CH 9 BSAD 310 Fall 2019

Chapter 9
Compensation
and Benefits
Copyright ©2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OUTCOMES
2
Copyright © 2020 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly
accessible website, in whole or in part. HR5 | CH9
1. Describe the basic issues involved in
developing a compensation strategy
2. Discuss how organizations develop a wage
and salary structure
3. Identify and describe the basic issues involved
in wage and salary administration
4. Discuss the basic considerations in
understanding benefit programs

3
LEARNING OUTCOMES (Continued)
5. Identify and describe mandated benefits
6. Identify and describe nonmandated benefits
7. Discuss contemporary issues in compensation
and benefits

4
Compensation and Benefits
• Compensation: Set of rewards that
organizations provide to individuals for their
willingness to perform tasks within the
organization
• Benefits: Items of value beyond their
wages, salaries, and other forms of direct
financial compensation that employees
receive from the organization
• Rewards
• Incentives

5
Basic Purposes of Compensation
• To provide appropriate and equitable
rewards to employees
• To help employees focus on activities that
the organization considers important
• To increase employee efforts along desired
lines
• To motivate individuals by creating a
perception that their efforts and
contributions are recognized and rewarded
LO 1

6
Internal and External Equity
• Internal equity: Comparisons made by
employees to other employees within the
same organization
• External equity: Comparisons made by
employees to others employed by different
organizations performing similar jobs
• Pay surveys: Surveys of compensation paid to
employees by other employers in a particular
geographic area, industry, or occupational
group
LO 1

7
Wage versus Salaries
• Wages: Hourly compensation paid to
operating employees
• Time acts as the basis for determining wages
• Salary: Income paid to an individual on the
basis of performance, not on the basis of
time
LO 1

8
Figure
9.2 Strategic Options for Compensation
LO 1

9
Determinants of Compensation Strategy
• Overall organizational strategy
• Ability to pay
• Ability to attract and retain employees
• Ability to bargain with unions
LO 1

10
Job Evaluation
• Determines the relative value of a job to the
organization to compensate adequately and
appropriately those who perform the job
• Methods
• Classification system: Attempts to group sets of
jobs together into clusters, often called grades
• Point system: Requires managers to quantify
the value of various elements of specific jobs in
objective terms
LO 2

11
Job Evaluation (Continued)
- Point manual: Carefully and specifically
defines the degrees of points from first to
fifth
- Factor-comparison method: Assesses jobs on
a factor-by-factor basis using a factor-
comparison scale as a benchmark
LO 2

12
Pay for Knowledge and Skill-Based Pay
• Pay for knowledge: Involves compensating
employees for learning specific information
• Skill-based pay: Rewards employees for
acquiring new skills
LO 2

13
Wage and Salary Administration
• Ongoing process of managing a wage and
salary structure
• Issues related to compensation
• Pay secrecy: Extent to which the compensation
of any individual in an organization is secret
• Pay compression: Occurs when individuals with
substantially different levels of experience or
performance abilities are paid relatively equal
- Pay inversion: New employees are paid more
than experienced employees because of
changes in the external market
LO 3

14
Nature of Benefits Programs
• Most organizations provide their employees
with an array of benefits
• Cost of benefits programs
• Organizations spend huge amounts on benefits
• Employees are asked to bear costs of benefits
• Purposes of benefits programs
• To attract better-qualified people
• To increase job satisfaction and subsequent
turnover
LO 4

15
Mandated Benefits
• Unemployment insurance: Provides a basic
subsistence payment to employees who are
between jobs
• Created in the United States as part of the Social
Security Act of 1935
• Social security: Designed to provide limited
income to retired individuals
• Officially called the Old Age Survivors and
Disability Insurance Program
• Many people have come to view it as their
primary source of retirement income
LO 5

16
Mandated Benefits (Continued)
• Workers’ compensation: Insurance that
covers individuals who suffer a job-related
illness or accident
• Employers pay the cost of this insurance
• Health care
• Patient Protection and Affordable Care Act,
2010, was introduced to:
- Increase the quality and affordability of
health-care insurance
- Lower the number of uninsured employees
- Reduce the cost of insurance for all involved
LO 5

17
Nonmandated Benefits
• Private pension plans: Provide income to
employees at their retirement
• Types: Defined benefit plans and defined
contribution plans
• Paid time off
• Wellness programs
• Life-cycle benefits
• Employee assistance plans and perquisites
• Cafeteria-style benefits plans: Employees
can choose the benefits they want
LO 6

18
Contemporary Issues in Compensation and
Benefits
• Executive compensation
• Growing legal issues
• Finding the best ways to evaluate
compensation and benefits programs
LO 7

19
Executive Compensation
• Most senior executives receive their
compensation in two forms
• Base salary
• Some form of incentive pay, such as bonuses and
stock-option plans
• Higher in the United States than in other
countries
• In many firms, there is little or no
relationship between its performance and
the compensation paid to senior executives
LO 7

20
Legal Issues in Compensation and Benefits
• Fair Labor Standards Act
• Includes provisions for the minimum wage,
overtime, and child labor
• Comp time: Time off that is offered to
nonexempt workers in exchange for working
more than 40 hours with no overtime pay
• Employee Retirement Income Security Act
(ERISA) of 1974
• Passed to protect employees who contributed to
their pensions but were unable to collect those
benefits later
LO 7

21
Legal Issues in Compensation and Benefits
(Continued)
• Provides protection for the funding underlying
the pension plan
• Benefit plans cannot disproportionately
favor employees with higher income levels
• The Pension Benefit Guaranty Corporation
• Oversees how pension plans are funded and
supports underfunded plans by seizing corporate
assets
• Many firms extend benefits to same-sex
partners
LO 7

22
Evaluating Compensation and Benefit
Programs
• Organizations that do not offer competitive
pay and benefit packages:
• Find it difficult to attract employees
• Face high rates of voluntary turnover
• Efficiency of benefit programs depends on
effective communication with employees
• Employees underestimate the cost of their
benefits when they are not fully informed about
their benefits
LO 7

KEY TERMS
23
• Compensation
• Benefits
• Internal equity
• External equity
• Pay surveys
• Wages
• Salary
• Maturity curve
• Job evaluation
• Classification system
• Point system
• Point manual
• Factor-comparison
method
• Pay for knowledge
• Skill-based pay
• Wage and salary
administration
• Pay secrecy
• Pay compression

KEY TERMS
24
• Pay inversion
• Unemployment
insurance
• Social Security (Old
Age Survivors and
Disability Insurance
Program)
• Workers’
compensation
• Private pension plans
• Defined benefit plans
• Defined contribution
plans
• Wellness programs
• Cafeteria-style
benefits plans
• Vesting rights

SUMMARY
25
• Compensation should be the result of a
careful and systematic strategic process
• It is important to determine exactly what
employees on a given job should be paid
• Pay secrecy and pay compression affect
wage and salary administration
• Organizations provide mandated and
nonmandated benefits to their employees
• There are three important contemporary
issues in compensation and benefits

CH 9 BSAD 310 Fall 2019

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