This document discusses components of employee compensation and benefits programs. It covers statutory benefits that are legally required such as Employees Provident Fund (EPF), social security, and paid leave. Non-statutory or discretionary benefits are also examined, including health insurance, retirement plans, education assistance, and work-life programs. Components of total compensation including direct financial pay, variable pay, and indirect benefits are broken down.

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Human Resource Management
Chapter 7
COMPENSATION MANAGEMENT

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HRM in Action: Unique Benefits
• Organizations are continually
competing for top caliber employees
• Unique benefits can take many forms
• It is often a way of saying “Keep up
the good work.”

3. The basic components of employee
compensation and benefits
Employee compensation and benefits are basically divided into :
•Guaranteed pay/Pay – monetary (cash) reward paid by an employer to an
employee based on employee/employer relations. The most common form of
guaranteed pay is the basic salary.
•Variable pay/Incentives – monetary (cash) reward paid by an employer to an
employee that is contingent on discretion, performance or results achieved. The
most common forms are bonuses and sales incentives.
•Benefits – programs an employer uses to supplement employees’
compensation, such as paid time off, medical insurance, company car, and
more.
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Benefits (Indirect Financial
Compensation)
All financial rewards
that are not paid
directly to the
employee

5. STATUTORY BENEFITS
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Benefits in a Total Compensation Program
External Environment
Internal Environment
Compensation
Indirect (Benefits)
Legally Required Benefits
Employees Provident Fund (EPF)
Social Security
Gazetted payments
Gazetted paid leaves
Human Resource Development Fund
Financial Nonfinancial
The Job Job EnvironmentDirect

7. EPF
• was formally founded after the enactment of the Employees Provident Fund Act 1991
(Act 452),
• grants employees retirement benefits via a body that is intended to manage their
savings
• intended to help employees from both private and non-pensionable public sectors
save a fraction of their salary in a lifetime banking scheme, to be used in an event
that the employee is temporarily or no longer fit to work.
• The EPF primarily applies to retirement, but sickness, disabilities or unemployment
are also covered. The EPF also provides a framework for employers to meet legal
and moral obligations to their employees.
• While in savings, a member's EPF savings may be used as investments for
companies deemed profitable and permissible by the organisation, from which
dividends are banked to respective members' accounts.
• Alternately, members may use their EPF savings in their own investments, although
such activities are not covered by the EPF and the members are to bear any losses
made.
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Social Security
• The Social Security Organisation (SOCSO)
operates as a social insurance programme
managed by the government of Malaysia to
provide financial assistance to employees and
their families in the event of accidents, resulting
in death, disablement, or affliction with
occupational diseases.
•
Employees with a monthly income of RM 3000
and below, along with their employers are
required to make contributions.

9. Gazetted payments
• 60 days maternity leaves
• Paid holidays : at least 11 days of gazetted public holidays
• Paid annual leave
- <2 years service : 8 days
- 2>x<5 years : 12 days
- >5 years : 16 days
• Paid sick leave for calendar year
- <2 years service : 14 days
- 2>x<5 years : 18 days
- >5 years : 22 days
- Hospitalization : 60 days
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10. HRDF
• established under the legal requirements of the Human Resources Development
Act 1992 (now known as the Pembangunan Sumber Manusia Berhad Act 2001).
• is a pool of funds that comprises Human Resources Development levies
collected from employers of the manufacturing and service sectors as listed in
the First Schedule of the Pembangunan Sumber Manusia Berhad Act 2001
(liable registrants) as well as optional registrants.
• is part of the Government’s initiative to encourage the private sector employers
in the manufacturing and service sectors to retrain and upgrade the skills of their
employees in line with the needs of their business and industrialisation strategy
of the country.
• from January 2005, the HRDF has been extended to include employers from 8
more industries under the services sector.
• Employers who are registered with the PSMB and fulfilled the payment
conditions are eligible to apply for training grants or financial assistance under
the Human Resources Development Fund (HRDF).
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11. The objectives
• Increase the supply of highly-skilled workers.
• Enhance the knowledge of workers and equip them with
up-to-date skills.
• Prevent the skills of workers from becoming obsolete in
a changing technological environment.
• Upgrade the quality and productivity of workers.
• Cultivate a training culture amongst employers.
• Maintain and enhance the competitiveness of Malaysian
products through skills retraining and
• Accelerate the process of technology transfer
• Assist in the attainment of the industrialisation objective
of the country
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Worker’s Compensation
• Expenses resulting from
job-related accidents or
illnesses
• Administered by states
• Program paid for by
employers
• Premium expense directly
tied to past experience

13. NON-STATUTORY BENEFITS
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Discretionary Benefits (Voluntary)
• Time-off payment
• Health care
• Life insurance
• Subsidies & services
• Retirement plans
• Allowances
• Educational fee assistance

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Payment for Time Not Worked -
Other Forms
• Perform civic duties
• Handle personal affairs
• Jury duty
• National Guard or military reserve
• Voting time
• Bereavement time
• Rest periods, coffee breaks, lunch
periods, cleanup time, travel time

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Health Care
• Employers spend $300 billion
annually on health insurance for
employees, dependents, and retirees
• Health insurance typically constitutes
25% of employer’s benefit costs
• Premiums for average family of 4 now
cost about $11,000 a year

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Life Insurance
Group life insurance
commonly provided
benefit to protect
employee’s family
in event of death

18. Subsidies & services
» Laundry service
» Relocation
» Child care
» Educational assistance
» Food service/subsidized cafeterias
» Financial services
» Legal services
» Scholarships for dependents
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Retirement Plans
• Defined benefits plans
• Defined contribution plan
• Cash balance plan

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Customized Benefit Plans
• Employees make yearly elections to
determine benefit package by
choosing between taxable cash and
numerous benefits
• 20 years ago or so firms offered
uniform package that generally
reflected typical employee
• Today, workforce has become
considerably more heterogeneous

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Cash Balance Plans
• Plan with elements of both defined
benefit and defined contribution plans
• Pension Benefit Guaranty Corporation
usually insures cash balance plans
• Employer contributes to each
participant’s account annually, and
investment earnings are at set amount

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Family and Medical Leave Act of
1993 (FMLA)
• Private employers with 50 or more
employees and governmental employers
regardless of number of employees
• Up to 12 workweeks of unpaid leave per
year for absences due to employee’s own
serious health condition, need to care for
newborn or newly-adopted child, seriously
ill child, parent, or spouse

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Payment for Time Not Worked -
Paid Vacations
• Provide workers with opportunity to rest,
become rejuvenated and more productive
• Encourage employees to remain with firm
• Increases with seniority
• Between 1/3 and 1/2 of employed adults do
not take as much vacation as they have
coming to them
• 35% of U.S. workers feel stressed about work
even while on vacation

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Vacation Days Taken a Year
• Italians take 42 days
• French take 37 days
• Brazilians take 34 days
• Canadians take 26 days
• Americans take 13 days

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Payment for Time Not Worked -
Sick Pay and Paid Time Off
• Many firms allocate each employee
certain number of days of sick leave
• Some managers are very critical of sick
leave programs
• Paid time off (PTO) - Certain number of
days off provided each year that
employees can use for any purpose

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Payment for Time Not Worked -
Sabbaticals
• Temporary leaves of absence from
organization, usually at reduced pay
• Used for years in academic community
• Some companies are now using
• Helps reduce turnover and prevents
burnout

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Factors Contributing to the High
Cost of Health Care
• Aging population
• Growing demand for medical care
• Increasingly expensive medical
technology
• Inefficient administrative processes

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Major Medical Benefits
Plans provide for
major medical
benefits to cover
extraordinary
expenses that result
from long-term or
serious health
problems

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Dental and Vision Care
Employers
typically pay
entire costs for
both types of
plans except for
a deductible

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Disability Protection
Provides monthly
benefit to
employees who,
due to illness or
injury, are unable
to work for
extended period

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Employee Stock Option Plan (ESOPs)
• Firm contributes stock shares to a
trust
• Trust allocates stock to participating
employee accounts according to
employee earnings
• Some employees want ability to sell
their shares prior to retirement, which
ESOPs do not allow
• Enron experience

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Supplemental Unemployment
Benefits (SUB)
• Provide additional income for
employees receiving unemployment
insurance benefits
• Usually financed by company
• Tend to benefit newer employees

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Employee Services
• Relocation
• Child care
• Educational assistance
• Food service/subsidized
cafeterias
• Financial services
• Legal services
• Scholarships for dependents

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Compensation Vehicles Utilized in a
Customized Benefit Plans Compensation Approach
• Accidental death, dismemberment insurance
• Birthdays (vacation)
• Bonus eligibility
• Business and professional membership
• Cash profit sharing
• Club memberships
• Commissions
• Company medical assistance
• Company-provided automobile
• Company-provided housing
• Company-provided or -subsidized travel
• Day care centers
• Deferred bonus
• Deferred compensation plan
• Dental and eye care insurance
• Discount on company products
• Education costs
• Educational activities (time off)
• Free checking account
• Free or subsidized lunches
• Group automobile insurance
• Group homeowners’ insurance
• Group life insurance
• Health maintenance organization fees
• Home health care
• Hospital-surgical-medical insurance
• Incentive growth fund
• Interest-free loans
• Long-term disability benefit
• Matching educational donations
• Nurseries
• Nursing home care
• Outside medical services
• Personal accident insurance
• Price discount plan
• Recreation facilities
• Resort facilities
• Sabbatical leaves
• Salary continuation
• Savings plan
• Scholarships for dependents
• Severance pay
• Sickness and accident insurance
• Stock appreciation rights
• Stock bonus plan
• Stock purchase plan

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Premium Pay
• Compensation paid to employees for
working long periods of time or working
under dangerous or undesirable
conditions
• Hazard Pay - Pay for work under
extremely dangerous conditions
• Shift Differentials - Pay for inconvenience
of working less desirable hours

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Health-Care Legislation
• Consolidated Omnibus Budget
Reconciliation Act (COBRA)
• Health Insurance Portability and
Accountability Act (HIPAA)
• Employee Retirement Income
Security Act (ERISA)
• Older Workers Benefit Protection
Act (OWBPA)
• Pension Protection Act (PPA)

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Communicating Information
about Benefits Package
• Workers need to fully
understand benefits that are
provided them
• Many times organizations do
not have to improve benefits
to keep best employees

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Nonfinancial Compensation
• Historically,
compensation
departments in
organizations have
not dealt with
nonfinancial factors
• This is changing

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Nonfinancial Compensation in a Total Compensation Program
External Environment
Internal Environment
Direct Indirect (Benefits) The Job
Skill Variety
Task Identity
Task Significance
Autonomy
Feedback
Job Environment
Sound Policies
Competent Employees
Congenial Coworkers
Appropriate Status
Symbols
Working Conditions
Workplace Flexibility
Flextime
Compressed Workweek
Job Sharing
Telecommuting
Part-time Work
Financial Nonfinancial

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The Job Itself as a Nonfinancial
Compensation Factor
Answering following questions can provide
considerable insight into value of job:
• Is job meaningful and challenging?
• Is there recognition for accomplishment?
• Do I get feeling of achievement from doing job?
• Is there possibility for increased responsibility?
• Is there opportunity for growth and advancement?
• Do I enjoy doing the job itself?

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Job Characteristics Theory
• Employees experience intrinsic
compensation when jobs rate high
on five core job dimensions
• Skill variety - Extent work requires
number of different activities for
successful completion
• Task identity - Extent job includes
identifiable unit of work carried out
from start to finish

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Job Characteristics Theory (Cont.)
• Task significance - Impact job has
on other people
• Autonomy - Individual freedom and
discretion employees have in
performing their jobs
• Feedback - Amount of information
employees receive about how well
they have performed job

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Job Environment as a Nonfinancial
Compensation Factor
• Sound policies
• Capable managers
• Competent employees
• Congenial coworkers
• Appropriate status
symbols
• Working conditions

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Workplace Flexibility
(Work-Life Balance)
• Flextime
• Compressed workweek
• Job sharing
• Telecommuting
• Part-time work

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Flextime
• Practice of permitting employees
to choose, with certain limitations,
their own working hours
• Work same number of hours per
day as they would on standard
schedule
• Many firms are using

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Illustration of Flextime
Flexible Time Core Time
Flexible
Time
(Lunch)
Core Time Flexible Time
6 a.m. 9 a.m. 6 p.m.3 p.m.Noon
Bandwidth

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Compressed Workweek
• Arrangement of work hours
that permits employees to
fulfill their work obligation in
fewer days than typical 5-day
workweek
• Four 10-hour days
• Often greater job satisfaction

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Job Sharing
• Two part-time people split duties of
one job in some agreed-on manner
and are paid according to
contributions
• Partners must be compatible, have
good communication skills and trust
must exist between job sharers and
their manager

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Two in a Box
• Companies such as Intel Corporation and
Goldman Sachs Group, Inc. are giving two
managers the same responsibilities and
the same title and letting them decide how
the work is to be divided

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Telecommuting
• Work arrangement whereby
employees, called
teleworkers or
telecommuters, are able to
remain at home, or away
from office, and perform work
using computers and other
electronic devices that
connect them with office

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Part-Time Work
• Some people do not either want or
need full-time employment
• Part-time work was listed as the most
important flexible work option
• Adds many highly qualified individuals
to labor market by permitting both
employment and personal needs to
be addressed

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Other Compensation Issues
• Severance pay
• Comparable worth
• Pay secrecy
• Pay compression

53. Factors influencing compensation plan
• Organizational factors
- Ability to pay
- Organizational politics
- Organizational policy
• Labour market factors
- Cost of living
- Economy
- Compensation survey
- Trade union
- Legal
• Employee’s factors
- Performance based compensation
- Seniority
- Experience
- Potential
- Political influences
- Luck
• Job factors
- Job analysis
- Job description
- Job evaluation
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Severance Pay
• Compensation designed to assist
laid-off employees as they
search for new employment
• Typically offer 1-2 weeks of pay
for every year of service, up to
some predetermined maximum

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Comparable Worth
• Requires value for dissimilar jobs, such
as company nurse and welder, to be
compared under some form of job
evaluation, and pay rates for both jobs
to be assigned according to their
evaluated worth
• Supreme Court has ruled the law does
not require comparable worth

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Pay Secrecy
• Some organizations
keep pay rates secret
for various reasons
• If firm’s compensation
plan is illogical,
secrecy may be
appropriate

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Pay Compression
• Hiring new employees at pay rates
comparable to, or higher than, those of
current employees who have been with
firm for several years and who hold same
or higher-rated jobs
• May also occur when pay adjustments are
made at lower end of job hierarchy without
commensurate adjustments at top