may not hold true when comparing employee awards across
award
pools/organizations.
For example, an employee in a given awards pool rated "Outstanding" should
receive a larger award than employees rated at lower levels within the same
awards pool.
However, if you compare those awards to the ones given in other awards
pools/organizations within the agency, it is possible for an employee with a
rating of "Outstanding" in one awards pool to get a lower award amount than
an employee rated at a lower level in a different awards pool.
Agencies have the flexibility to design their awards programs to meet the needs of
their agency and to reflect their agency cultures provided they ensure the
amounts of the performance-based awards reflect meaningful distinctions in
performance.
Agencies may calculate performance-based awards as a lump-sum dollar
amount, a percentage of base pay, or some other method such as assigning
shares to rating
levels to ensure meaningful distinctions.
2.4.1.Percentage of Base Pay
Agencies can design their awards programs so employees with higher ratings of
record receive larger cash awards, as a percentage of base pay, than those
with lower ratings. When computing a performance-based cash award as a
percentage of base pay, locality pay is included because this is one of the
purposes for which it is
considered to be base pay.
2.4.2.Lump-Sum Dollar Amount
Agencies can design their awards programs so employees with higher
ratings of record receive larger cash awards, as a lump-sum dollar amount,
than those with lower ratings.
2.5. Recognition Programs
An employee does something above and beyond and receives a gift card or a
lunch with the boss; a team achieves a goal and is rewarded with a party.
These rewards, however, can backfire; they tell the employee that he or she
 77

is worth n dollars to the

78

organization for some level of effort. In my opinion this approach misses the
point of recognition: people are motivated by more than money. People crave
positive
feedback, recognition they put in extra effort, acknowledgement of leaders
and peers, the glow that comes with knowing an achievement has been
seen,
appreciated and celebrated. I love this place. But I’m also realistic as I look at
ways leaders can recruit and truly nurture current and future talent.
Financial reward is a great thing, don’t get me wrong, but it’s not the
equivalent of recognition. Let’s not kid ourselves. It’s a short term solution.
Neither is constant
praise for average work. Recognition is a key tool in employee retention
programs for a reason: people need more than constructive feedback and
positive affirmation.
They need recognition of extra effort. They need to “feel” it. This will never go
away as a basic human need.
An effective approach to employee recognition encompasses these key points:
2.5.1.In the moment
Catch people doing exemplary work and acknowledge their efforts. Don’t be
knee- jerk – showing up for work on time does not count in most cases. Be
specific,
descriptive and measured.
2.5.2.In context
Recognition is most effective when it’s given in the context of a larger goal
or business-results-focused activity. Random affirmations are much less
meaningful
than those tied to a business goal. An employee who lands a big contract by
putting in the extra effort needs to know you noticed, and understand the
employee’s effort to ensure business success. This is matter.
2.5.3.Appropriate in volume/scale
Think back to the mom in the market. Was the praise she doled out
appropriate in scale and volume? Not really. Here again randomness is not
your ally. Recognition should match effort and results, or it loses meaning.
This is where the complexity lives.
2.5.4.Authentic, not automatic
You have to mean it when you give employees recognition. This is my chief
worry about automated recognition systems – they remove the human touch
so important to effective recognition. Can we find a smart balance? Can we
make social HR
Technology software work?
2.5.5.Tied to the employee’s perception of value
People know when they’re valued, and they should have a good idea of their
value to the organization. Monetary rewards can skew this notion of value,
linking it to cash when it should be linked to appreciation of extra effort and
smarts. Money is appropriate much of the time, but it’s not the only – or even
the most effective –
 79

motivator. Treat employees as valued team members, not as numbers. Most

of the
time it’s the best way to really recognize a valued player.
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3. Group Performance Pay Plans

A group-based incentive pay plan financially compensates employees for the goals they
meet as a collective group, rather than as individuals. Employers who use this
method find the approach brings a sense of urgency to the group effort and results
in greater performance and goal reaching than when individuals work on their own.
It also results in a greater sense of camaraderie among coworkers.
Group performance incentives reward group members for meeting or exceeding
performance standards, often in all egalitarian manners. (Each person receives
the same percentage of payer flat dollar award.) However, this system can result
in perceptions by high performers that they are not being recognized for their
performance. In addition, it can allow marginal performers to share equally in the
award.
3.1. Gainsharing
In gain sharing, gain means savings. An employee or team shares in the
amount saved by a business as a result of a suggestion he made. Gain sharing
is based on the idea
that the people doing the work know what is needed to improve the product,
service or process. Historical data is compared with actual costs generated by
an
implemented suggestion. If there is a cost savings, those who made the
suggestion receive a percentage of the gain.
Gainsharing offers industry the opportunity to improve plant performance and
boost productivity while reducing costs attributed to poor quality (e.g., waste,
spoilage,
rejects, and customer returns). Gainsharing is not an individual, piecework
system. It is a group incentive, pay-for-performance wage system—a group
bonus in which the entire factory workforce shares as a result of improving
productivity above a certain level and decreasing rejects and rework.
Moreover, while productivity gain is the object, the output must be a good
product; rejects and customer returns are deducted from the output totals.
Over a five-year period, the productivity gains should be close to 100 percent
and the costs of rejects and rework greatly reduced.
A successful gainsharing program relies on two factors—formula and training.
A sound formula based on a careful examination of the company's past
performance is the
level from which gain is measured and payout is made. There is no one-size-
fits-all gainsharing plan; each program is custom made to fit an individual
company's needs. Not only are productivity and quality factored into the
formula, but other costs such as the cost of worker's compensation or the
reduction in order-to-shipment lead
times can also be added. And in order for the program to work, all levels of
the workforce must be educated about their respective roles in gainsharing
through proper training methods.
3.1.1.Scanlon plan
The Scanlon plan is a model for business organization. This type of organizational
structure is a gain sharing program, and seeks to involve employees more
directly in the processes of corporate decision-making in order to benefit from
suggestions and
contributions from employees. Employees are rewarded for their input and
 81

assistance through profit sharing plans, which disperse some portion of the
economic benefits
82

generated by a more engaged workforce to the members of that workforce.

These plans work best in environments where employees have relatively
stable, long-term attachments to a single corporation.
3.1.2.Rucker Plans
Rucker Plans also use a committee system; the savings gain is based on
value added, the increased value of goods at each stage of production, and
calculated by comparing labor costs with sales minus the cost of goods sold.
These plans are used in manufacturing where costs are relatively stable over
time and where the business wants to reduce other costs in addition to labor,
such as the cost of energy and production waste materials.
3.1.3.Improshare Plans
An Improved Productivity Through Sharing (Improshare) Plan involves
developing standards for product or service-delivery time based on historical
data. These standards form the operational baseline against which suggested
improvements are compared. Savings are an indication of the amount of
change in the relationship of
labor (inputs) to outputs -- the final product or service. Because the plan is
based on performance standards, changes in sales volumes, technology and
equipment have minimal impact on the plan.
3.2. Profit Sharing
Profit sharing is an example of a variable pay plan. In profit sharing, company
leadership designates a percentage of annual profits as a pool of money to
share with employees, or a portion of employees such as executives. The pool
of money
generated is then divided across covered employees using a formula for distribution.
Profit sharing, when distributed as a percentage of annual pay - a common
practice - results in less money shared with employees in lower paying jobs
and higher amounts shared with highly compensated employees. This reflects
the belief that more highly compensated employees are responsible for
managing the company, making
decisions, taking more risk, and providing leadership to the other employees.
Profit sharing payments are generally made only if the company has been
profitable for the time period specified, or when an employment contract
requires the compensation. Profit sharing usually occurs annually after the
final results for the annual company profitability have been calculated.
3.2.1.Pros of Profit Sharing
The positive impact of profit sharing is that it sends the message that all of the
employees are working together on the same team. The employees have the
same goals and are rewarded equivalently to reinforce this shared service to
customers and lack of competition with each other.
3.2.2.Cons of Profit Sharing
The weakness of profit sharing plans is that individual employees cannot see and
know the impact of their own work and actions on the profitability of the company.
 83

Consequently, while employees enjoy receiving the profit sharing money, it

gradually becomes more of an entitlement than a motivational factor. With
profit sharing,
employees receive the profit sharing money regardless of their own
performance or contribution.
3.2.3.Deferred Profit Sharing Plan (DPSP)
A deferred profit sharing plan is a type of retirement plan in which the
contributions of the employer to the plan vary based on the profitability of the
business. In most plan structures, the contributions and any interest earned
are not subject to taxes until the funds are withdrawn. One of the chief
benefits for the employee is that no annual contributions that the employer
makes into the profit sharing plan are not subject to taxes until the funds are
withdrawn. Depending on governmental
regulations that apply, it may be possible to roll the proceeds from the plan into
a different retirement or investment account at some point and have the
withdrawals taxed at a lower rate. Typically, the account receiving the funds
from the DPSP must be part of a registered pension plan, which means the
governmental revenue agency involved must recognize and approve of that
receiving plan in order to qualify for the tax breaks.
3.3. Risk-Sharing Plans
Risk variable pay plans (sometimes called risk-sharing plans) are plans that put
some portion of the employee’s weekly, monthly, or yearly pay at risk. If
employees meet or exceed their goals, they earn back not only the portion of
their pay that was at risk, but also an incentive. If they fail to meet their goals,
they forego some of the pay they would normally have earned.
Shared-risk plan design allows sponsors to change employee contributions,
benefits, or some combination of the two, when the plan's financial condition
is affected by market downturns, longevity changes or inflation.
3.4. Employee Stock Ownership Plans (ESOPs)
ESOP is a way in which employees of a company can own a share of the
company they work for. There are different ways in which employees can
receive stocks and shares of their company. Employees can receive them as a
bonus, buy them directly from the company, or receive them through an ESOP.
In a non-leveraged ESOP, the employer contributes stock or cash or provides
employee discounts to buy stock. The stock is then allocated to accounts of
the employees. Non-leveraged ESOPs are intended to provide employees
with an
ownership stake in the company at a relatively low cost to the company and
to help create a market for the employer's stock.
In a leveraged ESOP, the employer borrows money from a financial institution
or the plan sponsor to finance the compal1y stock rather than contribute the
cash or stock directly. The employer establishes a trust, called an employee
stock-ownership trust.
3.5. Performance-Sharing Plan
Performance-sharing plans use predetermined criteria and standards to measure
84

results and, based on that, they create a fund available for incentive awards. The
criteria can be factors other than profits, such as quality and customer
satisfaction. A Performance Share Plan allows employees to earn actual stock
in their company. The company establishes specific financial objectives which,
once achieved, will trigger
the awarding of stock grants to employees.
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Part Three: Payroll and Benefits

1. Employee Benefits
A benefit is an indirect reward given to an employee or group of employees for
organizational membership. Benefits often include retirement plans, vacations
with pay, health insurance, educational assistance, and many more programs. In
many countries,
citizens and employers are taxed to pay for government-provided benefits, such
as health care and retirement programs. Benefits are costly for many employers in
developed countries, averaging from 30% to 40% of payroll expenses. In highly
unionized
manufacturing and utility industries, they may be over 70% of payroll.
1.1. Objectives of Benefits
Benefits should not be viewed entirely as cost factors because they can
positively affect HR efforts. Given the intense competition for competent
workers, companies should consider investing in benefits packages that are
attractive for those
employees. Researchers suggest that benefits do not always meet the needs
of both employers and workers, so more efforts are needed to successfully
position benefits as a driver of employee relations. A major advantage of
benefits is that they generally are not taxed as income to employees. For this
reason, benefits represent a
somewhat more valuable reward to employees than an equivalent cash payment.
1.2. Benefits for Workforce Recruitment and Retention
Organizations can choose to compete for or retain employees by providing
different levels of base compensation, variable pay, and benefits. The
benefits approach
chosen to be part of total rewards depends on many factors, such as
workforce competition, organizational life cycle, and corporate strategic
approach. What benefits are offered, the competitive level of benefits, and
how those benefits are viewed by individuals all affect employee attraction
and retention efforts of
employers.
Many baby boomers who are approaching retirement age are concerned about
retirement benefits and health care, while the younger generation of workers is
more interested in flexible and portable benefits. However, all generations
have concerns about the nature of and changes in health insurance. Having
benefits plans that appeal to the different groups is vital to attracting and
retaining all different types of employees.
1.3. Global Employee Benefits
Benefits vary from country to country. In many countries, retirement, health,
and other benefits are provided as part of government services. Employers
are taxed
heavily to pay into government funds that cover the benefits. Retirement and
pension systems are provided by the government in many countries. Also,
Health care benefits also differ significantly worldwide. Many countries have
national health
services. Some global firms require employees to use the medical services
86

available from host countries, whereas other global employers provide

special coverage that allows expatriates to receive health care from private
providers. Arranging quality
 87

private coverage becomes an especially important issue for global employees

located in various underdeveloped countries where the availability and quality
of medical facilities and treatment vary widely.
2. Benefits Design
An effective employee benefit program will accomplish a few targeted goals. First,
it will provide financial protection for employees and their families in the event of
illness, disability, death, or unemployment. Second, it will promote positive
employee morale and support the productivity of the company as a whole. Finally,
it should act as a recruitment tool that will attract and keep quality talent, without
costing your firm more than it’s worth. For many business owners, designing a
benefit program that meets all of these
criteria is a difficult task indeed.
Benefits plans can provide flexibility and choices for employees, or they
can be standardized for all employees. Increasingly, employers are finding
that providing
employees with some choices and flexibility allows individuals to tailor their
benefits to their own situations. However, the more choices available, the higher
the administrative demands placed on organizations.
A corporate strategies and compensation philosophy matter for developing
employee benefits because that is a strategic decision about how to position the
business in the marketplace. Whether it is documented or a matter of internal
practice, your
compensation philosophy shapes how employees perceive your business with
respect to your competitors. What are your company’s values? What benefits
budget do you have available? Which types of employees do you want to attract
and retain?
If you want to be the best company in your industry for innovative product design, you
must hire and retain the best product engineers. That means appropriately
compensating them to help reduce turnover. If your business is focused on
providing the best customer service in your industry, you must hire and retain the
best customer service
representatives. The benefits offering for these two groups of employees may
be very different.

Flexible
Develop benefits as
Benefits competitive advantage

Additional
Increase employee morale
Benefits
and retention rates

Industry
Standards Have significant difficulty
hiring or retaining talents

Statutory Begin with employees needs

Benefits and mandated
items
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2.1. Statutory Benefits

Begin your employee benefit program by including the basic, federally
mandated employee benefits. These benefits include unemployment
insurance, workers compensation insurance, and social security. Businesses
in the United States must provide at least these three benefits to ensure
employee protection in cases of unemployment, injury, or disability.
2.2. Industry Standards
Consider what optional benefits are necessary to include. You will find that
certain optional benefits have become industry standards and you will have
significant difficulty hiring or retaining talented staff without these benefits. For
example, health insurance, life insurance, paid and sick leave programs,
retirement plans, and flexible compensation plans have all become staples of
benefits plans in many industries.
2.3. Additional Benefits
Consider adding additional benefits to your program. Once your employee
benefits program includes the basics, you’ll want to evaluate benefits like
tuition
reimbursement programs, flexible spending accounts, child care subsidies,
retail discount programs, telecommuting options, legal insurance, bonus plans,
and fitness or wellness programs. These programs will often provide an
additional edge in
increasing employee morale and reducing your employee turnover rate.
2.4. Flexible Benefits
Evaluate what benefits are most important to your employees. You will need
to survey your employees or potential employees to find out what benefit
types hold the most value for them.
Looking for a way to customize your benefits plan to the needs of your individual
employees? A cafeteria plan is an employee benefits plan that allows your
employees to choose among a variety of options to create a benefits plan that
best meets their needs and those of their family. In a cafeteria plan, an
employee receives a certain number of dollars from the employer to "purchase"
particular components of a benefits plan.
Cafeteria plan options can include various levels of health insurance plans, other
insurance options, tax advantages as in a flexible spending account, and
retirement plan contributions.
The advantage of a cafeteria plan is that employees have benefits plan
options. For example, a young employee with no health problems might opt
to spend cafeteria plan dollars on a minimal health plan.
An employee with four family members might choose to spend the cafeteria
plan dollars on a health plan with more comprehensive coverage. The
employee without a family might choose to “spend” his or her benefits dollars
for investments in a
retirement plan.
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In a typical cafeteria plan, an employee might exceed the number of dollars

allowed by the employer with the benefits plan choices made. In these cases,
the employee pays a part of the premium for his or her chosen benefits, so the
cost to employers is lower.
2.5. Part-Time Employee Benefits
Another key design issue is whether or not to provide benefits coverage to
part-time employees. Many employers do not provide part-time employee
benefits, except some time-off leave benefits. In some companies, part-time
employees who do
receive benefits usually do so in proportion to the percentage of full-time work
they provide. According to many cases, employees initially hired as part-
timers often end up transitioning into full-time positions; offering them benefits
as part-timers can help motivate them to stay with you until opportunities for
full-time employment arise.
If you decide to offer benefits to part-timers, the first step is to set a minimum
number of hours per week or month that must be worked in order to qualify.
Twenty hours a week is common in United States. Next, define the eligibility
requirements for part-time employees by determining a set number of months
or hours they must be on the job (such as three months or 250 hours) before
they’re eligible for benefits.
It may be smart to start off with part-time benefits that are relatively easy and
inexpensive. Flextime and telecommuting are two good examples of low-cost
benefits that most employees value greatly. Be sure to consult with a labor
attorney or your state department of labor for more details on offering benefits
to part-time
employees.
3. Flexible Employee Benefits
As part of both benefits design and administration, many employers offer
employees choices for benefits. A flexible benefits plan allows employees to
select the benefits they prefer from groups of benefits established by the
employer. Sometimes called a
flex plan or cafeteria plan, these plans have a variety of “dishes,” or benefits,
available so that each employee can select an individual combination of
benefits within some overall limits.
As a result of the changing composition of the workforce, flexible benefits plans
have grown in popularity. Flexible benefits systems recognize that individual
employee situations differ because of age, family status, and lifestyle. For
instance, dual-career couples may not want the same benefits from two
different employers. Under a flex plan, one of them can forgo some benefits that
are available in the partner’s plan and take other benefits instead.
A problem with flexibility in benefits choice is that an inappropriate benefits
package may be chosen by an employee. A young construction worker may not
choose a disability benefit, but if that person is injured, the family may suffer
financial hardship. Part of this problem can be overcome by requiring
employees to select a core set of benefits (life, health, and disability insurance)
and then offering options on other benefits.
90

Another problem can be adverse selection by employees, whereby only higher-risk

employees select and use certain benefits. For example, only employees with chronic
illnesses might choose health insurance. Because insurance plans are based on
a group rate, the employer may face higher rates if insufficient numbers of
healthy employees select an insurance option.
Because many flexible plans have become so complex, they require more
administrative time and information systems to track the different choices
made by employees. Despite the disadvantages, flex plans will likely
continue to grow in popularity.
3.1. Flexible Spending Accounts
Flexible spending accounts, often called reimbursement accounts, are
conceptually similar to a bank savings account. Employees deposit funds
through the year and use them for health care, dependent care and other
qualified expenses. An employer may also contribute to these accounts but is
under no obligation to do so. The three basic types of flexible spending
accounts are premium-only, medical and dependent care.
Premium-only plans allow employees to deposit funds for medical and life
insurance premiums. Medical FSAs allow employees to set aside funds for
health costs not covered by health insurance, and dependent care FSAs allow
savings for day care and other expenses.
3.2. Transportation Plans
Transportation benefit plans allow employees to deposit funds to pay for
commuting expenses, parking expenses or both. Eligible commuting
expenses include passes, tokens and vouchers purchased for travel on
buses, trains, ferries and other forms of mass transit. Eligible parking
expenses include parking at or near the workplace and transit station park-
and-ride lots. Ineligible commuting and parking expenses include
transportation by personal car, cab fares, traffic tickets, tolls and gas.
3.3. Cafeteria Plans
As discussed, cafeteria benefit plans give employees the choice of receiving a
selection of nontaxable benefits, cash or some other taxable benefit. Employers
can offer only some benefits through these plans, such as health and life
insurance, disability and dental coverage, pension plans, day care and elder
care. The funding may come from
the employer, the employee or both. Employers may also provide spending
credits, which employees can use to select benefits from a range several
options.
4. Benefits Administration
Benefits administration is the process of establishing, maintaining, and managing
benefits for the employees of an organization. Employee benefits typically include
medical
insurance, pension plans, individual retirement accounts (IRAs), vacation time,
sick time, and maternity leave.
A good benefits administration program creates and maintains an enrolment
profile for every employee, keeping track of information such as the date hired,
marital status, number of dependents, total hours worked, and attendance
records. The program offers
 91

flexibility, taking into account special employee needs, part-time and temporary
hires, and changes in government regulations. The benefits administration program
can function in tandem with tax preparation software, ensuring that all allowable
deductions are taken and maintaining detailed records for reference in case of an
audit.
4.1. Benefits and HR Technology
The spread of HR technology, particularly Internet-based systems, has
significantly changed the benefits administration time and activities for HR
staff members.
Internet and computer-based systems are being used to communicate
benefits information, conduct employee benefits surveys, and facilitate
benefits
administration. Recent research shows that these systems can decrease
expenses, increase positive communication, and effectively connect people
across many different HR functions, including benefits management.
4.2. Benefits and HR Outsourcing
Administering employee benefits can be quite complex. Understanding the
considerations involved in the process will assist you in deciding whether you
should handle your benefits administration on your own or outsource all or part
of it.
However, administering even a few employee benefits can be complex and
will be time-consuming. Only you can make the decision as to whether you
should handle your employee benefit administration or hire someone else to
take over the job.
In today's market, HR departments are able to find an able administrator
for a fair price, so that they can concentrate more of their time on what they
know best.
Among those who provide administrative services for a fee are insurance
companies, consulting firms, banks, payroll service companies, and
investment brokers.
One significant trend affecting HR is that outsourcing of benefits administration
may be necessary. A study indicated that they were outsourcing more benefits
functions. The most frequently outsourced item is Employee Assistance Plans
(EAP).
Administrative activities related to retiree benefits, pension plans, and
flexible spending accounts also are often outsourced.
4.3. Benefits and HR Metrics
The significant costs associated with benefits require that analyses be
conducted to determine the payoffs for the benefits. With the wide range of
benefits that are offered, numerous HR metrics can be used.
 Benefits as a percentage of payroll (pattern over a multiyear period)
 Benefits expenditures per full-time-equivalent (FTE) employee
 Benefits costs by employee group (full-time vs. part-time, union vs.
nonunion, management, professional, technical, office, etc.)
 Benefits administration costs (including staff time multiplied by the staff
pay and benefits costs per hour)
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 Health care benefits costs per participating employee

 93

Some common benefits that employers track using HR metrics are workers’
compensation, wellness programs, prescription drug costs, leave time, tuition
aid, and disability insurance. The overriding point is that both benefits
expenditures generally, and costs for individual benefits specifically, need to
be measured and evaluated as part of strategic benefits management.
4.4. Benefits and Cost Control
Because benefits expenditures have risen significantly in the past few years,
particularly for health care, employers are focusing more attention on
measuring and controlling benefits costs, even reducing or dropping benefits
offered to employees.
The common means of benefits cost control is cost sharing, which refers to
having employees pay for more of their benefits costs. A lot of global
companies use this
means. The next three means of health care cost control are using wellness
programs, adding employee health education efforts, and changing prescription
drug programs. Sometimes it is more cost effective for individuals to purchase
benefits directly from providers, and some companies also are negotiating
contracts with providers to offer benefits at reduced rates. Companies might
also consider consolidating benefits packages into more streamlined offerings
so that costs can be minimized.
4.5. Benefits and Communication
Benefits communication and satisfaction of employees with their benefits are linked.
For instance, employees often do not fully understand their health benefits, a
situation that can cause individual dissatisfaction. Consequently, many
employers should consider developing special benefits communication
systems to inform
employees about the monetary value of the benefits they provide. Employers
can use various means, including videos, CDs, emails, electronic alerts,
newsletters, and
employee meetings. All these efforts are done to ensure that employees are
knowledgeable about their benefits. Some of the important information to be
communicated includes the value of the plans offered, why changes have to be
made, and the fundamental financial costs of the plans.
When planning benefits communication efforts, it is important to consider
factors such as the timing and frequency, the communication sources, and
the specialized content. Any significant changes to benefits should be
communicated by the top
managers in the organization, and these communications should be supported
by HR professionals and other key managers who are well-informed to answer
any
questions. HR professionals should also collect feedback about benefits programs.
Some employers give individual employees a “personal statement of
benefits”, as well as total reward statement, that translates benefits into dollar
amounts.
Increasingly, firms are using the Internet to provide statements, and these
statements often are used as part of a total rewards education and
communication effort.
5. Type of Benefits
A wide range of benefits are offered by employers. Some are mandated by laws and
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government regulations, while others are offered voluntarily by employers as part

of their HR strategies.
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1 Legally required payments

2 Retirement and savings plan payments

3 Life insurance and death benefits

4 Health and medical-related benefit payments

5 Paid Rest Periods, Meal Break, Coffee breaks

6 Payments for time not worked (Leave and time-off)

7 Miscellaneous benefit payments

5.1. Legally required payments

There are two types of employee benefits must provide by law those the employer
must provide by law in many countries, and those the employer offers as an
option to compensate employees. Every employer may pay Social Security
taxes at the same rate paid by their employees in accordance with the local
laws. Examples of required benefits include workers’ compensation,
unemployment compensation, and
severance pay, while optional benefits include health care insurance
coverage and retirement benefits. All required and optional benefits may
have legal and tax
implications for the employer.
5.1.1.Worker Compensation
Workers’ compensation provides benefits to persons who are injured on the
job. The workers’ compensation system requires employers to give cash
benefits, medical
care, and rehabilitation services to employees for injuries or illnesses occurring
within the scope of their employment. In exchange, employees give up the right
to pursue
legal actions and awards.
5.1.2.Unemployment Compensation
Unemployment compensation is money paid to workers who have lost their
jobs. It is not paid to those who leave voluntarily. Unemployment compensation
is provided by states and is paid according to formulas, for a specified period
of time to those
actively looking for work. To pay for this compensation, companies are
required to pay unemployment taxes, based on a percentage of money paid
to employees and the type of industry.
5.1.3.Severance Pay
Severance pay may be given to employees upon termination of employment.
However, companies are not required to provide severance pay. Severance
pay is usually based on length of employment. For example, it could be a
week's pay for every year or service or a flat amount based on six weeks pay,
or any other amount
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determined by the employer. When provided, it is given as either a lump sum

or paid over a number of weeks. A severance package may also include
health insurance coverage for a certain period of time and other continuation
of benefits coverage.
5.2. Retirement and Savings Plan Payments
A pension plan is a retirement program established and funded by the
employer and employees.
5.2.1.Defined-Benefit Pension Plans
A “traditional” pension plan, in which the employer makes the contributions
and the employee will get a defined amount each month upon retirement, is no
longer the norm in the private sector. Through a defined-benefit plan,
employees are promised a pension amount based on age and service. The
employees’ contributions are based on actuarial calculations on the benefits to
be received by the employees after
retirement and the methods used to determine such benefits. A defined-benefit
plan gives employees greater assurance of benefits and greater predictability
in the amount of benefits that will be available for retirement. Defined-benefit
plans are often preferred by workers with longer service, as well as by small
business owners. If the funding in a defined-benefit plan is insufficient, the
employer may have to make up the shortfall.
5.2.2.Defined-Contribution Pension Plans
In a defined-contribution plan, the employer makes an annual payment to an
employee’s pension account. The key to this plan is the contribution rate;
employee retirement benefits depend on fixed contributions and employee
earnings levels.
Profit-sharing plans, employee stock ownership plans (ESOPs), and the US
401(k) plans are common defined-contribution plans. Because these plans
hinge on the
investment returns on the previous contributions, the returns can vary
according to profitability or other factors. Therefore, employees’ retirement
benefits are
somewhat less secure and predictable. But because of their structure, these
plans are sometimes preferred by younger, shorter-service employees.
5.2.3.Cash Balance Pension Plans
Some employers have changed traditional pension plans to hybrids based on
ideas from both defined-benefit and defined-contribution plans. One such plan
is a cash balance plan, in which retirement benefits are based on an
accumulation of annual company contributions, expressed as a percentage of
pay, plus interest credited each year. With these plans, retirement benefits
accumulate at the same annual rate until an employee retires. Because cash
balance plans spread funding across a worker’s
entire career, these plans work better for mobile younger workers.
5.2.4.Early Retirement Plan
Many pension plans include provisions for early retirement to give workers
voluntary opportunities to leave their jobs. After spending 25 to 30 years
working for the same employer, individuals may wish to use their talents in
other areas. Phased-in and part- time retirements are alternatives being used
by individuals and firms. Some
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employers use early retirement buyout programs to cut back their workforces
and reduce costs. Employers must take care to make these early retirement
programs truly voluntary.
5.3. Life Insurance and Death Benefits
Generally, life insurance death benefits that are paid out to a beneficiary in
lump sum are not included as income to the recipient of the life insurance
payout. This tax-free exclusion also covers death benefits payment made
under endowment contracts, worker's compensation insurance contracts,
employer's group plans or accident and health insurance contracts in many
countries.
5.3.1.Life Insurance
Bought as a group policy, the employer pays all or some of the premiums. A
typical level of coverage is one and one-half or two times an employee’s
annual salary.
5.3.2.Disability insurance
Both short-term and long-term disability insurance provide continuing income
protection for employees who become disabled and unable to work. Long-
term
disability insurance is much more common because many employers cover
short-term disability situations through sick leave programs.
5.3.3.Long-term care insurance
Usually voluntary, these plans allow employees to purchase insurance to
cover costs for long-term health care in a nursing home, an assisted-living
facility, or at home.
Though employees pay for the premiums, they may get cheaper rates
through employer sponsored group plans.
5.4. Health care and medical-related benefit payments
Employers provide a variety of health care and medical benefits, usually through
insurance coverage. For several decades, the costs of health care have
escalated at rates well above those of inflation and changes in workers’
earnings. In addition, the costs of health care have increased by two
percentage points over increases in the Gross Domestic Product (GDP)
across many developed nations for close to 50 years. As a result of large
increases such as these, many employers find that dealing with health care
benefits is time consuming and expensive.
Employers offering health care benefits are taking a number of approaches to
controlling their costs. The most prominent ones are changing copayments
and employee contributions, using managed care, switching to mini-medical
plans or
consumer-driven health plans, and increasing health preventive and wellness efforts.
5.4.1.Changing Copayments and Employee Contributions
The copayment strategy requires employees to pay a portion of the cost of
insurance premiums, medical care, and prescription drugs. Requiring new or
higher copayments and employee contributions is the most prevalent cost-
control strategy identified by many employers surveyed.
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5.4.2.Using Managed Care

Managed care consists of approaches that monitor and reduce medical costs
through restrictions and market system alternatives. Managed care plans
emphasize primary and preventive care, the use of specific providers who will
charge lower prices,
restrictions on certain kinds of treatment, and prices negotiated with hospitals
and physicians.
5.4.3.Mini-Medical Plans
Another type of plan that has grown in usage in the past few years is the mini-
medical plan. This type of plan provides limited health benefits coverage for
employees.
Minimal coverage plans typically offer individuals scaled-down health care
benefits, and because coverage is limited, the plans are offered at a highly
discounted rate. Management can negotiate different coverage caps
depending on the needs of workers, and premium prices, which may or may
not be paid completely by
employees, tend to rise as the caps increase.
5.5. Paid Rest Periods, Meal Break, Coffee breaks
5.5.1.Paid Rest Periods
“Hours of work” is the period of time during which an employee works
for an employer. It includes time off with pay instead of overtime pay
provided by an employer and taken by an employee.
5.5.2.Meal Break
In some countries, an employee is entitled to at least 30 minutes of rest (break) in
each shift longer than five consecutive hours of work. Most employees are
entitled to an eating period (meal break) during their shift. The length and
timing of the eating period is somewhat flexible, recognizing work demands.
Meal breaks, whether paid or unpaid, are generally not considered working
time and are therefore not typically counted toward the limits on hours of work,
overtime pay or minimum wage.
5.5.3.Coffee Breaks
There is may be not requirement to give the employees coffee breaks or any other
kind of break other than eating periods. Time spent by an employee on a coffee
break or other non-eating period break during which he or she is required to
remain at the workplace is considered to be working time under the
Employment Standards Act. If
the employee is free to leave the workplace during the coffee break or other
type of break, it is not considered to be working time.
5.6. Pay for Time Not Worked
Pay for time not worked also called supplemental pay benefits is one of the most
costly benefits because of the large amount of time off that many employees receive.
Common time off with pay periods include holidays, vacations, jury duty, funeral
leave, military duty, personal days sick leave, sabbatical leave, maternity
leave and unemployment insurance payments for laid off or terminated
employees.
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A growing number of employers have made use of a paid-time-off (PTO) plan,

which combines all sick leaves, vacation time, and holidays into a total number
of hours or days that employees can take off with pay. Many of those
employers have found PTO plans to be more effective than other means of
reducing absenteeism and in having time off scheduled more efficiently. Other
advantages cited by employers with PTO plans are ease of administration and
as an aid for recruiting and retention and for
increasing employee understanding and use of leave policies. Alternatively,
PTO plans might increase absenteeism rates in companies and can make
workers think that
managers do not trust them to effectively manage their time off.
5.7. Miscellaneous Benefits
Employers offer a wide variety of miscellaneous benefits. Some of the
benefits are voluntary, meaning that employees can participate in them and
pay for the costs
themselves, often at group discount rates. Various types of voluntary
insurance programs are the most common offered. Others are unique to
employers and are provided at little or no cost to employees.
Some benefits and services are social and recreational in nature, such as
tennis courts, bowling leagues, picnics, parties, employer-sponsored athletic
teams, organizationally owned recreational lodges, and other sponsored
activities and interest groups. As interest in employee wellness has
increased, more firms are
providing recreational facilities and activities. The idea behind social and
recreational programs is to promote employee happiness and team spirit.
Employees may appreciate this type of benefit, but managers should not
necessarily expect increased job productivity or job satisfaction as a result.
Further, employers should retain control of all events associated with their
organizations because of possible legal responsibility.
6. Payroll Administration
Payroll administration is defined as any of the tasks necessary to organize the
compensation of employees for the hours that have been worked. This may
include
keeping totals for hours worked by employees, rates of pay and managing
payments to employees. Businesses that use a commission system often
benefit from having a
dedicated payroll administrator in order to better manage payroll services for employees.
For a small business owner, payroll administrative work is often performed by the
business owner initially as there may be few employees. Software may be used
to
facilitate ease of payment and tracking of payroll concerns or payroll may be
managed on paper. Often, software used for payroll purposes can make issuing
paychecks easier as well as helping business owners to keep track of payments
made. This can also help with direct deposit payments for employees or managing
company accounts used for funding payments.
When payroll must be organized for only a few employees it may be easy to keep
track of payments but as employee numbers grow it is important that enough time
is devoted to payroll upkeep. This can help to prevent errors in both accounting
and payroll to ensure
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0
that employees receive the appropriate amount of compensation per pay period. Payroll
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1
administrators are also responsible for making sure that payments are delivered
on time to employees.
Another aspect to managing payroll is ensuring that payroll taxes have been
properly deducted from the employee's income. This process can sometimes
become
overwhelming, prompting the small business owner to hire a payroll specialist who
is experienced in managing payroll matters. This can help to prevent problems
such as direct deposit issues, tax exemptions or problems with deducting taxes.
Errors in deductions for taxes can cause serious complications for small business
owners. Manage payroll as efficiently and effectively as possible is vitally important.
Payroll administration also includes making sure that company payroll policies
adhere to employment laws. This can apply to overtime that has been worked,
holiday pay or other payroll changes. As businesses grow and employ more
workers, it becomes increasingly
important to have someone who is capable of processing payroll.
6.1. Element of Payroll
6.1.1.Hourly Pay
The first step in payroll processing is to calculate the wages to pay each
employee. The most frequent pay cycles are weekly, biweekly, semi-
monthly and monthly.
Hourly employees are usually paid weekly or biweekly. Most companies will
have hourly employees complete a time sheet to be turned in at the end of
each week. The payroll professional must ensure the employee and her
manager/supervisor signs the time sheet; if not, it is invalid. Typically,
regular, personal/sick or vacation hours are recorded on the time sheet and
are paid at regular pay. Overtime pay should be listed on the time sheet as
well to be paid at time and a half.
6.1.2.Salaried Pay
Salaried employees are usually paid biweekly, semi-monthly or monthly. They
are not required to complete a time sheet for they are paid the same amount
of hours each pay date. The only time a salaried employee's hours will
change is if she had a salary change or is to be paid on a prorated basis (this
could be due to termination or other unpaid days). Typically, the payroll
professional does not need to make any changes to a salaried employees
pay, as the system automatically pays the amount due.
6.1.3.Benefits
Employees may opt to participate in the company's health insurance. These
amounts are usually deducted from the have to be changed unless the
employee is making a
change to his deductions. In this case, he should notify the payroll
professional in writing of the change. If the changes are submitted timely,
they are made effective on the next payroll.
6.1.4.Taxes
The employee and the employer may be both required to pay payroll taxes.
Some companies use payroll software that will compute these taxes,
automatically deducting the amounts from the employees' paychecks. The
payroll professional is also responsible for depositing taxes to the
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government, for filing quarterly and
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3
annual taxes, and for issuing yearly income withholds to employees.
6.1.5.Payroll Adjustments
Once the hours to be paid are entered in the system, the payroll professional
must double-check the information. She can run reports from the system and
use them to check for errors. Any errors detected before the payroll closes
can be corrected and reflected on the current payroll. Once the payroll is
closed, changes or adjustments can be manually done (e.g. a manual check)
or adjusted on the next payroll.
6.2. Payroll Process
Payroll involves performing many tasks to ensure accurate and timely
paychecks and payroll tax and record-keeping compliance. These duties
cannot be rushed, and they should be performed with painstaking detail.
Otherwise, erroneous paychecks and
improper payroll tax and record-keeping procedures can result.
6.2.1.Process the payroll ahead of time.
Devise a payroll-processing schedule that allows you ample time to process the
payroll and to correct detected errors before employees receive their
paychecks. For example, perform payroll processing two or three days before
the actual pay date.
6.2.2.Make changes to the employees’ payroll record
Make changes to the employees’ payroll record, if applicable. This includes:
address changes; payroll deduction changes, such as state income tax form
changes; and voluntary deduction changes, such as retirement and health
benefits. Furthermore, enter new hire information for employees hired in the
current pay period.
6.2.3.Compute timekeeping data
Compute timekeeping data from time cards or time sheets and enter the hours
to be paid into the system, such as regular, overtime and vacation hours. If you
use a computerized timekeeping system, you can import the time into the
payroll software. All you have to do is ensure the time is transported correctly
and make the necessary edits.
6.2.4.Pay other types of income
Pay other types of income, such as bonuses, commissions and retroactive
pay due to a pay raise. Perform other adjustments, such as additional pay or
wage deduction due underpayment or overpayment from a prior pay period.
Prorate the salaried
employees’ pay if she terminates but does not work the entire pay period, and
enter stop dates in the payroll software to stop future payments.
Furthermore, prorate the salaried new employees’ pay if they are hired after the
current pay period begins. For instance, if she starts working on the fourth day
of the biweekly pay period, pay her for seven working days instead of 10.
6.2.5.Verify the payroll reports
Print reports that allow you to verify the payroll before you print paychecks and
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generate the direct deposit file. Make adjustments, if necessary.
6.1.6. Print paychecks/pay stubs
Print paychecks/pay stubs. Generate the direct deposit file and forward to the bank.
Contact the bank and ensure it is appropriately received, and verify the
amount received.
6.2.7.Filing the payroll records
Print payroll registers showing employees’ gross-to-net wages for the current
payroll. File in a confidential storage area. Keep these records for a minimum
of three years. Keep timekeeping records and those upon which wage
computations are based for a minimum of two years.
6.2.8.Forward the payroll reports
Print and distribute reports needed by related departments, such as human
resources and finance, for benefits administration and reconciliation
purposes. If a separate department or company handles payroll taxes,
forward the necessary tax records for each pay period to the appropriate
individual.
6.3. Payroll Audit
Employers should audit payroll processing as part of regular business
operations. A small business usually has the advantage of fewer employees
making a thorough audit possible rather than sampling data for further
review. A good time frame for scheduling a payroll audit is at the end of each
quarter of business.

Verify Review Review

Active Hours Payroll Tax
Employees Paid Submissio Ban
Verify ns k
Reconciliatio
Pay n
Rate Review

6.3.1.Verify Active Employees

For each person that received a paycheck during the quarter, verify that the
person was employed during the time period for which the check was issued.
Although it is more difficult to commit payroll fraud on a smaller business, one
method of financial theft is by cutting checks to terminated employees and
then altering the checks for cashing or colluding with the terminated employee
to cash the checks and provide a kick back.
6.3.2.Verify Pay Rate
Verify the pay rate entered into the payroll processing system for each employee.
Payroll rates should always be in writing, approved by an owner or manager,
and filed with other employee paperwork.
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6.3.3.Review Hours Paid
Compare the hours paid to employees for each pay period to the time clock
reports or other tracking device used to record employee hours worked. Pay
special attention to overtime hours as the cost of overtime can add up quickly
and push a small business over budget in salaries and wages expense. If you
offer paid time off, such as paid holidays, sick time and vacation days, review
each entry of paid time off to
ensure the employee who received paid time off pay was eligible for the pay.
6.3.4.Compare Payroll Reports to General Ledger
Compare the totals, such as gross payroll expense, taxes withheld and net
check amount, to the general ledger to ensure each payroll processing is
correctly recorded on the general ledger. If you have multiple salaries and
wages accounts, such as
manager payroll, administrative payroll and sales payroll, ensure that each
category of payroll reflects the correct expense for the employees in those
specified positions.
6.3.5.Review Payroll Tax Submissions
Business payroll taxes include Social Security taxes, Medicare/Medicaid
taxes, state unemployment taxes and federal unemployment taxes, as well
as the remission of federal withholdings for the employee. The total amount
of payroll processed
determines how often you remit payroll taxes to the respective taxing
authorities, but most payroll remissions will occur at least quarterly with the
exception of federal unemployment taxes, which can occur once a year if the
business has low payroll amounts.
Compare the payroll totals on the tax remittance reports with reports generated by
the payroll system to ensure proper reporting of all payroll amounts. Perform
manual calculations of all computer-generated totals to ensure proper
calculation of amounts due. Verify that electronic or check remissions equal
the exact amount recorded on tax remittance reports.
6.3.6.Bank Reconciliation Review
Review the bank reconciliation for the payroll account to ensure that all checks
cleared for the issued amount and make a note of any stale-dated payroll
checks to research. Make sure you receive the hard copy of all payroll
checks from your bank,
even if you have to pay an additional fee for the service. Review each payroll
check to ensure the check does not appear altered in any way.
6.4. Payroll System
A payroll system is software which organizes all the tasks of employee
payment and the filing of employee taxes. These tasks can include keeping
tracking of hours, calculating wages, withholding taxes and deductions,
printing and delivering checks and paying employment taxes to the
government.
Payroll software often requires very little input from the employer. The
employer needs to input employee wage information and hours—then the
software calculates the information including withholdings automatically. Most
payroll software is automatically updated every time a tax law changes and
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will remind employers when
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to file various tax forms.
Choosing a payroll system that best fits your business is essential. It may be
difficult to decide which system to choose, but there are some factors to keep
in mind when deciding. First, analyze the size of your business and how
much of your budget you are willing to spend on payroll processing.
While it is possible for smaller businesses to handle payroll duties in-house
through a manual process, a lot of time can be wasted attempting to calculate
everything
correctly. Payroll system software can eliminate errors in the payroll process and
eliminate excessive effort involved in put calculating employee hours, wages
and tax withholdings. Payroll software is easy to use often times very
affordable for small businesses.
Employers or HR departments can purchase an affordable system accessible
on their local computer or via a cloud service. Purchasing software eliminates
the expense of hiring an in-house accountant for payroll processing. Lastly,
small business owners can maintain more control of the payroll process by
using software. Using payroll software allows the business to compile reports
at whatever pace they desire.
When choosing a payroll system, you’ll want to look for security. Is the
software password protected? Having a password protected software
ensures there is no tampering of information. Next, is the software
compatible and flexible? It is
important to have payroll software that functions well with your other
business systems and will grow with your business.
Another factor to consider is systems credibility. Make sure the software is
made by a well-known brand. Lastly, you’ll want a payroll system which will
allow the employer to still have control and the option of viewing reports and
historical information.
Once you choose your payroll system it is up to you how much control you
want over it.
6.5. Payroll Outsourcing
Payroll outsourcing is a business practice that involves contracting with a
business service to handle all functions related to a company payroll. Using an
outsourcing service makes it possible to manage the payroll process without
the need to maintain a large payroll department. Payroll service providers
manage such diverse functions as the calculation of wages and salary,
withholding of taxes, the distribution of
withheld funds to the proper government agencies, and the direct deposit of
net pay into the bank accounts of employees.
There are many reasons why a company may choose to go with a payroll
outsourcing option. The most common is to save time and money on the
handling of financial tasks associated with a payroll. By contracting with an
outside vendor, it is possible to restrict the payroll team to one or two
individuals within the company. Often, these
two designated individuals are authorized to supply basic data to the payroll
service, which then handles the rest of the details. As a result, there is no
need for anyone to spend a majority of the workweek calculating hourly
wages, taxes, and dealing with various types of withholding issues.
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Since most payroll outsourcing services offer the option of cutting checks or
direct deposit, it is possible for each employee to choose which format he or
she prefers. When checks are selected, they are usually sent by courier to
the client, who then distributes them to the employees. In situations where
the direct deposit option is selected, employees often find their money is
credited to their account the evening before their actual pay date, or early on
the standard pay date.
Another benefit to using a payroll outsourcing service is that the employer
does not have to keep up with changes in regulations that impact the
calculation of taxes.
Since the outsourcing service constantly updates their information to comply with
current laws, the employer never has to worry about incurring late charges and
other penalties, due to an improper calculation of the taxes due. This benefit
alone can save a large corporation a significant amount of money over the
course of a year.
Payroll outsourcing also prevents an employer from having to deal with
technology woes. Since the payroll is processed off-site, there is never a
need to upgrade payroll software or spend time and money on program or
hardware glitches or any of the system issues that can occur and slow down
the payroll process. As a result,
employees are consistently paid on time and remain happy.
While payroll outsourcing does mean incurring another business expense on a
regular basis, even small businesses often find that using this type of service
saves time and money each month. Most outsourcing vendors will offer
several different payroll plans that are likely to be ideal for businesses of
different sizes. In terms of convenience, keeping the payroll records up to
date, and keeping the withholding accurate, going with a payroll outsourcing
service just makes sense.
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Part Four: Employee Value Proposition
1. Employee Value Proposition
The employee value proposition (EVP) is the deliberate construct of the
organization to provide a compelling set of value that will attract the desired future
workforce and, at the same time, keep the desired current workforce in the
organization. The EVP will offer
messages that address the rewards, the opportunity, the culture, the organization,
the work, and the people you will be working with. Inside of these categories the
EVP might as the full array of elements an organization delivers to employees in
return for the
contribution those employees make to the organization. It’s everything that
matters to employees about their work and their organizations, the things they
brag about at the neighborhood barbeque.
EVP encompasses the factors that some organizations categorize as total
rewards: various forms of pay and benefits, plus such other programmatic
elements as learning and
development, flexible work arrangements and wellness programs. The value
proposition also includes a range of intangible factors that don’t show up in the
pay check or on the benefits statement but nonetheless carry high value.
Research suggested that
organizations fall into one of four stages on a value proposition evolutionary scale.
1.1. Tactical
First-stage organizations have made little progress in defining the coherent
set of factors that make up the value proposition to employees and
candidates. Nature abhors an EVP vacuum, however, so no organization
can truly be without a value proposition, any more than it can be without a
strategy or a set of organizational values.
All of these exist, even if not formally recognized or clearly explained. Stage 1
companies certainly provide rewards and have cultures, but employees are on
their own to understand and interpret these. In our global research, about one-
third of organizations fall into this category.
1.2. Integrated
Organizations at the next evolutionary step have established a formal EVP
and have made strides to integrate their strategies for talent and rewards
management. These enterprises have typically established stated objectives
for each reward and talent management program.
They’ve made key connections among those programs (for example, creating clear
linkages among competencies, hiring processes, learning programs, career
paths and compensation bands). They represent about one-fourth of our
global data set.
1.3. Communicating and Delivering
Companies at the third evolutionary step have accomplished the advances we see
with Stage 2 companies. Third-stage organizations (a little less than one-fourth
of our data set) have also gone further by cogently communicating the EVP to
employees and delivering consistently on their EVP promises.
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In effect, they have established an internal brand, sometimes expressed

through clever graphics and messages, and communicated it to employees and
candidates.
1.4. Segmenting and Differentiating
On the foundation of an EVP solidly defined, communicated and delivered,
Stage 4 organizations have differentiated their EVPs from those of their talent
market
competitors. We usually find that these companies have also made significant
progress in customizing the EVP for critical workforce segments. They are also
more likely than
their less-advanced brethren to measure the effectiveness of their rewards programs.
These enterprises represent less than 20 percent of the companies we’ve
studied. They are more than twice times as likely as Stage 1 companies to
report financial performance substantially above their peer group.
These four stages not only represent increased sophistication, but also
incremental value associated with the employee value proposition.
Stage 4 organizations believe their value propositions, reflected in their brand
promises, give them a competitive advantage in the employment market. They
view their employee brands as strong and, in some important way, uniquely
attractive.
This advantage comes from the way they respect the order of the phrase employee
value proposition: they start by understanding the employee, then defining and
delivering
rewards that have true value, and then conveying a clear and compelling why-you-
should- care proposition to the target audiences.
2. Employer Branding
One of the greatest challenges facing companies right now is their ability to
exploit synergies and efficiencies in their talent acquisition and retention
programs. When considered with the fact we are about to enter an era of
unparalleled talent scarcity
around the world, employer branding is set to become one of the most critical roles
inside global companies. Then, what is the “Employer Branding”?
2.1. Definition of Employer Branding
It is the process of positioning an organization as an "employer of choice" in
the workforce market. An employer brand creates an image that makes people
want to work for and stay working for the organization. An organizational value
proposition of employees is the foundation of employer branding.
2.2. Branding Techniques
Employer branding uses the same marketing, communications, and performance
technology used to market products and services to create an image of what it is
like to work at the company. Firms typically use the following techniques,
collectively or in a selective manner:
2.2.1.The corporate Web site
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1
2.2.2.Media ads (e.g., print, television, radio)
2.2.3.Collateral materials (e.g., brochures)
2.2.4.Marketing campaigns
2.2.5.Representation of the company at job fairs, campuses, etc.
2.2.6.Community events, sponsorships, and CSR, etc.
2.2.7.Continuous recruiting to keep visible in the labor market.
2.3. Employee Value Proposition (EVP) is the Foundation of Employer Branding
An EVP answers the question, why would a talented person want to work for
the organization? The EVP must be aligned with the organizational strategic
plan, vision, mission, and values and create an image that attracts and retains
people. Further, it must provide an accurate picture of employment for
employees and candidates. Any inconsistencies in the work environment can
erode the credibility of a branding
strategy.
An EVP should promote the tangible and intangible benefits that people derive
from working there. Many people are attracted to work for international NGOs
or other nonprofits because they want to make a difference.
To create a global Employee Value Proposition can build on the principles of
corporate brand to further differentiate the company in an increasingly
competitive talent
marketplace. This included identifying:
2.3.1.Any different approaches needed to attract and retain different talent
segments and what those differences should be.
2.3.2.Priority areas for change in order to maintain and improve engagement
of key talent.
2.3.3.The messages to use to attract different talent groups in different countries.
2.4. Employer Brand Framework
An employer brand framework defines the employment experience from a
stakeholder perspective. The Framework considers the role of stakeholders
including employees, prospective candidates, customers, investors, and society
in employer branding.
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2

Stakeholde Prospective
rs Employees

Corporate Employer Value Proposition

Brand
EBSP
Employer and Employee Platform
• Recruitment and induction
• Compensation and benefits
EBEP • Career development
• Employee research
• Reward and recognition
• Communication systems
• Work environment

EVP
Employer Brand Strategic Platform
• Mission, vision, values
• CSR
• Leadership
• Corporate reputation and culture
• People management policies and practice
• Performance management
• Innovation

Market
Forces Costumers

Employer Brand Excellence Framework

Source: Minchington, B. (2011). Employer Branding Without Borders – A
Pathway to Corporate Success. Retrieved from ere.net.

Adapting the employer brand strategy to external environments should begin

with a focus on the employee experience. Not all employees are the same and
while companies like to use a “one-size-fits-all” engagement strategy, the reality
is that most employees want to have their own needs met before they consider
those of their team members or the organization as a whole. The employer
brand strategy has to be build from the ground up.
2.5. Manage the Employer Brand for the Long Term
If there is one variable that causes more employer brand strategies to fail or
to not even get started, it is the lack of relevant measures to determine the
return on
investment of the employer brand strategy over the long term. Most metrics
used are short-term measures such as recruitment advertising costs or job-
board spends.
Metrics need to be more strategic and should include measures such as quality
of hire, retention rate, and employee engagement which will provide deeper
insights into the
level of value creation from your employer brand strategy.
At the onset of your employer brand strategy, metrics based on desired
outcomes should be established. There is no one-size-fits-all
measurement tool for your
employer brand program. The key is developing a set of metrics that is based
on your own unique challenges and business objectives. Senior managers
should develop a dashboard of metrics that is relevant to their organization’s
strategy rather than
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implementing a “me-too” ROI measurement tool.
The key differentiator of companies that successfully adopt the employer brand
concept in the future will be those that appoint dedicated employer brand
resources and staffing, develop a clear strategy to work toward, achieving a
Tier 1 status, and whose outcomes consider the objectives of candidates,
employees, customers,
investors, and society.
3. Employee Engagement
Gallup found that whether unionized or not, world-class organizations have two crucial
things in common: They recognize that talented managers are the core of an
organization's success, and they understand and leverage the fact that
engagement predicts performance. Employee engagement has become a widely
used and popular term, and it has its basis in practice rather than theory and
empirical research, while its construct often overlaps with other constructs, such as
organization commitment, job involvement, or organizational citizenship behaviors
(OCB). However, engagement is not an attitude; it is
the degree to which an individual is attentive and absorbed in the performance of
their roles. In HR practice, the concept is commonly seen as capturing levels of
commitment and discretionary effort exhibited by employees.
*Organizational citizenship behaviors (OCBs) are discretionary workplace
behaviors that exceed one's basic job requirements. They are often described as
behaviors that "go above and beyond the call of duty".
An engaged employee is a person who is fully involved in, and enthusiastic about,
his or her work. Truly engaged employees are attracted to, and inspired by, their
work (“I want to do this”), committed (“I am dedicated to the success of what I am
doing”), and fascinated (“I love what I am doing”). Engaged employees care about
the future of the company and are willing to invest the discretionary effort –
exceeding duty’s call – to see that the organization succeeds.
According to Aon Hewitt, there are three dimensions through which organizations can
measure the strength of their employee engagement – which the consulting firm
defines as “the psychological state and behavioral outcomes that lead to better
performance”.
These dimensions are labelled by Aon Hewitt simply as Say, Stay and Strive.
Engaged employees: Say—speak positively about the organization to coworkers,
potential employees and customers; Stay—have an intense sense of belonging
and desire to be a part of the organization; and Strive—are motivated and exert
effort toward success in one’s job and for the company.
Aon Hewitt’s Engagement Model also covers “Engagement Drivers.” These are
the areas over which management has a great deal of control—the action areas.
Their extensive research formed the six major categories of the work experience
that include the work
people do, the people they work with, opportunities, total rewards, company
practices and general quality of life.
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Engagement Business
Engagement Outcomes Outcomes
Drivers

Talent
Retention
Brand
Reputation Wellness
Brand/EVP
Differentiators

Corporate responsibility

Leadership Operational
The Senior leadership Productivity
Work BU leadership Safety
Experience
Performance
Foundation

Career opportunities
Learning and development Customer
Performance management
People management NPS
Rewards and recognition Retention

Company Practices The Basics The Work Financial

Communication Benefits Collaboration Revenue/sales growth
Customer focus Job security Empowerment/autonomy Op. income/margin
Diversity and inclusion Safety Work tasks Total shareholder return
Enabling infrastructure Work environment
Talent and staffing Work/life balance

Employee Engagement Model

Source: Aon
Hewitt
3.1. Brand

The organizational reputation of a company isn’t just important from a consumer

point of view, says Aon Hewitt. The consulting firm explains that how the
business is
perceived, both internally among employees and externally to the public can
have a big impact on employee engagement. It is therefore important to consider
your employee value proposition, or EVP, and recognize its role in connecting
“an external brand promise to customers with delivery on the internal brand
promise to employees”. Aon Hewitt revealed that around 82 per cent of
employees value this aspect of a company’s brand, and a solid reputation as an
employer of choice can go a long way in engaging
employees.
3.2. Leadership
A company does not become a best employer without strong leadership.
Companies that excel at leadership are differentiated through four disciplines:
1) Leaders set the tone for the importance of leadership by cultivating and
developing talent; 2) they pursue an unrelenting focus on talent beyond a
typical performance management
cycle; 3) leadership programs and practices are aligned with business strategy;
and 4) leadership is a way of life—it is embedded into the values and expected
behaviors and culture of the organization. Leaders play an important role in
employee engagement
and becoming a best employer company. They do this in direct and indirect
ways. First, leaders have an indirect “multiplier effect” on all the top engagement
drivers and other best employer indices. Ultimately, leaders make the decisions
on brands, performance goals, pay and recognition, communication to
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employees, work process and
innovation.
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3.3. Performance
Lastly, a strong “performance focus” is essential to employee engagement.
Getting real about employee engagement requires moving beyond a generic
concept and clarifying the behaviors in which you would like employees to go
above and beyond. For many
employers there is increasing need for agility, speed and flexibility—these
traits and behaviors will vary by industry and job profile. Clarifying what
engagement looks like for employees is a prerequisite to their engagement.
Aligning performance
management, people management, learning and development, and rewards and
recognition with these engaged behavior expectations will focus, enable and
reinforce employees’ efforts and energy.
3.4. The Basics
Many organizations with lower levels of engagement struggle to jump right to a
“culture of engagement.” Leaders should not overlook the positive impact of
strong company practices and enabling infrastructure; basics like benefits,
safety and work-life balance; or fulfilling work itself. Many companies that have
had significant increases in employee engagement in a short period of time
focus on fixing issues in some of these basic elements. Getting the foundation
right is often the first step in building a culture of engagement, and cracks in this
foundation can quickly erode employee engagement for any organization.
3.5. The Work
Collaboration: The act of working with other people to achieve a mutual benefit
is vital to employee engagement. Surveys indicate that being cared about by
colleagues is a
strong predictor of employee engagement. Thus, a continuous challenge for
leaders is to rally individuals to collaborate on organizational, departmental, and
group goals,
while excluding individuals pursuing their self-interest.
Empower/autonomy: Employees are given the freedom and authority they
need to make necessary decisions. Empowerment is therefore critical to
driving higher
performance. Give people more autonomy, empower them to act and you
increase the chances of them delivering more.
Work task: Meaning and purpose are core employee performance motivators
that money doesn’t compare to. Meaningful work is work that makes sense
because we
know what’s expected and have the resources to do it, while understanding
how our part contributes to a greater company goal and how it benefits others.
3.6. Company Practices
Communication: Internal communication is important for building a culture of
transparency between management and employees, and it can engage
employees in the organization’s priorities. Executives employ a variety of
communication methods, including face-to-face communication, to
communicate with employees. The
executives’ chosen communication strategies aim to build trust and
engagement with employees.
Customer Focus: Customer focus and employee engagement are two sides of the same
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coin. Clearly if your customers are going to be satisfied it takes an engaged
workforce that is passionate about their work and holds a strong desire to
deliver great experiences. In line with meaning of work, employees become
disengaged when they lose meaning in their work. This meaning can only
come from recognition and acknowledgment from customers (whether internal
or external).
Diversity and inclusion: Diversity and Inclusion are values that reflect a company’s
culture of respect for people and the value it place on differences. An open and
more inclusive environment will build trust and confidence within the
organization and
generate a culture in which everyone feels valued and respects their
colleagues, and therefore increase employee engagement.
The business outcomes often result from strong engagement drivers and higher
employee engagement levels. Researches have consistently found that
companies with higher engagement levels also have better talent, operational,
customer and financial outcomes.
4. Employee Retention
Retention of employees as human resources is part of HR staffing and planning efforts.
Turnover, as the opposite of retention, often has been seen as a routine HR matter
requiring records and reports. However, what was once a bothersome detail has
become a substantial HR issue for many employers. Thus, organizations are being
forced to study why employees leave and why they stay. Sometimes an individual in
the HR area is assigned to specifically focus on retention to ensure that it receives
high priority.
Keeping good employees is a challenge that all organizations share and that
becomes even more difficult as labor markets change. Unfortunately, some myths
have arisen about what it takes to retain employees. Some of the most prevalent
myths and realities are as follows:
 Money is the main reason people leave. Money certainly is a vital HR tool,
and if people feel they are being paid inadequately, they may be more likely
to leave. But if
they are paid close to the competitive level they expect, other parts of the job
become more important.
 Hiring has little to do with retention. This is not true. Recruiting and selecting
the people who fit the jobs and who are less likely to leave in the first place,
and then orienting them to the company, can greatly increase retention. It is
important to select for retention.
 If you train people, you are only training them for another employer.
Developing skills in employees may indeed make them more marketable, but
it also tends to improve retention. When an employer provides employees with
training and development assistance, job satisfaction may increase and
employees are more likely to stay, particularly if they see more future
opportunities internally.
 Do not be concerned about retention during organizational change. That is
exactly the time to worry about retention. Although some people’s jobs may
have to be cut because of economic organizational factors, the remaining
employees that the company would like to keep may have the most
opportunity and reason to leave voluntarily. For example, during a merger or
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acquisition, most workers are concerned
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9
about job security and their employer’s future. If they do not feel a part of the
new organization early on, many may leave or evaluate alternatives.
 If solid performers want to leave, the company cannot hold them. Employees
are best viewed as “free agents,” who indeed can leave when they want. The
key to keeping solidly performing employees is to create an environment in
which they want to stay and grow.
4.1. Retention Matrix
Because both people and jobs are so varied, managers and HR professionals
need to realize that individuals may remain or leave their employment for both
job-related and personal reasons. For instance, if employees choose to leave an
organization for family reasons (e.g., because a spouse is transferring or to raise
children), there may be a
limited number of actions the employer can take to keep them on the job.
However, there are significant actions that an employer can take to retain
employees in many
other circumstances. The below figure illustrates some of these “drivers” of
retention, or areas in which employers can take action to strengthen the
possibility of keeping
employees.

Phillips, J.J. & Connell, A.O. (2011). Managing Employee Retention. London,
UK: Routledge.

The actual reasons that people stay or leave vary according to job groupings, industry
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0
and organizational issues, geographical global aspects, and other factors. For
instance, a survey of executives by Robert Half International found that the
most common factors that caused satisfactory employees to quit their jobs were
unhappiness with management, limited career advancements and recognition,
insufficient pay and benefits, and job boredom. This survey illustrates that many
of the factors involved in retention drivers are organizational and management
factors within the employer’s control.
4.1.1.Organizational and Management Factors
A number of organizational/management factors influence individuals in
their decisions to stay with or leave their employers. Organizations that
have clearly
established goals and hold managers and employees accountable for
accomplishing results are viewed as better places to work, especially by
individuals wishing to
progress both financially and career-wise. Further, effective management
provides the resources necessary for employees to perform their jobs well.
These factors reflect workplace commitment by employees, which leads to
more positive organizational
views in the industry and communities.
Other organizational components that affect employee retention are related
to the management of the organization. Some organizations see external
events as
threatening, whereas others see changes as challenges requiring responses.
The latter approach can be a source of competitive advantage, especially if an
organization is in a growing, dynamic industry. Another organizational factor that
can affect employee job performance and potential turnover intentions is
“organizational politics.” This can
include managerial favoritism, having to be involved in undesirable activities,
taking credit for what others do, and other actions that occur in many
departments and organizational settings.
A final factor affecting how employees view their organizations is the quality of
organizational leadership. Often, leaders have an identified strategic plan that
guides how the firm responds to changes. If a firm is not effectively managed,
then employees may be disappointed by the ineffective responses and
inefficiencies they deal with in
their jobs. A survey of 700 workers identified that “bad bosses” who do not give
employees recognition for accomplishments or who fail to keep promises can
lead to almost 40% of the workers being dissatisfied and more likely to look for
other jobs.
4.1.2.Work Relationships
Work relationships that affect employee retention include
supervisory/management support and coworker relations. A supervisor or
manager builds positive relationships and aids retention by being fair and
nondiscriminatory, allowing work flexibility and work-family balancing, giving
feedback that recognizes employee efforts and performance, and supporting
career planning and development.
Additionally, many individuals build close relationships with coworkers. Such work-
related friendships do not appear on employee records, but these relationships
can be an important signal that a workplace is positive. Overall, what this
means is that it is not just where people work, but also with whom they work,
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1
that affects employee
retention. If individuals are not linked with or do not relate well to their coworkers,
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there is greater likelihood for turnover to occur.
4.1.3.Job and Work-Life
Many individuals have seen a decline in job security during the past decade.
All the downsizings, layoffs, mergers and acquisitions, and organizational
restructurings have affected employee loyalty and retention. As coworkers
experience layoffs and job
reductions, the anxiety levels of the remaining employees rise. Consequently,
employees start thinking about leaving before they too get cut. Organizations in
which job continuity and security are high tend to have higher retention rates.
Some jobs are considered “good” and others are thought to be “bad,” but not all
people agree on which jobs are which. As mentioned previously, the design of
jobs and peoples’ preferences can vary significantly. Job design factors that can
impact retention include the following:
 A knowledge, skills, and abilities mismatch, either through
overqualification or underqualification, can lead to turnover.
 Job accomplishments and workload demands that are dissatisfying or
stressful may impact performance and lead to turnover.
 Both timing of work schedules and geographic locations may
contribute to burnout of some individuals but not others.
 The ability of employees to balance work and life requirements affects
their job performance and retention.
Numerous examples could be given on how each of these items affect
retention, but one example comes from a survey of chief financial officers on
the impact of these
issues in their firms. In this survey, work-life flexibility efforts were seen as
creating significant retention, recruitment, and productivity results. This study
illustrates that how organizations address jobs can drive retention efforts,
including global retention as discussed in the HR Perspective.
4.1.4.Rewards: Compensation, Benefits, and Performance
The tangible rewards that people receive for working come in the form of pay,
incentives, and benefits. Employees often cite better pay or benefits as the
reason for leaving one employer for another. Employers do best if they offer
competitive pay and benefits, which means they must be close to what other
employers are providing and what individuals believe to be consistent with their
capabilities, experience, and performance. If compensation is not close, often
defined as within 10% to 15% of the “market” rate, turnover is likely to be
higher.
However, the reality of compensation is a bit more complex than it seems at first
glance. For instance, one study of public-sector employees identified that broad
reward programs, not just pay and benefits, aided with workforce retention in
difficult
economic situations. A number of employers have used a wide range of special
benefits and perks to attract and retain employees. For example, Student Media
Group in Delaware added work-related plasma television screens, videogame
players, and
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free soda and snacks as part of a special rewards package to create more
positive views to aid in retaining employees.
Another part of rewards generally is that individuals need to be satisfied with
both the actual levels of pay and the processes used to determine pay. That is
why the performance management systems and performance appraisal
processes in
organizations must be designed so they are linked to compensation increases.
To strengthen links between organizational and individual performance, an
increasing number of fast-growing private-sector firms are using variable pay
and incentives
programs. Some programs offer cash bonuses or lump-sum payments to
reward extra performance, which also aids with retention efforts.
Another rewards aspect that affects retention is employee recognition, which
can be both tangible and intangible. Tangible recognition comes in many
forms, such as
“employee of the month” plaques and perfect-attendance certificates.
Intangible and psychological recognition includes feedback from managers
and supervisors that acknowledges extra effort and performance, even if
monetary rewards are not given. For instance, one firm, Fairmont Hotels and
Resorts, is using a “Serviceplus Colleague Recognition Program” to engage its
30,000 employees. Different types of recognitions include “Star of the Month”
and “Memory Maker” for significant service. For such
recognition, a small amount of money (under $50) and other types of rewards are
given. An employee survey has shown significant increases in positive
employee views of both their jobs and the Fairmont firm.
4.1.5.Career Training and Development
Many employees in all types of jobs consistently indicate that organizational
efforts to aid their career training and development can significantly affect
employee retention.
Opportunities for personal growth lead the list of reasons why individuals took
their current jobs and why they stay there. In one survey, nearly one-third of
workers
identified the lack of career advancement opportunities to be the most
important reason for potentially changing employers.
Training and development efforts can be designed to indicate that employers are
committed to keeping employees’ knowledge, skills, and abilities current. Also,
training and development can help underused employees attain new
capabilities. Such a program at Southwest Airlines has been very successful.
Recruiters were reassigned to different departments, which resulted in their
generating sales and revenues in flight operations and other areas.50
Organizations address training and development in a number of ways. Tuition
aid programs, typically offered as a benefit by many employers, allow
employees to pursue additional educational and training opportunities. These
programs often contribute to higher employee retention rates because the
employees’ new knowledge and capabilities can aid the employer. Also, through
formal career planning efforts,
employees discuss with their managers career opportunities within the
organization and career development activities that will help them to grow.
Career development and planning efforts may include formal mentoring
programs. For instance, information technology (IT) organizations are using
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career development
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programs so that IT individuals can expand their skills outside of technical areas.
Programs in some firms cover communication and negotiation tactics, which
gives the employees additional capabilities that are needed in managerial and
other jobs.51 Companies can help reduce attrition by showing employees that
they are serious about career advancement opportunities.
4.1.6.Employer Policies and Practices
A final set of factors found to affect retention is based on the employer relations
policies that exist. Such areas as the reasonableness of HR policies, the
fairness of disciplinary actions, and the means used to decide work assignments
and opportunities all affect employee retention. If individuals feel that policies
are unreasonably
restrictive or are applied inconsistently, they may be more likely to look at jobs
offered by other employers.
To ensure that appropriate actions are taken to enhance retention,
management decisions require data and analyses rather than subjective
impressions, anecdotes of selected individual situations, or panic reactions to
the loss of key people.
The analysis of turnover data is an attempt to get at the cause of retention
problems. Analysis should recognize that turnover is a symptom of other
factors that may be causing problems. When the causes are treated, the
symptoms can go away.
Some of the first areas to consider when analyzing data for retention include the
work, pay/benefits, supervision, and management systems. Common methods
of obtaining useful perspectives are employee surveys, exit interviews, and first-
year turnover
evaluations.
4.2. Employee Surveys
Employee surveys can be used to diagnose specific problem areas, identify
employee needs or preferences, and reveal areas in which HR activities are
well received or
viewed negatively. Whether the surveys are on general employee attitudes, job
satisfaction, or specific issues, the survey results must be examined as part of
retention measurement efforts. For example, a growing number of “mini-surveys”
on specific topics are being sent via e-mail questionnaires, blogs, and other
means.
Regardless of the topics in a survey, obtaining employee input provides
managers and HR professionals with data on the “retention climate” in an
organization. By obtaining data on how employees view their jobs, their
coworkers, their supervisors, and organizational policies and practices, these
surveys can be starting points for reducing turnover and increasing the length of
time that employees are retained. Some
employers conduct attitude surveys yearly while others do so intermittently.
By asking employees to respond candidly to an attitude survey, management is
building employees’ expectations that actions will be taken on the concerns
identified.
Therefore, a crucial part of conducting an attitude survey is providing feedback to
those who participated in it. It is especially important that even negative survey
results be communicated to avoid fostering the appearance of hiding the results
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or placing blame.
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4.3. Exit Interviews
One widely used means for assisting retention assessment efforts is the exit
interview, in which individuals who are leaving the organization are asked to
give their reasons.
HR must regularly summarize and analyze the data by category (e.g., reasons for
leaving, department, length of service, etc.) to provide managers and
supervisors with information for improving company efforts.
In exit interview is an interview conducted when an employee is leaving with a
company. Exit interviews can have value not only in terms of assessing and
improving corporate culture but also in minimizing an employer's exposure in
litigation. The following are suggestions for conducting an appropriate exit
interview:

• Glean feedback from employees in order to improve organization

• Minimize an employer's exposure in litigation
• Retain high performers or talents

• Should be a neutral person (HR or a consultant)

• Should provide a sufficient training for the interviewer
• Should be a structure interview format that contains questions about unavoidable
and avoidable reasons for leaving
• Should prepare for each exit interview by reviewing the interview format and
the interviewee’s personnel file
• Should be conducted in a private place, before the employee’s last day
• Should confidential and that only will used for retention
• Should be aligned with the organization's business needs

4.4. First-Year Turnover Evaluations

A special type of retention assessment focuses on first-year employees. It is not
unusual for turnover to be high among newer employees during their first year.
Sometimes the cause of departure is voluntary; for example, individuals may
identify a mismatch between what they expected in their jobs and managers
and what actually occurs, or between their perceptions of the new job and its
reality. Other times
individuals are involuntarily removed in the first year. Some causes can be
excessive absenteeism and poor performance, mismatches with job
requirements, and conflicts with other employees and managers. If these
situations occur too often, HR may need to reevaluate its recruiting and
selection processes, as well as its job previews to make sure they are realistic.
Overall, focus on first-year retention and turnover is useful because individuals
who stay for a year are more likely to extend their employment and have
greater retention beyond the first year. Also, effective first-year efforts may lead
to future career
development, higher performance, and other positive retention factors.
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4.5. Retention Evaluation and Follow-Up
Management can take numerous actions to deal with retention issues. The
choice of a particular action depends on the analysis of the turnover and
retention problems in a particular organization and should be custom tailored for
that organization.
Tracking of intervention results and adjustment of intervention efforts should
be part of retention evaluation and follow-up. Some firms use pilot programs to
see how
changes affect retention before extending them to the entire organization. For
instance, to test the effect of flextime scheduling on employee turnover, a firm
might try flexible scheduling in one department. If the turnover rate in that
department drops in comparison to the turnover rates in other departments still
working set schedules, the firm might extend the use of flexible scheduling to
other departments.
Retention evaluation and follow-up are key facets of the broader organizational
HR planning and staffing. Effective retention management can have major
impacts on the integrated HR attraction, recruiting, and selection processes.
4.6. Job Embeddedness
Job embeddedness represents a broad set of influences on an employee’s
decision to stay on the job. In other word, job embeddedness is the collection
of forces that
influence employee retention. It can be distinguished from turnover in that its
emphasis is on all of the factors that keep an employee on the job, rather than
the psychological process one goes through when quitting.
Job embeddedness is a construct developed to explain why people stay in their jobs.
Job embeddedness theory suggests that we are held in our jobs and the communities
in which we live by ties to other people, groups, organizations, places, and
things. Each tie can vary in strength and size; however, it is the ‘totality of
embedding forces’ that results in someone becoming enmeshed in their job.
Job embeddedness predicted
turnover, over and above job satisfaction and commitment.
4.6.1.Implications
Being embedded in an organization and one’s community is associated with
reduced intent to leave and actual leaving. Thus, enhancing job
embeddedness could be an
effective retention tool. Organizations that offer flexible scheduling and family
friendly programs may further enhance employee embeddedness by
strengthening employees’ social bonds to others within the community. Family
perception of fit to the
organization could be improved by educating families on the value of the
employees’ work to the organization and creating a sense of pride in the
organization.
4.6.2.Pros and Cons
Job embeddedness may actually strengthen employees' motivation to generate,
spread, and implement innovative ideas in organizations for individuals in the
mid- and late stages of their careers than for those in the early stage of their
careers.
 12
9
One potential downside of job embeddedness that warrants consideration is
that people who feel stuck in an unfavorable job may lose motivation,
experience frustration, and even engage in counterproductive workplace
behaviors.
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0
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1
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