PHRi MODULE 4

COMPESNATION AND BENEFITS

Professional in Human Resources – International (PHRi)

2016 Edition

© 2016 International Human Resource Certification Institute

 4.1: Compensation

This section covers the following information from the Knowledge

Base:

Behaviors: 01. Communicate information about an employee‘s compensation

package, when required

02. Communicate information about company benefits

04. Provide information about payment to employees for working hours

and non-working hours (for example, not working because of illness
or vacation)

05. Administer salary adjustments

09. Coordinate the completion of salary surveys from external

organizations

10. Report the results of current research and available information about
salaries
Skills & Knowledge: 01. Total compensation packages

02. Benefit programs (for example, health care plans and flexible
benefits)

04. Salary surveys

06. Company-wide compensation policies (for example, wage agreements

with unions or work councils, employee categories and salary
increases)

07. Contracts with service and product providers (for example, health
insurance and pension plans)

08. Bonus/incentive programs

09. Payroll processes

Source: HR Certification Institute

Module 4: Compensation and Benefits Section 4.1: Compensation

Introduction
Compensation refers to the financial returns and tangible services, including
salary, allowances and incentives. In this section you will learn the steps used to
design a compensation system. You will also learn what is involved in developing
a pay system that helps attract, motivate and keep valuable employees.

This section examines the following:

 How to design a compensation system
 The components of a compensation system

Designing a Compensation System

Developing a compensation system that is fair and impartial requires an
understanding of the positions in the organization. The compensation system
design process consists of four phases, as shown in Figure 2-1.

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Module 4: Compensation and Benefits Section 4.1: Compensation

Figure 2-1. Phases of Compensation System Design Process

Job Analysis
Job analysis helps ensure that jobs within the organization are related. This is an
important step toward achieving the organization‘s mission, vision, goals and
objectives.

What is the purpose of a job analysis?

 To understand the requirements of a job and to develop a pay structure

What is a job analysis?

 A systematic method of collecting information about a job and evaluating
the job requirements

What are the results of a job analysis?

 A written statement of the tasks performed in the job and the basic
qualifications:
o Education level
o Experience

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o Training
o Knowledge, skills and abilities (KSAs)

The three key elements of a job analysis are the following:

 Knowledge: Information necessary for performing a task
 Skills: Level of expertise needed for performing a task
 Abilities: Capabilities needed to perform the job

These three key elements are commonly abbreviated as KSAs.

Minimum selection criteria should not include KSAs that can be taught in a
relatively short time frame (for example, a day).

Supervisors and HR work together to design a job analysis for new positions.
Time limits are usually placed on this task.
 For new positions: A follow-up assessment needs to be completed within
six months (no later than one year) after placement.
 For current positions: Job analysis needs to be completed on a regular
and ongoing basis—every two years or when there is a vacancy.

Relevant information. The purpose of collecting data for a job analysis is to help
differentiate the job from other jobs. The data needs to describe the following job
features:
 Essential and nonessential tasks and responsibilities
 Required knowledge, skills, abilities and mental and physical attributes
 Required level of responsibility in the job (supervision received and given)
 Work environment, including the following: o Machines and equipment
used
o Hazards
o General physical conditions that may affect the work

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Module 4: Compensation and Benefits Section 4.1: Compensation

Primary source data. When collecting job analysis data, two data sources are
most important:
 Employees who are actually performing the job
 Employees who are supervising others who perform the job

If these two sources are used, the data sample will better represent the target
population, and the job analysis conclusions will be valid.

Collection tools and techniques. Most organizations use more than one method
for collecting primary source data. Deciding who conducts the job analysis will
depend on the collection method(s) chosen and the resources that are available.

Figure 2-2 summarizes various common data collection methods.

Method Description Benefits

Observation  Directly observe  Provides a realistic view of

employees performing the the daily tasks and
tasks of a job. activities performed in a
 Record observations. job
 Translate observations into  Works best for short-cycle
the necessary KSAs. jobs in production

Interview  Conduct a face-to-face  Uses predetermined

interview to obtain the questions
necessary information  Adds new questions based
from the employee about on the response of the
KSAs needed to perform employee being
the job. interviewed
 Works well for
professional jobs

Figure 2-2. Common Data Collection Methods (continued to next page)

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 Module 4: Compensation and Benefits Section 4.1: Compensation

Method Description Benefits

Open-ended  Use a questionnaire to ask  Produces reasonable job

questionnaire job incumbents and their requirements because
managers about the KSAs input is requested from
necessary to perform the both employees and
job. managers
 Combine the answers and  Works well when a large
publish a composite number of jobs must be
statement of job analyzed with limited
requirements. resources

Figure 2-2. Common Data Collection Methods (concluded)

Job Documentation
Job documentation, which involves creating job descriptions and job
specifications, is the second step in the process of developing a compensation
system.

Job Descriptions

Job descriptions play a crucial role in an organization‘s HR system. A job

description is a written document describing an employee‘s work activities.
(Organizations may use another name for the job description, such as role profile
or role description.) The uses of job descriptions as they relate to the design and
administration of a compensation system are as follows:
 Help to set up evaluation criteria for job performance
 Provide data for comparing pay with that of other organizations
 Help in assigning objective classifications or job titles to employees
 Communicate expectations to both supervisors and employees
 Improve an organization‘s ability to defend unwarranted charges of
discrimination

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In addition to their uses in developing compensation systems, job descriptions

bring value to many areas, as shown in Figure 2-3.

Figure 2-3. Value of Job Descriptions

Although job descriptions may vary in format, they should include the elements
shown in Figure 2-4.

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Job Element Description

Job identification  Job title

 Department or location
 Date the job description was completed
 Approvals
 Who the position reports to

Summary Overview (four or five sentences) that summarizes

the purpose and objectives of the job, including the
following:
 Primary responsibilities
 Expected results
 Degree of freedom (for example, works
independently or works under direct
supervision)

Essential functions Tasks, duties and responsibilities of the job

Nonessential functions Desirable but not essential aspects of the job

KSAs Minimum knowledge, skills and abilities required to

perform the job satisfactorily

Supervisory responsibilities Extent of authority, including a list of who reports to

this position

Working conditions Environment in which the job is performed,

especially hazardous or difficult physical conditions

Figure 2-4. Elements of a Job Description

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Not every component listed in Figure 2-4 will appear in every job description.
Organizations have flexibility in the format of their job descriptions.

A sample job description is provided in the Essentials of Human Resource

Management Resource Center at http://www.learnhrm.com.

Job Specifications

The written statement of the minimum qualifications required to perform a

specific job is called the job specification. The specification includes both
essential and nonessential functions and abilities:
 Experience
 Education
 Training
 Licenses and certifications (if required)
 Mental abilities and physical skills
 Level of organizational responsibility

Essential and Nonessential Functions

By analyzing a job specification, the employer can assess a job‘s most important
functions and the criteria for deciding whether an individual can perform the
essential functions. The analysis process involves three steps, as shown in Figure
2-5.

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Step Description

1. Get job information Includes information about the job tasks, duties and
responsibilities in terms of the following:
 Nature
 Frequency
 Intensity
 Duration
 Impact
 Perceived importance to the job

2. Analyze data The core of the process, this step reveals the job‘s main
purposes. Analyzing the data includes the following:
 Distinguishing essential functions from
nonessential ones, with a focus on essential
functions
 Deciding on ways of achieving the desired job
results

3. Document conclusions Documentation must always be consistent with the results

of the analysis. Its level of detail can never exceed the
level of detail provided by the analysis. Job facts and
conclusions must be documented so they are not biased
toward people with disabilities.

Figure 2-5. Analysis of a Job Specification

Remember, it is crucial to differentiate between the job‘s essential and

nonessential functions. Good job documentation supports decisions about who is
qualified for a job.

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Together, job analysis and job documentation are important steps in the process of
developing pay structures for jobs. As an organization grows in size and
complexity, these steps become more critical because the resulting compensation
programs help guarantee fairness within the organization.

Job Evaluation
Job evaluation assesses the worth of a position within the organization. This
process consists of two main tasks:
 Defining the pay rate structure
 Setting pay rates equal to rates for similar jobs in other organizations

All methods of job evaluation have the same objective—to develop a system that
is measurable and realistic for deciding pay structures. Most evaluation methods
can be grouped into one of two categories:
 Nonquantitative (whole-job) methods
 Quantitative methods

Nonquantitative Evaluation Methods

Nonquantitative methods evaluate the whole job and try to place jobs in order of
value to the organization. The sequence will indicate that one job is more
important than another job, but it will not tell how much more important.
Examples of two nonquantitative methods include job ranking and job
classification.

Job Ranking

WorldatWork describes a process for ranking job and the relationship between job
evaluation and job ranking.

―The ranking method of job evaluation is the simplest form of job evaluation.
Basically, the organization would use a whole job comparison approach and
rank order the jobs within the organization from highest to lowest. It is
important to note that ranking only gives an organization an indication of how

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each job fits within the job-worth hierarchy; ranking does not provide any
insight as to the relative degree of distance between the various jobs. Ranking
jobs within an organization typically follows three steps:
1. Analyze and document job content.
2. Identify selected groups of jobs (also known as job sets).
3. Rank order jobs within the sets.‖ (WorldatWork 2007)

Job Classification

The job-classification method writes descriptions for each class of jobs. The jobs
are then put into the grade that best matches its class description, based on the
judgment of the evaluator. There are a few disadvantages to this method:
 Because this process is subjective, with a wide variety of jobs and job
descriptions, jobs could easily fall within more than one grade level.
 This method relies on job titles and duties and assumes the jobs are similar
among organizations. Many organizations are moving to the point-factor
method (described below) for these reasons.

Quantitative Evaluation Methods

Quantitative evaluation methods use a scaling system to show how much more
valuable one job is than another. While nonquantitative methods evaluate the
whole job, quantitative methods evaluate the job using a variety of factors—often
called compensable factors. Compensable factors reflect how much the job adds
value to the organization.

Point-Factor System

The point-factor system is a form of quantitative evaluation. It is the most

commonly used method of job evaluation. The compensable factors chosen for
the evaluation must reflect the nature of the job being evaluated. For example,
hazards and working environment would be pertinent factors in a manufacturing
setting but not as relevant in most office jobs.

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The factors most commonly used in point-factor evaluations include the following:

 Skills
 Responsibilities
 Effort and physical demands
 Working conditions
 Supervision of others

HR may independently conduct the job evaluation or lead a discussion with an

internal or external committee to decide how much each factor (such as skills and
working conditions) is present in a specific job. The committee assigns points to
each factor and then adds the points to come up with an overall point value for the
job. Then they can compare the relative worth of jobs on the basis of their point
values.

The advantages of a point-factor system are listed below (Koss 2008):

 Forces an organization to quantify total points for each unique job, the true
value that the company places on this job. This process provides value
beyond just compensation.
 Forces an organization to do some real soul searching about the traits they
value in employees. This exercise has some side benefits for recruitment,
promotions and job design.

The disadvantages of a point-factor system are as follows (Koss 2008):

 If the organization requires an outside resource to design a custom system,
there will be a substantial cost in consulting fees for each 30 unique jobs
that need to be evaluated.
 A time commitment from senior management also is needed for the initial
design of the system. This generally requires at least three half-day
meetings, and then a smaller group will need to review job descriptions and
assign points.

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Market-Based Evaluation

In a market-based evaluation, an organization identifies the labor market in which

it wants to compete and uses the current pay rates as the relative worth of
corresponding jobs. Although evaluating jobs on the basis of their market value is
not a true method of job evaluation, market rates are used as the standard for
developing a job-worth hierarchy. Remaining jobs that do not fit the standard are
usually put into the hierarchy based on whole-job comparisons (for example, the
job-ranking method) with the market-value jobs.

Developing a Pay Structure

After the job analysis, job documentation and job evaluation are completed, an
organization uses all the data to develop its pay structure. There are two steps to
developing a pay structure:
 Grouping jobs into pay grades
 Setting pay ranges

Grouping Jobs into Pay Grades

Pay grades are used to group jobs that have approximately the same relative
worth within the organization. All jobs within a particular grade are paid the
same rate or within the same pay range.

The purpose of pay grades is to create a pay structure for the entire organization
rather than having to set up a separate pay range for each job. The number of pay
grades an organization has will depend on the following factors:
 The size of the organization
 The distance between the highest and lowest level of job
 How clearly the organization defines and differentiates jobs
 The policies regarding pay increases and promotions
.

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During the job evaluation phase, if the organization used the point-factor method,
the pay grade consists of jobs falling within a range of points. If the job-ranking
method was used, the pay grade will consist of all jobs that fall within two or
three ranks. The job-classification method categorizes jobs into classes or grades.

To be successful, there must be enough grades to distinguish jobs by relative

worth but not so many grades that the lines between grades become insignificant.
By using pay grades, management can develop a coordinated pay system without
having to create a separate pay range for each job in the organization.

Setting Pay Ranges

For each pay grade, the organization creates a pay range that sets the upper and
lower limits of compensation for employees whose jobs fit within that particular
grade. It is best to have overlap between pay ranges so that an experienced person
in a lower-grade job may be paid more than an inexperienced person in a higher-
grade job.

A maximum, a minimum and a midpoint of the pay range are set on the basis of
market data from pay surveys:
 Range minimum equals the lowest value on the job.
 Range maximum equals the highest value on the job.
 Midpoint is the middle point between the minimum and maximum rates.
The midpoint is often considered the market rate paid to an experienced,
fully performing employee.

―The difference between the maximum and the minimum is the range spread, or
the width of the range‖ (WorldatWork 2007). The difference will vary with an
organization‘s administrative, promotion and pay increase policies. Lower-level
jobs normally have a smaller range between minimum and maximum salaries.
Entry-level employees usually have more opportunity for promotion and tend to
remain at entry level for only a short time.

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Even when a pay structure is set up, an organization can usually identify a few
employees whose pay is either lower than the minimum or higher than the
maximum of their pay range. In either case, the organization needs to take steps to
bring the employee back into the organization‘s pay structure. Figure 2-6
summarizes the steps to develop a pay structure.

Step Description

1 Develop a market line for all jobs, comparing the job-evaluation points or
values with the market value for comparable jobs.

2 Use the market line to decide pay grades by grouping together the jobs with
similar value to the organization.

3 Spread pay grades evenly over the points or values on the market line,
attempting to place jobs in the middle of the pay grade.

4 Calculate the pay ranges for each grade. Assuming that the jobs are placed in
the middle of the range (midpoint), set up a range spread that fits with the type
of positions and the number of grades

5 Each pay range will have a minimum, midpoint and maximum, with equal
distance between each.

6 Individual pay rates are calculated using a pay policy line that is set by the
organization. For example, in a highly competitive marketplace, an employer
may decide to hire employees at 105% of the pay structure, or 5% above the
midpoint of each range (the midpoint represents the market rate).

Figure 2-6. Developing a Pay Structure Worksheet

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A typical pay structure will look something like this:

 Production employees: 10-20%
 Clerical employees: 20-40%
 Exempt employees: 35-50%
 Management employees: 45-60%

A description of compensation system design can be found in Compensation

Basics for HR Generalists, Elaine M. Evans, 2006, WorldatWork.

Compensation Systems
Once the job analysis, job documentation and job evaluation are completed, and
the pay structure is developed, the pay system is developed and maintained.

Base-Pay Systems
After an organization has analyzed, evaluated and priced its jobs and designed its
pay structure, the next step is to develop a pay system that helps attract, motivate
and retain employees.

To manage base pay for employees, it is important to understand the mechanics of

the organization‘s base pay program and how much freedom there is within that
system. Typically, as organizations grow and mature, they need to formalize how
they manage pay as well as people. The best compensation structure is one that
fits your organization‘s strategy and culture. Decisions about base pay are made
not on an individual employee basis but within the context of the organization‘s
needs and operation philosophy (Jensen, McMullen and Stark 2006).

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Most employees receive some type of base pay, in one of these forms:
 Hourly wage (for each hour worked)
 Salary (the same amount no matter how many hours are worked)

Base-pay systems can be structured in many different ways, as described below.

Single- or Flat-Rate System

In single-rate pay or flat-rate pay systems, each employee currently performing

the job has the same rate of pay, regardless of performance or seniority. This
system is typically used for elected government jobs or union hourly workers. The
flat rate is often set to correspond to survey data relating to the job. There may be
a training wage in a flat-rate system.

Time-Based Step-Rate System

In a time-based step-rate pay system, the rate is based on how long an employee
has been performing the job. Pay increases occur on a set schedule.

Employees are normally hired at, or given promotional adjustments to, the first
step, although people with qualifications greater than that required for the job may
be hired at a higher step. There are several types of time-based step-rate systems.
 In an automatic step-rate pay structure, the pay scale is usually divided
into a number of steps that are 3% to 7% apart. At set time periods, each
employee with the required seniority receives a one-step increase. This
system is most commonly used in union and government environments.
Figure 2-7 shows an example of a step-rate pay structure with four steps
that are 7% apart.

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Figure 2-7. Automatic Step-Rate Pay Structure

 A step-rate system with variability-based performance considerations

is similar to the time-based system, except that the size or timing of
increases may vary if performance is significantly above or below standard.
For example, a very capable employee may skip steps.
 In a combination step-rate and performance structure, employees
receive increases on a step-rate basis up to the job rate. Above the job rate,
increases are granted only for above-standard performance. This system
requires resources that can develop and administer a performance appraisal
system and communicate it to employees so that they understand how they
can earn performance-based increases.

Performance-Based/Merit Pay System

In a performance-based pay system, the individual employee‘s performance is the

basis for the amount and timing of pay increases. Another term for a performance-
based pay system is a merit pay system.

In a merit pay system, employees are usually hired at or near the pay range
minimum. Pay increases are tied to performance and the degree to which the
employee masters the job.

Employers using a performance-based system must be able to explain the

differences in salary increases from one employee to another. Employers must
also be able to support the performance appraisal methods that were used to
decide why an employee deserved a specific pay increase. Without such controls,

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performance-based systems are difficult to justify to employees, and supervisors

could rate employees in ways that give the desired wage regardless of actual work
performance.

Productivity-Based System

In a productivity-based pay system, pay is decided based on the employee‘s

output. The two examples listed here are most frequently used in manufacturing
industries:
 Straight piece-rate system. The employee receives a base wage rate and is
awarded additional compensation for the amount of output produced.
 Differential piece-rate systems. The employee receives one piece rate up
to the standard and then a higher rate once the standard is exceeded.

In assembly line work, a productivity-based system works best under the

following conditions:
 Units of output can be measured.
 A clear relationship exists between employee effort and quantity of output.
 The job is standardized, the workflow is regular and there are few delays.
 Quality is less important than quantity. If quality is important, it is easily
measured and controlled.
 Costs are known and precise.

Because these systems stress quantity of work, the quality of the work must be
closely monitored.

Person-Based System

In person-based pay, employee characteristics rather than the job performed

decide pay. In such systems, two employees may perform similar tasks, but the
person with superior knowledge or skill mastery receives more pay.

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―Unfortunately paying people based on what they could do rather than on what
they produce can bankrupt the organization— unrealized potential is hard to turn
into profits‖ (Society for Human Resource Management 2010).

There are three basic approaches to tying base pay to people‘s qualifications:
 In a knowledge-based system, pay is based on the level of knowledge the
employee has in a field. This approach is used mainly for compensating
learned professions such as scientists or teachers. Staff professionals may
also be paid this way.
 Skill-based systems base pay on the number of different skills an
employee is qualified to perform. Employees increase their pay by
acquiring new skills, even if they do not use the skills on their current
assignment. This type of system is most commonly used in a production
environment.
 Competency-based systems base pay on the level at which an employee
can operate in defined competencies, such as training other employees.
This type of system is commonly found when rewarding professional
groups of employees. (Competencies are the skills, behaviors and
knowledge that are needed to succeed in a specific job.)

A recommended article, Effectively Managing Base Pay: Strategies and

Programs for Success, by Robert J. Greene, is available at
http://www.shrm.org/hrdisciplines/compensation/Articles/Pages/CMS_005592.aspx.

Pay Variations
There are times when individual employees are paid outside the pay ranges that
are set up in the organization. Examples of these variations include the following:
 Red-circle rates
 Green-circle rates
 Pay compression

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Pay structures must be reevaluated over time, and necessary changes must be
made to ensure they remain internally equitable and externally competitive.

Red-Circle Rates

Red-circle rates are rates above the range maximum.

Here are some examples of when red-circle rates may occur:

 Long-term employees who reach the maximum rate in their range or jobs
in which promotion opportunities are rare.
 Employees who are bumped down to a lower-level job, rather than getting
laid off, but their salary is not reduced. Sometimes a red-circle rate is
frozen until the pay structure is increased enough so that the rate falls
within the range.
 A manager who is paid at the top of the job range, but there are no
openings at the next job range. In this case, bonuses are sometimes used to
increase the manager‘s take-home pay.

If red-circle rates become common in the organization, the organization‘s pay

ranges may lag the market and may need to be reexamined.

Green-Circle Rates

Green-circle rates are the opposite of red-circle rates—an employee‘s pay is

below the minimum of the range.

Generally, employees in this situation should be given pay raises to get them into
the range as soon as they meet the minimum requirements for the position.

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Pay Compression

Pay compression, or ―salary compression, which means longer-term employees‘

salaries are lower than those of workers entering the firm today, is a creature of
inflation. Prices (and starting salaries) go up faster than the company‘s salaries,
and firms need a policy to handle it‖ (Dessler 2008).

Pay compression usually occurs for one of the following reasons:

 Beginning salaries are raised due to increases in the minimum wage or
inflation. Therefore, new hires can make the same as employees with more
experience who began at a lower wage.
 Labor market pay levels increase more rapidly than an employer‘s pay
adjustments. An example would be hiring an inexperienced systems
engineer at or close to what more experienced systems engineers earn
because of an increase in competitive hiring rates. If the inexperienced
systems engineer is paid more than the experienced ones, salary inversion
occurs.
 There is not enough difference between pay levels. This situation allows an
employee making overtime to have a larger net pay than that of a
supervisor, even though the base pay of the employee is less than the
supervisor‘s pay.

To offset the effects of pay compression, organizations can do the following:

 Match the market in pay rates for all employees, not just new hires.
 Provide other benefits to employees affected by pay compression.
 Continuously evaluate survey data and update pay ranges accordingly.
 Provide incentive plans for managers.
 Increase the amount of time off.
 Provide longevity bonuses.
 Monitor salaries for inflation.
 Install a more aggressive merit pay program.

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Pay Adjustments
Some organizations use a technique that integrates performance appraisals and
pay adjustments. Figure 2-8 is an example of a pay adjustment matrix that helps
guide decisions on salary increases. As you can see, an employee in the lower half
of the range who has a performance appraisal rating of ―fully meets standards‖
would be eligible for a 3% to 4% raise.

Position of Pay Rate in Position of Pay Rate in

Performance Rating
“Below Midpoint” Range “Above Midpoint” Range

Outstanding 7–8% 5–6%

Significantly exceeds 5–6% 3–4%

standards

Fully meets standards 3–4% 1–2%

Does not fully meet 0% 0%

standards

Figure 2-8. Pay Adjustment Matrix

Other pay adjustment techniques include the following:

Cost-of-Living Adjustments (COLAs)

The purpose of a cost-of-living increase is to protect the employees‘ purchasing

power against rising inflation. These increases are given to all employees, either
in equal cents per hour or as a percentage of their current pay.

General Pay Increase

A general pay increase is given to all employees (or sometimes a class of

employees such as office or production workers) based on local competitive
market requirements. This type of increase is awarded regardless of employee

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performance. The pay increase is not linked to the cost of living and will depend
on the employer‘s ability to pay for compensation increases.

Seniority

Seniority, which is the time spent in an organization, is sometimes the basis for
pay adjustments. Organizations may agree to one of these two rules when
seniority is used:
 Employees may need to be employed for a certain period of time before
they are eligible for pay increases.
 Employees may receive pay increases automatically after a set time in
the job.

Lump-Sum Increases (LSI)

Some organizations use a lump-sum increase (LSI), or performance bonus,

method to reward employees. An LSI is a one-time payment of all or part of a
yearly pay increase. An employee‘s base wage rate is typically not adjusted by
this increase.

The LSI approach is an advantage to the organization because other wages and
benefits linked to the base rate, such as overtime, shift premium, sick pay and
life insurance, are not impacted.

Market-Based Increases

Organizations may use market-based salary increases to be competitive in

attracting new talent or to keep key employees.

Market-based salary increases are usually added to base pay and may also be
called equity increases.

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Variable or Differential Pay

Variable pay, or differential pay, depends on performance and is not added to the
employee‘s base pay. This practice allows organizations to better control their
labor costs and to tie performance and pay together. There are two ways to
differentiate pay:
 Time-based (when the employee works)
 Geographic (where the employee works)

Time-Based Differential Pay

Some employees receive time-based differential pay, or a different rate of pay,

based on when they work. Keep in mind that any overtime premium must be
applied to the differential pay.
 Shift pay. Some employees receive extra pay when they work less
desirable hours, such as a second or third shift. Shift pay may be a flat
amount per hour or a percentage of their base pay.
 Emergency-shift pay. Certain types of industries pay emergency-shift pay
when employees work in response to an emergency.
 Premium pay. Some employers pay extra pay, or overtime at a higher
rate, for working any of the following:
o Holidays or vacation days
o For the sixth or seventh day of straight time
o After eight hours in a day
 Hazard pay. In some industries, employees earn extra pay for working in
an environment that is considered to be more risky from a safety or health
perspective.
 On-call or call-back pay. In some organizations employees earn pay for
the following reasons:
o When they are on call, even if they are not called in to work (on-call
allowance)
o When they are called back for an extra shift in the same workday (earn
extra pay)

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 Module 4: Compensation and Benefits Section 4.1: Compensation

 Reporting pay. Employees are paid for reporting to work as scheduled

even if upon arrival no work is available.
 Travel pay. Hourly employees receive pay for time spent traveling to work
assignments, even if the travel time is outside of working hours.
 Overtime pay. In various countries the minimum amount to be paid for
overtime is dictated by legislation.

Geographic Differential Pay

Geographic differential pay is based on where an employee works. Organizations

with facilities in different locations often need to tailor their compensation
programs to the differences in local labor markets. For example, geographic
differences may occur between different cities or regions within the United States
and between the United States and other countries where the organization is
located. Some reasons for differential pay by geographic region include:
 For labor costs. Employers change their base-pay structure to reflect
different wage rates or factors that impact the cost of living in different
geographic areas.
 To attract workers to certain locations. Employers pay more for
employees who accept work in remote locations or in places where the
climate or quality of living is a deterrent. An offshore oil platform is a good
example.
 For foreign pay. Employers offer a base-pay structure plus allowances to
reflect factors that affect the economics of employees who work in offices
located in foreign countries. These factors may include the following
examples:
o Differences in culture
o Education
o Technology
o Climate
o Taxes

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Module 4: Compensation and Benefits Section 4.1: Compensation

For more information, see Compensating Globally Mobile Employees, How-to

Series for the HR Professional, Calvin Reynolds, WorldatWork, 2006.

Incentive Pay
Incentives are used to motivate employees by paying for performance that
exceeds base-pay expectations. Incentives can be structured to reward short-term
accomplishments or long-term results.
 Short-term is easy to measure but may not have a lasting impact on the
overall health of the organization. For example, a salesperson who receives
incentives for having the most monthly sales may be motivated to exceed
goals in the short term only.
 Long-term can help keep high performers and provide long-term positive
results for the organization.

It is important that employees have the ability to achieve the incentive goal and
to see the results of their efforts. For example, a customer help line has no
impact on increasing production on the line, so customer service employees
should not be compensated for an increase in production. However, they can
increase customer satisfaction, which can be an appropriate incentive goal.

Keep in mind that ―some people may prefer consolidated increases to base pay
rather than rely on possibly unpredictable bonus payments that may be perceived
as arbitrary, and which are likely to be non-pensionable‖ (Armstrong and
Cummins, Reward Management Toolkit: A Step-by-Step Guide to Designing and
Delivering Pay and Benefits 2011).

The best system balances both short- and long-term goals. Incentives can be
developed at any of these levels:
 Individual
 Group
 Organization-wide

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Module 4: Compensation and Benefits Section 4.1: Compensation

Figure 2-9 provides examples of each.

Incentive Type Examples

Individual  The piece-rate system is the most basic individual

incentive system. Workers who produce more earn more.
Wages are decided by multiplying the number of units
produced by the piece rate for one unit.
 A commission is another example of an individual
incentive. A commission is generally a percentage of
sales.
Group Group incentives are used when measuring individual performance
is difficult or when performance requires cooperation of the group.
 In gain sharing plans, an organization shares a portion of
the gains from a successful group effort. For example, past
production records may be used to set up base productivity
standards. Any gains above that standard are shared 50/50
by the organization and its employees.
 Team bonuses can also be used and are based on
achieving group goals and objectives.

Organization-wide  Profit sharing and stock ownership are the most

common organization-wide incentive plans.
 Another example is a bonus program that is tied to
organizational goals. A goal may be to gain repeat
business from 10% of hotel customers. Examples of the
method of payout include a flat monetary amount and a
percentage of base pay; the methods are typically
dependent on the position within the organization.

Figure 2-9. Types of Incentives

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 Module 4: Compensation and Benefits Section 4.1: Compensation

For an incentive program to be successful, the following conditions must apply:

 Employees must feel the program is related to aspects of the job that they
can influence.
 Incentive pay should never be used as a way to reduce salary costs.
 Employees must believe that the goals are achievable.
 Organizations need to have the following in place:
o Competitive base salaries
o Fairly stable management presence and strategic direction
o Good communication between management and employees
o Reliable method for measuring the results linked to incentives
o Commitment from the top down to communicate the plan and to
provide ongoing training and coaching

HR‘s challenge is to design an incentive plan that is tailored to the organization.

Even within the organization, the plan may vary across business units, functions
and locations.

Pay Plans for Select Employees

Sometimes specific categories of employees are compensated differently.
Organizations may develop separate pay plans for direct sales personnel,
professionals and outside directors.

Direct Sales Personnel

Most organizations compensate their direct sales force in one of three ways:
 Straight salary
 Straight commission
 Salary plus commission and/or bonus

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Module 4: Compensation and Benefits Section 4.1: Compensation

In addition, sales personnel often receive the following:

 Car and expense allowances
 Company cars
 Club memberships or allowances
 Other noncash perquisites

Straight salary plans are the least used compensation package for direct
salespeople. However, they are appropriate under these circumstances:
 The sales staff spends a significant amount of time servicing customers
rather than securing sales (for example, training, trade shows or handling
customer inquiries).
 Measuring sales performance is difficult.
 The nature of the sales process makes it impossible to separate one
individual‘s efforts from those of the support people who also help secure
the sale.
 There is a long sales cycle.

In the case of straight commission plans, the salesperson‘s entire salary is based
on commission. Straight commission plans are appropriate in the following
situations:
 When the organization‘s objectives are to motivate sales volume (even if
that means less service)
 When holding down the cost of sales is important
 When competitors also compensate through commission-only systems

Sometimes organizations that use a straight commission plan provide an entry-

level sales representative with a non-recoverable draw or a guaranteed
commission for a set period of time, usually six months to one year. After that
time, the salesperson does not need to repay the draw and goes on a regular
commission plan.

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Nonrecoverable Draw (Guarantee): A compensation payment made in

addition to base salary regardless of performance. Typically given to individuals
who are either new to the company, position or territory. This type of
compensation is typically temporary and usually lasts a few months and no more
than a one-year period. If the incentive earnings do not exceed the draw amount,
the monies are not owed to the company by the individual (Society for Human
Resource Management 2007).

Salary plus commission/bonus is the most widely used approach to

compensating sales personnel, for these reasons:
 Traditionally, salespeople are thought to be motivated by financial gain.
 Salary-plus-commission systems allow organizations to directly reward
those behaviors that best support their organizational strategy.
 Salary-plus-commission systems are adaptable and allow organizations to
readjust the plan to fit current conditions.
 Competitors usually use a salary-plus-commission/bonus sales strategy.

Professionals

Another special compensation challenge is appropriately compensating

professionals. Almost all professionals are primarily oriented to their chosen
fields and to their career progressions in that field. As a result, the pay system
must reward career progression, and a promotional structure must be developed.

 A dual-ladder career progression allows professionals to earn as much

in senior technical positions as they would on a management track
(see Section 5.3 in Module 5: Training and Development).
 Maturity curves link pay with time spent in the professional field. They
are most frequently used for teachers and research-focused scientists,
engineers and other technical personnel.

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 Module 4: Compensation and Benefits Section 4.1: Compensation

Outside Directors

Members of boards of directors are compensated in various ways:

 Base pay or retainer
 Incentives, usually for attending meetings, chairing a committee or other
services
 Benefits such as liability and life insurance
 Perquisites similar to those offered executives
 Nonqualified stock options/grant plans
 Nonqualified deferred compensation programs

Payroll Function
Few employees understand how complex it is to get paychecks issued; however,
all employees expect their paychecks to be on time and accurate to the penny.

The responsibilities of the payroll function are far more than just issuing
paychecks. The payroll function is also responsible for the following:
 Compliance with legal regulations
 Periodic reporting
 Record retention
 Control and security

The main tasks involved in payroll function are described here.

Completing Paychecks

Issuing paychecks is a complex operation that may use all the resources in
payroll. The following is a brief description of some of the tasks the payroll
function performs, sometimes on a daily basis. Each of these tasks depends on the
knowledge of skilled payroll administrators who must remain current as to all
applicable laws affecting payroll:

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 Calculating employees’ gross earnings. Gross earnings include regular

wages plus additional earnings such as tips, shift premiums, paid time off,
bonuses and overtime pay.
 Determining taxable wages. Most countries define taxable wages as all
remuneration for services (including noncash benefits) that is taxable when
paid. However, determining what is taxable and what is not can be
complex and may change from one tax year to the next.
 Withholding taxes. Withholding taxes can be done in different ways based
on country or state requirements. In either case, issues such as pay
frequency (such as weekly, biweekly or monthly) and withholding
allowances affect the amount of tax to withhold. If supplemental wages
such as bonuses or commissions are paid, they may be taxed differently.
 Calculating Social Security tax and Medicare tax. Typically, the Social
Security tax is a percentage (which changes periodically) of the employee‘s
salary up to a yearly maximum, with the employer matching that amount in
some countries. All employers are required to withhold and match to the
maximum each year regardless of an employee‘s previous earnings with
another employer. In some countries, Medicare taxes (also based on a
percentage of wages) are withheld with no yearly maximum.
 Withholding voluntary and involuntary deductions. Employees may
authorize the payroll department to take amounts directly from their
paychecks. Such voluntary deductions include union dues, some charitable
contributions, and contributions to retirement programs. Involuntary
deductions, or wage attachments in certain countries, include items such as
tax levies, court-ordered child support payments, and garnishments.
Involuntary deductions are withheld from paychecks before voluntary ones.

Payroll Record Keeping and Retention

Administering the payroll function includes keeping the organization in

compliance with its own internal policies as well as with applicable laws and
regulations. Ensuring compliance, combined with issuing paychecks, could cause

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payroll to be buried in paperwork. Therefore, efficient payroll record-keeping

practices are vital to having an effective payroll system.

An employer is required to keep a master file of employment records for the

government. In addition, employers need a master file with accurate records to
understand their labor costs and to have an organized pay process. A master file
includes information such as the following:
 Personal data on each employee (for example, name, gender, birth date and
Social Security number or equivalent number)
 Employment data on each employee (for example, hire date, hours worked
per day or week and regular rate of pay)
 Tax and payroll data on each employee, allowances claimed, marital status
and timecards
 Form 1099, a form used in the United States to record payment to
independent contractors who provided $600 or more of services during the
previous year (US-specific)

Retention of payroll records differs from that for personnel files. Unlike personnel
files, payroll records do not need to be retained for the term of employment plus a
specified period of time after employment ends. Instead, payroll records should be
retained on a rolling basis beginning with the date on which they were created, or
as specified by the respective government.

After employment ends, payroll records should include a copy of the termination
notice; all wages, salaries, commissions or other compensation paid to the
employee (for example, vested vacation time, unused compensating time and sick
pay); and any deductions made for money the employee owed the company.
Records should reflect deductions made from final paychecks in accordance with
the law.

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Payroll Systems
Most payroll departments use a computerized payroll system because of the
enormous task involved with payroll and record keeping. Such a system allows
the payroll function to do the following:
 Comply with tax rules, multistate taxing (if applicable) and withholding,
depositing and reporting requirements on a timely basis
 Reduce human error and possibly reduce labor costs by calculating wages,
tax withholding and various tax complexities
 Provide management with timely, accurate reports
 Maintain control and security

A computerized system relies on its hardware configuration and software choices.

Payroll System Hardware

The basic configuration of a payroll system within an organization can use any of
the following:
 Manual system
 Payroll service provider to administer turnkey payroll operation
 In-house mainframe or minicomputer
 Networked or online system

The organization can also choose to combine the various alternatives for a
customized system and may want to coordinate its efforts with the HRIS.

Payroll System Software

No matter which hardware configuration the payroll system uses, it is dependent

on software. Organizations have three software choices:
 Buy off-the-shelf software.
 Buy a vendor-supplied software package.
 Develop customized software package.

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Considerations

Besides hardware or software options, there are other issues that must be
considered:
 People. The people who work with the system are the ones who decide its
success or failure. Their customers are the employees who depend on
timely and accurate paychecks and the organization that depends on an
accurate and cost-effective system. In all of their dealings with the
organization and its employees, the people in the payroll department will
provide the best customer service if they possess the following
characteristics:
o Reliable
o Responsive
o Empathetic
o Professional
 Security. The organization must have a system of checks and balances.
The organization cannot use the same employees to enter payroll data and
control the employee database. For example, if an employee fraudulently
issues a paycheck to an employee who does not exist, the organization is
legally responsible for that paycheck.
 Compatibility. The HRIS and payroll systems must be compatible. They
must be able to share data, and changes to employee records made in one
system must be reflected in the other.

Controlling Costs
Controlling costs is a concern for all organizations and is crucial to their success.
Organizations can control compensation system costs and keep the system from
growing out of control by setting maximum/minimum ranges that govern pay
decisions, using a formal budgeting process and auditing the system.
 Setting ranges. Setting pay ranges, the upper and lower bounds of possible
compensation for jobs that fall within each pay grade, is one of the most
common ways for an organization to contain and predict labor costs. Once

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ranges are set up, calculating compa-ratios can help HR managers decide if
compensation policies are being carried out as intended.

Assuming that pay ranges are based on the market average, compa-ratios are an
indicator as to how actual wages match, lead or lag behind the market.

Compa-ratios are computed by dividing the pay level of an employee by the

midpoint of the pay range. A compa-ratio of 100% means that the salary would
be at the midpoint (Armstrong and Cummins, Reward Management Toolkit: A
Step-by-Step Guide to Designing and Delivering Pay and Benefits 2011).

 Budgeting. A formal budget process helps control and coordinate future

spending. There are two basic approaches to budgeting:
o Top-down. Top management sets a budge, and line managers make the
necessary personnel decisions to make it work. This is the more
common approach.
o Bottom-up. The employees‘ compensation package for next year is
forecast to decide on the organization‘s total labor budget. A bottom-
up system is rarely used because it does not offer any way to control
costs.
 Auditing. Pay ranges and a budget cannot be effective without ongoing
monitoring of the spending. Areas that need special attention include the
following:
o Administrative process
o Policy compliance, both organizational and regulatory o
Adequate documentation and record keeping
o Overall results

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 Module 4: Compensation and Benefits Section 4.1: Compensation

Practice Questions

Directions: Choose the best answer to each question.

1. What happens during the job analysis phase of the compensation system design process?
a. Figure out the value of jobs within the organization.
b. Create job descriptions and job specifications.
c. Set up pay grades and pay ranges.
d. Collect information about a job and evaluate the job requirements.

2. Which phase of the compensation system design process involves creating job
descriptions and job specifications?
a. Job documentation
b. Job analysis
c. Job evaluation
d. Pay structure

3. What type of methods use a scaling system to show how much more valuable one job is
than another?
a. Job classification
b. Job ranking
c. Quantitative evaluation
d. Nonquantitative evaluation

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 Module 4: Compensation and Benefits Section 4.1: Compensation

4. In which base-pay system is the rate based on how long an employee has been performing
the job, with pay increases occurring on a set schedule?
a. Flat-rate
b. Time-based step-rate
c. Performance-based
d. Productivity-based

5. How is pay based in a person-based pay system?

a. On employee characteristics
b. On how long an employee has been performing the job
c. On the individual employee‘s performance
d. On the employee‘s output

6. Which pay adjustment technique is an advantage to the organization because other wages
and benefits linked to the base rate are not impacted?
a. Seniority
b. General pay increase
c. Market-based increase
d. Lump-sum increase (LSI)

7. What is the top-down approach to budgeting?

a. The organization shares a portion of the gains from a successful group effort.
b. The employees‘ compensation package for next year is forecast to decide on the
organization‘s total labor budget.
c. Top management sets a budget, and line managers make the necessary personnel
decisions to make it work.
d. HR personnel set maximum/minimum ranges that govern pay decisions.

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 Module 4: Compensation and Benefits Section 4.1: Compensation

Practice Question Answers

1. d
2. a
3. c
4. b
5. a
6. d
7. c

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Module 4: Compensation and Benefits Section 4.1: Compensation

4.2: Benefits

This section covers the following information from the Knowledge

Base:

Behaviors: 02. Communicate information about company benefits

03. Record information about employees in HR database (for benefits or

tax purposes)

04. Provide information about payment to employees for working hours

and non-working hours (for example, not working because of illness
or vacation)

06. Track eligibility for time off and temporary leaves (for example,
maternity, mourning, unpaid leave)

07. Explain policies and procedures for taking time off and requesting
leaves of absence

08. Coordinate activities to support employee programs (for example,

programs to improve health, tuition reimbursement or educational
assistance)

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Module 4: Compensation and Benefits Section 4.1: Compensation

Skills & Knowledge: 02. Benefit programs (for example, health care plans and flexible
benefits)

03. Retirement plans and/or programs

06. Company-wide compensation policies (for example, wage

agreements with unions or work councils, employee categories and
salary increases)

07. Contracts with service and product providers (for example, health
insurance and pension plans)

08. Bonus and incentive programs

10. Leave and time-off allowances

Source: HR Certification Institute

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Module 4: Compensation and Benefits Section 4.2: Benefits

Introduction
In addition to direct compensation, organizations provide employees with indirect
compensation, commonly known as employee benefits.

Benefits could be a large part of an organization‘s total employment cost. In

general, the cost of benefits could add an estimated 35% to an employee‘s base
salary. In most countries, rising health care costs have produced record highs for
employer-sponsored health plans and employee contributions. Because of the
expense, an organization must spend its benefit money wisely so that both the
organization and the employee benefit.

Benefit programs can be thought of as a contract to protect the financial and

physical well-being of workers and their families. They are designed to reward
continued employment, promote loyalty and enable employees to live healthier
lives.

Indirect compensation also benefits employers in the following ways:

 Helps organizations recruit and keep good employees.
 Increases the employee‘s commitment to the organization. This
commitment then transforms into improved productivity, work quality and
competitiveness.
 Provides tax-effective purchase of insurance and benefits.

This section examines the types of benefits and trends associated with benefits.

Deciding Which Benefits to Offer

Armstrong and Murlis state, ―Benefit entitlements are an area which employees
watch closely and where perceived injustice can rapidly cause problems. They are
also a major component of employee costs, particularly at management level

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where keeping up with ‗best practice‘ can add 40 percent or more to basic salary
costs for a fairly average group of executives‖ (Armstrong and Murlis 2007).

In order to spend its benefit money wisely, an organization must answer the
following questions:
 Which benefits are required by law?
Laws require that employers provide certain benefits to their employees.
These benefits must be included in your organization‘s total compensation
package.
 Which benefits enable an employer to compete for employees? Some
benefits, such as paid time off, have become so common that organizations
that do not offer them will have a problem finding and keeping workers.
Offering these benefits allows an organization to compete for the best
employees. Also, if an organization offers an attractive benefit that is not
commonly offered by competitors, such as day care, the organization will
have an advantage over its competitors.
 Which benefits are cost-effective to purchase and to administer?
Because organizations usually have a limited budget for benefits, they must
always assess the cost of the benefits and the associated administrative
burden. Benefits such as paid holidays are easy to administer, but pension
and health care plans are more time consuming and costly to administer.
 Which benefits do employees prefer?
Organizations must consider what benefits will attract and keep new
employees. Maintaining a well-qualified, motivated workforce is important
to the organization‘s success. Surveying employees regularly and
understanding the makeup of the workforce allows the organization to
identify benefits that employees value. Here are some examples:
o Health insurance ranks high with employees of all ages.
o Some benefits, like tuition reimbursement, may appeal more to
younger workers.
o Older workers may also be interested in life insurance and retirement
benefits.

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 Which benefits provide creative choices?

Look for ways to be creative when designing benefit programs. Constantly
monitor the marketplace to decide if legislation or other changes have
made desirable benefits more affordable. Here are two examples of how to
provide benefits that save employees time and money and cost the
organization very little:
o An organization that cannot afford to provide health insurance may
consider annual cash bonuses that employees can apply toward their
insurance costs.
o An organization that cannot offer a benefit due to cost may think about
offering popular lower-cost benefits, such as a flexible work schedule,
telecommuting and casual dress.

Types of Benefits
WorldatWork describes the role of strategic benefits planning as:

―Strategic benefits planning is not a one-time event but a continuous effort

to provide organizations with a return on their investment in employees.
The process includes an evaluation of existing benefits programs and
concludes with a definition of the direction for future employer-sponsored
programs and policies. In essence, strategic benefits planning addresses
the following question: How can the organization‘s benefits plan better
support the business direction?‖ (WorldatWork 2007)

HR will need to consider that there are several benefits required by law. In
addition to those benefits, HR will select from a wide array of voluntary benefits.
To aid in the selection process, they will need to know the following:
 Benefits most important to employees
 Benefits offered by competitors

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Module 4: Compensation and Benefits Section 4.2: Benefits

Selecting the right voluntary benefits will make a difference in recruiting and
retaining valuable employees.

Benefits Needs Assessment

Employee benefits are a significant factor in an organization‘s total budget and in
the reward package offered to employees. The HR professional has the
responsibility to develop an employee benefits package that fulfills the objectives
of both the employer and the employee. This is done by gathering data through a
needs assessment.

The purpose of the needs assessment is to decide on a benefits package that will
provide the following results:
 Match the overall business strategies.
 Support the organization‘s mission and vision.
 Meet employee needs.

A benefits needs assessment includes the activities listed in Figure 3-1 and ends
with a gap analysis.

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Module 4: Compensation and Benefits Section 4.2: Benefits

Activity Description

Review the organization’s The organization‘s market strategy has a direct effect on
strategy. the benefits it offers employees:
 Organizations that want to lead the market will
offer their employees a more extensive benefits
package.
 Organizations that have a lagging or matching
market strategy will offer their employees a simple
benefits package.

Review the organization’s The organization‘s total rewards philosophy will provide
total rewards philosophy. an understanding of how benefits fit into that philosophy.
HR professionals will need to find out how much can be
spent on benefits and their actual impact on the
organization‘s cash flow. Benefits must be balanced with
the other elements in the total rewards program.

Analyze the demographics An organization‘s benefits plan must address the needs of
of the organization’s various categories of employees. These categories include
workforce. the following:
 Full-time versus part-time status
 Active versus retired status
 Age
 Marital status
 Family status

Figure 3-1. Activities in a Benefits Needs Assessment (continued to next page)

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 Module 4: Compensation and Benefits Section 4.2: Benefits

Activity Description

Analyze the design and Utilization data need to look at specific benefits plan usage
utilization data on all benefit (for example, relevance of defined benefit schemes for a
plans. workforce that has a lower than average age and a high
turnover). This analysis may result in design changes to a
plan. Based on employee lifestyle and employee mix, types
of benefits will vary and may include the following:
 Retirement
 Medical expenses
 Insurance
 Dependent care assistance
 Capital accumulation

Figure 3-1. Activities in a Benefits Needs Assessment (concluded)

Gap Analysis

The final step in a benefits needs assessment is to compare the following:

 Organizational needs (including budget)
 Employee needs
 Existing set of benefits

The HR professional performs a gap analysis to identify the set of benefits that
best matches the needs of the organization and its employees.

Based on employee demographics and employees‘ need for different benefits,

current benefits must be looked at to decide if the benefits need is being met.

A review of the use of current benefits can also be done to decide which specific
parts of each benefits plan are being used and whether that use is in line with the
organization's strategies.

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Module 4: Compensation and Benefits Section 4.2: Benefits

Figure 3-2 summarizes some issues that may surface during a gap analysis and
suggests the appropriate action.

Figure 3-2. Gap Analysis Findings and Actions

Needs assessment data should help HR develop a benefits package that is

affordable for the organization, valued and used by employees. A benefits needs
assessment allows HR to build a business case for important recommendations
listed here:
 The type of benefits provided
 Who is covered under the plan (for example, employees, dependents,
retirees)
 What options employees have (for example, flexible spending accounts,
cafeteria plans)
 How the plan will be financed and whether employees share in the costs

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Module 4: Compensation and Benefits Section 4.2: Benefits

 Who should administer the plan (for example, the organization, an

insurance carrier, a third-party administrator)
 How the benefit plan will be communicated to all affected individuals

Government Mandated Benefits

In some countries, certain benefits are administered or provided by the employer
as per law. The organization cannot change or remove these benefits even if a
needs assessment suggests the benefits are not required by the organization or its
employees. Different countries may use different words or terms to describe these
benefits; however, they all tend to operate similarly to insurance programs
whereby a premium is paid (by either the employer, employee or both) and a
benefit is offered. These benefits may be deferred to the future or may operate in
parallel to the employee‘s tenure.

In addition, some programs may be administered at different levels:

 National
 Subnational (for example, state or provincial)
 Both national and subnational

Some northern European countries use what is called a Ghent system. In this
system, trade unions take on the role of government, acting as the collector of
premiums and administrator of such benefits. These mandated workplace benefits,
together with nonemployment-related government benefits, create what has been
called social protection or a social safety net.

In general, government-mandated benefits that affect employers tend to fall into

four main categories related to the following:
 Retirement (or loss of ability to work)
 Health
 Unemployment (loss of job or work)
 Work-related accidents

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In some countries, some or all of these benefits may be administered as a single

group of social services within the broader tax system (for example, Provident
Funds or Welfare). In other countries each category of benefit may have its own
national, state, provincial or quasi-government body that collects fees and
administers the benefit. In all cases the employer‘s contribution is effectively a
tax. It must also be emphasized that the same term or phrase associated with a
benefits program in one country may have very different meanings and
applications in another.

Mandated Retirement (or Loss-of-Ability-to-Work) Benefits

Many countries mandate a form of social security or social insurance programs

that may provide the following employee benefits:
 Retirement
 Disability
 Death
 Survivor‘s benefits

Often the manner of calculating the employer‘s contribution to fund this benefit is
based on a percentage of salary up to a yearly maximum. This amount must be
deducted from the employee‘s regular pay until the maximum is reached. This
premium may be jointly paid by the employer and the employee.

The social principle of this benefit is to defer income for when an employee is
retired or no longer able to work. However, in many cases the funds collected by
the government (or government-appointed body) are not specifically allocated to a
dedicated fund but rather are paid out of general revenue once the employee
qualifies for the benefit. Terms or phrases often associated with this type of
benefit are:
 Social Security
 Social insurance
 Government pension

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 Module 4: Compensation and Benefits Section 4.2: Benefits

Mandated Health Benefits

Many jurisdictions collect premiums from employers and employees to be applied

toward payments to employees if and when they require health care services
and/or are unable to financially provide for their own health care services.
Globally there are two extremes relating to this benefit:
 Universal (single-payer) health care systems at one extreme
 Purely private or self-insured systems at the other extreme

Employers must comply with the laws associated with health-related benefits of
the jurisdiction within which they have operations. In terms of legally mandated
health benefits, this compliance may involve the employer paying dedicated
health-related premiums or simply paying into general income tax to support the
public policy.

In countries such as the United States, the mandated health benefit relates to when
the employee retires (Medicare). In other countries, the government-mandated
health benefit coverage and premium are ongoing as part of the general medical
services provided to residents or citizens.

The formulas for collecting premiums vary; however, most follow a pattern that is
similar to the formulas for mandated retirement benefits. In this pattern, the law
establishes a certain yearly maximum contribution. The employer—and perhaps
the employee—makes regular contributions based on a percentage of the
employee‘s salary until the yearly maximum is reached.

The actual methods and payout of mandated health-related benefits vary

significantly between countries and are too broad to generalize. However, many
principles of insurance such as deductibles, means testing, co-insurance and
qualification periods are often applied to this benefit depending on the
jurisdiction.

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Mandated Unemployment Insurance Benefits

Many jurisdictions collect premiums from employers—and perhaps employees—

to be applied toward paying a percentage of an employee‘s salary in the case of
the employee losing his or her job through no fault of the employee. The principle
behind this benefit is to help workers who have been terminated to transition from
one job to another equally suitable job.

In most jurisdictions the amount paid to the unemployed worker first requires a
waiting period and is followed by time and financial limits (the benefit period is
limited, as is the financial payout). The goal of such public policy is to enable
people to meet their basic financial obligations while searching for a new job.
Though the unemployment benefits plans may operate differently, here are some
examples of terms or phrases used to describe this kind of benefit:
 Unemployment insurance
 Employment insurance
 Job seekers allowance/benefit
 Redundancy funds

Mandated Work-Related Accident Benefits

In many jurisdictions, insurance against work-related accidents is called workers‘

compensation. This wording can be a bit misleading because the benefit is more
of an insurance policy against accidents than a form of compensation for work;
only a person who has a work-related accident would collect this benefit.

The goal of the benefit is to offer employees and employers a financial buffer if
an employee is unable to work for a period of time because of a work-related
accident.
 The employer is usually exempt from paying the employee‘s salary or
wages during the accident-related leave period.
 The employee receives a portion of his or her salary during the same
period.

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Module 4: Compensation and Benefits Section 4.2: Benefits

An additional benefit to the employer is that these plans usually function as non-
fault insurance policies, meaning the employer is protected against being sued by
the injured employee even though the injury occurred at the workplace (provided
the employer was not negligent).

In jurisdictions with broader or more universal social health care systems,

sometimes the need for a separate work-related accident benefits program is not
necessary because it relates to the medical coverage for the injured worker.
Nevertheless, in these cases it is usually mandatory that the employer obtain some
form of insurance related to the income loss potential for the employee, which can
be significant, especially if the employee is permanently disabled. The following
are terms or phrases often associated with this type of benefit:
 Workers‘ compensation
 Workers‘ comp
 Compo
 Workers‘ indemnity
 Employers‘ liability insurance

Voluntary Benefits
Highly regarded employers are always looking for solutions to help employees
with the following:
 Manage their personal lives
 Increase performance
 Develop professionally

Knowing what type of benefits are offered by your competitors and which
benefits are meaningful for your organization‘s employees makes it easier for
your organization to design a plan that will help recruit and keep valuable
employees.

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 Module 4: Compensation and Benefits Section 4.2: Benefits

Health Care Benefits

In most countries, health care is paid through some type of social insurance,
funded by employers, employees, general taxation or combinations of these. It is
very unusual for employees not to be at least partially covered by some form of
government-supported health care.

The role of private health insurance varies, usually depending on the amount and
quality of health care provided by the local government or the employer. Many
employees purchase additional private health insurance and go to private health
care facilities because the quality of government-provided health care is
sometimes less than desirable. Private health insurance is too expensive for most
employees in less developed countries, so this option is usually available only to
upper management.

Cultural values play a role in which health care benefits are provided to
employees. Health care options considered by many Western countries as
nontraditional may be considered both traditional and acceptable in other
countries.

In the United States, health insurance has become very important to the average
employee; however, health insurance is an optional protection program that is not
mandated by law.

Additional Health Care Benefits

Many organizations are progressively looking to offer additional health care

benefits such as the following:
 Dental plans. Dental plans vary, but coverage is usually provided for
preventive and restorative services and orthodontia, in varying percentages.

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 Vision care plans. Because health care plans provide little or no vision
care except for medical or surgical treatment, employers sometimes offer a
vision care plan. Many employers calculate the cost of lowered
productivity because of eye care problems and decide that offering vision
care is a good business decision—especially as the workforce ages and the
use of computers becomes more widespread. Vision care plans include all
or some coverage for eye exams, frames and lenses.
 Prescription drug plans. The most common drug plans require a per-
prescription co-payment or a percentage of the ceiling amount. If the cost is
less than the co-payment, the amount is the cost of the drug. Mail-order
drug benefits are becoming more popular for maintenance drugs. Some
prescription drug plans may have the following requirements:
o Employees must fill prescriptions at specified pharmacies for a
prearranged reduced cost.
o Employees must use generic-brand drugs when available.
o Employees must refer to a list that states which prescription drugs are
covered.

Information on the cost of health care can be found in the article The Rising Cost of
Health Care: Strategic and Societal Considerations for Employers, by Leslie A.
Weatherly, HR Magazine, September 2004, at:
http://www.shrm.org/Research/Articles/Documents/q304health.pdf

Life Insurance Plans

A major concern of most employees is caring for their families if the employees
were to die. Many employers provide death benefits through group-term life
insurance.

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Group-term life insurance provides a lump-sum payment to beneficiaries. These

plans may have any of the following characteristics:
 The insurance may be for a flat amount (such as $50,000) or a multiple of
salary (such as two times base annual salary). The amount does not usually
vary by the length of service or the position of the insured.
 The majority of employers provide life insurance, payable to a beneficiary
upon the death of the employee, as a voluntary company-provided benefit.
 Sometimes life insurance is required by law. These required insurances are
often very small lump-sum amounts, enough to cover burial but not enough
for the beneficiary to live on. Here are two examples:
o In some countries, some life insurance is provided by Social Security.
o In some countries, the government mandates that life insurance must
be provided by the employer.
 In many countries, the employee can purchase additional life insurance
through an organization-sponsored group plan. Examples of this include
the following:
o In many Latin American countries, employees may receive life
insurance that pays twenty-four months of salary, although the amount
may vary depending on the employee‘s level in the organization.
o In the United Kingdom, employees may receive three to four times
their annual salary as a life insurance benefit.
o In the United States, the organization-provided amount tends to be one
or two times the annual salary, and the employee is able to buy
additional coverage at group rates.
o Keep in mind that life insurance practices may vary even within a
country. For example, in India it varies across industries and could
vary across local/multinational organizations. There is no uniformity.

Dependent Group Life Insurance

Some employers also insure the employee‘s spouse or dependent children through
dependent group life insurance. Most organizations allow employees to pay for
this coverage through a payroll deduction at favorable group rates.

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Disability Income Plans

In addition to replacing income when they retire and are no longer working,
employees may need an income-replacement plan in case they become disabled,
die prematurely (leaving their family without adequate resources) or are
temporarily out of work.

In many countries, work-related illnesses or injuries are covered under workers‘

compensation. Non-work-related disabilities are covered by the employer‘s
disability plan, which typically has three phases:
 Employer-provided sick leave
 Short-term disability (STD) coverage
 Long-term disability (LTD) coverage

 Sick leave. Most sick leave policies pay 100% of pay for a specified
number of earned sick leave days. Employees usually accrue sick leave up
to a maximum amount specified by the organization. When an employee
uses the maximum amount, the sick leave ends, and short-term disability
coverage or leave without pay begins.
―Sick leave pay causes difficulty for many employees. The
problem is that while many employees use their sick days only
when they are legitimately sick, others use sick leave as extensions
of vacations, whether they are sick or not. Employers have tried
several tactics to overcome the problem. They used to repurchase
unused sick leave at the end of the year by paying their employees
the equivalent sum of the amount of unused sick days.‖ (Bhatia
2010)
 Many organizations provide paid-time-off (PTO) banks rather than sick
leave. The PTO bank combines all paid-time-off programs into one large
bank of time that includes vacation, sick leave and personal days.
 Short-term disability (STD). This type of disability coverage replaces a
portion of lost income and may require a waiting period. STD normally
provides employees with 50% to 70% of their compensation for up to six

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months. Sometimes employees with more years of service are given more
STD coverage.
 Long-term disability (LTD). Long-term disability (LTD) coverage
usually begins after the short-term coverage ends. Because of the risks
associated with long-term coverage, a commercial insurance company
almost always underwrites such coverage.
o During the first two years of LTD, employees must be unable to
perform their own occupation. After the first two years of LTD
coverage, benefits will be continued if the person is still unable to
engage in any work or occupation that he or she has the education,
training or experience to perform.
o Benefits end if the person returns to work or dies prior to retirement
age.
o There are no income-level restrictions on LTD.
o Compared to short-term disability, LTD is an expensive benefit to
offer employees because it could begin at an early age and may last
until normal retirement age (the age at which Social Security begins).

Retirement Plans

Retirement programs are sometimes mandated by the government, but they are
often paid for with employee and employer contributions. Supplemental
government support is sometimes provided.

Retirement and pension benefits may be provided through a wide variety of plans.
The main goal is to provide retirement income to employees with some type of
income payable periodically. The two most common types of plans, defined
benefit and defined contribution, are described in Figure 3-3.

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Plan Description

Defined benefit  Promises specific benefit amount upon retirement.

 Vesting schedule is set up. (Vesting is the process by
which employees gain permanent claim to a portion or
all of their benefit. Employees are always 100% vested
in their own contributions; employer contributions
usually vest over time.)
 Provides benefits based on service and perhaps on
salary.
 Amount of benefit is decided by a formula.
 Provides a prespecified level of benefits.
 Employer bears the investment risk.

Defined contribution  The amount of money that is to be regularly

contributed to the fund is specified.
 No promises are made about the future value of the
benefit.
 Employees will be entitled to 100% of their
investment and the vested portion of the employer‘s
contributions upon retirement.
 Requires individual accounts for each employee.
 The amount of the benefit at retirement will depend on
the investment return.
 Employee bears the investment risk.

Figure 3-3. Types of Retirement Plans

Paid Time Off

Paid leave provides well-deserved relief from the physical and mental demands of
work. It may also reward long-term employees for their seniority and service.
Paid leave also contributes to a worker‘s ability to be productive and to keep up

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with the stress of the job. Employers normally offer their full-time employees the
following types of paid leave:
 Holidays
 Vacations
 Leave of absence
 Bereavement
 Maternity/paternity/parental

Holiday Pay

Each country has paid public holidays, usually nationally, during which
organizations may be required to shut down. Certain holidays may be observed on
a local basis or only by certain industries.

HR personnel need to be aware of country requirements and employee

expectations for holidays.

Vacation Pay

Most vacation policies are based on the employee‘s length of service and pay
100% of base earnings.

The number of paid employee vacation days varies from employer to employer.
The common trend is to relate the length of vacation to the length of tenure and
job classification in the organization. Examples include the following:
 Six months of service = one weeks‘ vacation
 One year of service = two weeks‘ vacation
 Five years of service = three weeks‘ vacation
 Ten or more years of service = four weeks‘ vacation (Bhatia 2010)

In some organizations, vacation time can be accrued and carried over to the next
year (or beyond). There are legal considerations for vacation carry-over; usually,
there is a limit on how many days can be carried over.

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Employees are usually required to schedule their vacation time in advance and to
get approval from their supervisor. In some flexible benefit plans, employees may
buy or sell a limited number of vacation days.

Leave of Absence

Some industries or professions (for example, teaching) allow long-term

employees to take a leave of absence. A leave of absence is a period of time to
complete a course of study, to do research or to engage in other activities that will
help employees gain knowledge or expertise in their profession.

Bereavement Leave

Many organizations allow time off with pay to attend the funeral of a close
relative. Some organizations also extend this benefit to funerals of friends.

Maternity/Paternity/Parental Leave

In many countries, organizations pay some portion of maternity leave. To enhance

maternity leave, some organizations offer unpaid time off or allow the employee
to work part time. In addition to maternity leave, some countries offer paid or
unpaid paternity and parental leave. There is also a trend toward adoption leave.

Work/Life Balance
In today‘s work environment, employees often live with a twenty-four-hour,
seven-days-a-week work ethic. There always seems to be a need to deliver
superior products, services and information. Technology makes possible
worldwide connectivity. Because of these factors, employees have less free time
because they are spending more time at work.

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Work/life balance (WLB) is a term used to describe a variety of benefits-related

programs to help employees successfully manage their work, family and
personal life without too much stress or negative impact.

Many organizations report that a key factor in employee satisfaction surveys is

balancing work and family. Organizations are increasingly using WLB as a
recruitment and retention strategy.

―How an organization defines work-life depends on its culture, leadership,

and in some cases, the length of time the company has had a work-life
initiative in place. For some organizations, work-life is simply a collection
of programs, policies and benefits. In the most progressive companies,
work-life has come to represent culture change efforts or practices that
include changing work, the way employees are managed and how
productivity is measured.‖ (WorldatWork 2007)

Work/Life Programs

The purpose of work/life programs and services is to support the well-being of

employees and to help them achieve a balance between their jobs, families and
personal lives. Some organizations express work/life programs in terms of
diversity and corporate social responsibility (CSR) programs. Others present
work/life programs as a way to promote the organization.

An organization can choose from a wide range of work/life programs to offer

their employees. Examples are listed here:
 Convenience/concierge services
o Banking service
o Dinners-to-go program
o Dry cleaning and laundry service
o Grocery service
o Referral services for household needs
o Subsidized cafeteria service

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 Employee assistance/employee development programs o Career

development and coaching
o Employee development courses
o Financial planning
o Legal assistance
o Mentoring
o Resources and referrals for counseling and education o Retirement
planning
o Tuition assistance program
 Family assistance programs
o Adoption assistance
o Backup (emergency) child care program o Child care assistance
o Eldercare assistance
o Long-term care for extended family members
 Flexible work arrangements
o Flexible work hours (flextime). Employees choose starting and ending
hours but typically must be present in the office during core working
hours.
o Job sharing. Two employees share or divide the workload of a single
job.
o Part-time employment. Employees are offered a reduced work
schedule.
o Telecommuting. With the aid of technology, employees can work
remotely.
o Variable workweek (flexible week). Sometimes called a compressed
workweek, it allows employees to work longer hours over fewer days.
(For example, a person could work ten hours a day for four days
instead of eight hours a day for five days.)
 Leave of absence
o Maternity and paternity leave program
o Self-funded leave

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 Wellness programs
o Disease management program
o Fitness benefits or workplace fitness program
o Smoking cessation program
o Weight management program
 Miscellaneous
o Commuting program
o Employer-sponsored discounts
o Ergonomics program
o New mothers‘ rooms
o Public transportation assistance

Which Work/Life Programs Are Appropriate?

Organizations decide which work/life program benefits to offer its employees

based on several factors. Primary factors are listed in Figure 3-5.

Factor Description

Laws  Are WLB benefits required by law?

Labor relations  Do labor contracts specify WLB

provisions for workers?

Figure 3-5. Factors Influencing Work/Life Program Decisions (continued to next page)

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Factor Description

Organizational culture  Is the organization family friendly, or is

there the expectation of long hours of
work for career progression?
 What behaviors do managers model?
 What employee behaviors are rewarded?

Maturity of the organization  Is the firm in a start-up, entrepreneurial

phase or established with the capabilities
to support WLB initiatives?

Market practice  What work/life benefits are necessary to

be competitive (locally and globally)?

Expectations and needs of  What are the demographics and demands

employees employees have in terms of family
support, child care and other personal
matters?

Level of formalized human  Are there strategies within the

resources management organization, supported by training, to
make offerings possible?

Figure 3-5. Factors Influencing Work/Life Program Decisions (concluded)

In many countries, social programs for employees focus mainly on work/life

balance. Several countries have enacted employment legislation that directly
relates to work/life balance (for example, laws governing different types of
employee leave, working time and part-time protection).

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Impact of Work/Life Programs

Why are so many organizations interested in work/life balance? They feel they
have a responsibility to care for their employees‘ mental and physical health.
Actually, employers and employees both benefit from work/life programs, as
shown in Figure 3-6.

Benefits of Work/Life Balance Programs

To Employers To Employees
 Provides an appropriate work  Improves job satisfaction
environment  Reduces on-the-job stress
 Strengthens the employer brand  Increases commitment to the
 Decreases absenteeism employer
 Reduces turnover  Improves overall life satisfaction
 Reduces workplace stress  Assists with the management of
 Reduces health care costs work and family responsibilities
 Improves employee engagement,  Allows parents to be more
morale and productivity involved in their children‘s lives
 Improves customer satisfaction and  Helps with eldercare issues
client retention  Improves self-esteem
 Helps attract qualified talent
 Improves employee commitment
and retention

Figure 3-6. Benefits of WLB Programs

There are many good reasons for work/life balance, but commitment and
communication can make or break success. Having work/life programs means
little if employees are not aware they exist or if the culture does not support the
programs.

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For more information on work/life balance, you may access the article Work/Life
Balance: Challenges and Solutions, by Nancy R. Lockwood, 2003 SHRM
Research Quarterly, at:
http://www.shrm.org/Research/SurveyFindings/Articles/Documents/0302wl.pdf

Perquisites
There are many perquisites that organizations may offer employees. The
following are some of the more common:
 Club memberships. Entrance fees as well as annual subscriptions for
social or sports club memberships
 Free/discounted products or services. Eligibility for free products and
services or discounts
 Housing. Accommodations or related allowances
o May be company-owned or company-leased housing o Allowances
may be a fixed monetary amount or a percentage of basic
salary
o May include furnishings
 Mobile phones. Mobile phone equipment, typically for senior executives
and employees with a business need (such as direct sales)
 Professional organizations. Employee membership in professional
associations
 Training programs. Payment of training programs, available to many
levels of employees
 Company car and/or cash car allowances and meal subsidies/vouchers.
Often included in international compensation packages

The following are some additional (less common) perquisites:

 Education/tuition fee reimbursements
 Employee assistance programs
 Financial counseling
 Medical checkups

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 Subsidized/low-interest rate loans for the purchase of a house or car

 Travel allowances

Metrics
As an HR professional, understanding how benefits costs are calculated will help
in the following ways:
 To analyze the requirement of a particular benefits program
 To understand the cost-benefit ratio of a particular program
 To prioritize the money spent
 To communicate with employees

Figure 3-7 provides descriptions/formulas for figuring the cost of benefits.

Metric Description Formula

Benefits costs as a Reflects total costs of benefits

percentage of total divided by total payroll costs for
payroll costs organization.

Figure 3-7. Metrics for Costs of Benefits (continued to next page)

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Module 4: Compensation and Benefits Section 4.2: Benefits

Metric Description Formula

Annual increase / 1. Represents expected 1. Health care expense per

decrease in benefits increase/decrease in organization‘s covered employee
costs (from previous health care expense for a given
years and projected) fiscal year.

2.
2. Health care expense per covered
employee is calculated by taking
the total health care expenses paid
by the organization in a given
fiscal year and dividing it by the
number of employees who are
enrolled in a health care plan in
that organizational unit. Total
health care expenses include both
employee- and company-paid
premiums, stop-loss insurance and
administrative fees.

Percentage of Calculated by dividing the amount

premiums the organization pays for
organization pays for employee-only coverage
employee-only premiums by the total amount.
coverage

Figure 3-7. Metrics for Costs of Benefits (continued to next page)

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Module 4: Compensation and Benefits Section 4.2: Benefits

Metric Description Formula

Percentage of Calculated by dividing the amount

premiums the organization pays for
organization pays for employee and dependent coverage
employee and premiums by the total premium
dependent coverage amount.

Figure 3-7. Metrics for Costs of Benefits (concluded)

Trends in Benefits
Armstrong and Murlis state, ―The main trends in benefits policy are:
 Continued simplification of benefit packages
 Increased emphasis on individual need and individual choice, particularly
evidenced by flexible and voluntary benefit schemes
 More attention paid to communicating the benefits available to employees‖
(Armstrong and Murlis 2007)

The trends provided here are brief snapshots of the type of issues that HR
professionals must consider when making employee benefits decisions. Trends
related to employee benefits include the following:
 Health care cost control. Because health care costs continue to rise,
organizations are finding multiple ways to cut costs. Some examples are
listed here:
o Reduced number of choices for employees
o Choices that force employees to be more conscious of costs when
making health care decisions
o Higher co-payments for office visits and drugs
o Networks that offer a limited choice of doctors

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o Limited number of participants in the organization‘s plan

o Spousal surcharge to encourage a spouse who has coverage elsewhere
to enroll in that plan

For more information on trends in health care reform, you may access the article
Health Reform: Mixed Impact on Retiree Benefits, Study Finds, by Stephen
Miller at
http://www.shrm.org/hrdisciplines/benefits/Articles/Pages/Reform_RetireeBenefits.
aspx?marquee=DD3_032310.

 Consumer-directed health care plans. Under the umbrella of consumer-

directed health care, employers are adding high-deductible health plans,
personal health care spending accounts and tiered benefit designs. These
plans are designed to encourage consumers to avoid unnecessary care and
to seek lower-cost, higher-quality providers.

For more information on trends in consumer-directed health plans, you may access the
following articles by Stephen Miller:

Studies Quantify Savings with Consumer-Driven Health Plans:

http://www.shrm.org/hrdisciplines/benefits/Articles/Pages/CostSavingsCDHPlans.aspx

Reform Creates Opportunities, Uncertainties for Consumer-Directed Plans:

http://www.shrm.org/Publications/HRNews/Pages/UncertaintyConsumerDirected.aspx

 Demand for work/life balance. As mentioned earlier, one of the reasons

the demand for work/life balance is increasing is that employees have less
free time because they are spending more time at work. In addition,
increases in employees‘ caring responsibilities (for example, aging parents)
may also lead to greater demands for work/life balance benefits.
 Preventive health and wellness programs. Many organizations are
adopting preventive health and wellness programs because of the increase
in preventable and chronic health conditions. This increase also results in

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an increase in the organization‘s health insurance costs. Examples of

wellness programs include the following:
o Stop smoking program
o Stress management
o Weight management
o Hypertension (high blood pressure) screening and education

For more information on trends in preventive health and wellness programs, you
may access the article 10 Steps for Wellness Program Success, by Stephen Miller
at
http://www.shrm.org/Pages/loginA.aspx?ReturnUrl=%2fhrdisciplines%2fbenefits%
2fArticles%2fPages%2f10StepsforWellness.aspx.

 Retaining younger workers. Organizations are beginning to provide

benefits for the purpose of encouraging younger workers to remain in the
organization. Younger workers are often interested in the following:
o Child care
o Tuition reimbursement for education that will allow them to advance
in their careers
 Flexible benefits. The choice is in the hands of the employees to allocate
the benefits most suitable to them based on their needs. Kanchan Bhatia
details the initial motivation for flexible benefits packages:
―[The flexible benefits package]…was basically designed to
enable senior executives, top professionals and managers to choose
individually many of these benefits and services. The demands of
services depend on their age, their educational and income levels,
their life style and other forms of preferences. Recent studies
suggest that flexible or cafeteria compensation programs are
becoming increasingly popular among employees. It provides an
opportunity to contain the costs of the benefit package and
provides benefits on a more tax-effective basis. It also increases
loyalty and motivation of employees, which in turn enhances
productivity.‖ (Bhatia 2010)

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 Module 4: Compensation and Benefits Section 4.2: Benefits

Practice Questions

Directions: Choose the best answer to each question.

1. All of the following are important for HR professionals to know when they are selecting
voluntary benefits for the organization EXCEPT
a. Benefits offered by competitors.
b. Benefits most important to employees.
c. How much the organization can spend on benefits.
d. Which government-mandated benefit can be changed or dropped.

2. The purpose of a benefits needs assessment is to decide on a benefits package that will
provide all of the following results, EXCEPT
a. Decide which government-mandated benefits are necessary.
b. Match the overall business strategies.
c. Meet employee needs.
d. Support the organization‘s mission and vision.

3. During a gap analysis, HR professionals identified that there are benefits that are not used
enough. What would be the appropriate action?
a. Drop or revise benefits that are not meeting needs.
b. Research new benefits or revise existing benefits.
c. Do research and then drop or revise benefits that are not being used.
d. Set up cost-containment strategies and reevaluate each benefit.

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 Module 4: Compensation and Benefits Section 4.2: Benefits

4. Which government-mandated benefit is designed to offer employees and employers a

financial buffer if an employee is unable to work for a period of time because of a work-
related accident?
a. Medicare
b. Work-related accident benefit
c. Unemployment compensation
d. Social security

5. Which one of the following does not describe a defined contribution retirement plan?
a. The amount of money that is to be regularly contributed to the fund is specified.
b. No promises are made about the future value of the benefit.
c. The benefit amount upon retirement is specified.
d. The employee bears the investment risk.

6. Which of these work/life balance program benefits is a benefit to the employee?

a. Reduces turnover
b. Improves job satisfaction
c. Helps attract qualified talent
d. Improves customer satisfaction and client retention

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 Module 4: Compensation and Benefits Section 4.2: Benefits

Practice Question Answers

1. d
2. a
3. c
4. b
5. c
6. b

Try the e-flashcards to check your knowledge of terminology.

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