Compensation and Benefits Administration PDF

COMPENSATION AND BENEFITS DEFINITION AND COMPONENTS OF TOTAL APPROACHES AND DESIGN OF COMPENSATION ADMINISTRATION COMPENSATION TOTAL COMPENSATION PLANS, FORMULATING COMPENS...

COMPENSATION AND BENEFITS DEFINITION AND COMPONENTS OF TOTAL APPROACHES AND DESIGN OF COMPENSATION ADMINISTRATION COMPENSATION TOTAL COMPENSATION PLANS, FORMULATING COMPENSATION POLICIES Compensation - Refers to the package of quantifiable rewards an Refers to a payment that is given or received as employee receives for his labor which consist of three DESIGNING AN EFFECTIVE COMPENSATION reparation for a service or loss components classified into direct financial payments PLAN (wages and Incentives) and indirect payments Employee Compensation (benefits). Creative use of compensation plans can work to - Refers to all forms of pay or rewards going to maximize human resource productivity and contribute employees and arising from their employment. THREE COMPONENTS OF TOTAL significantly to the achievement of human resource - It is the function of Human Resource Management COMPENSATION and organizational objectives. that deals with every type of reward that individuals receive in return for performing organizational tasks. It 1. BASE PAY When developing and designing a compensation includes all forms of pay or rewards received by the The fixed pay an employee receives on a regular system, organization must take into consideration the employees for the performance of their jobs. It is a basis either in the form of salary (monthly) or a wage external and internal environments in which they do reward for his services and contribution to the (daily or hourly). business. Three external environmental factors that business. have a direct effect on an organization's pay system - To employees, compensation is important for their 2. INCENTIVE PAY are: purchasing power. The amount of money the Programs designed to reward employees for good employee earns serves as an indicator of his power or performance which comes in many forms Ike bonus, COMPENSATION PLAN NATURE OF prestige and is tied to his feeling of self-worth. profit sharing, differential piece rate etc. COMPETITION - Compensation has a direct bearing on the When an organization has many product competitors, employees' standard of living, status and recognition 3. BENEFITS cost control becomes significant. Increased costs due that they may be able to achieve both on and off the -Sometimes called fringes or indirect compensation to salary increases cannot be passed on to customers job. Compensation affects an employee economically, which encompasses a wide variety of programs such without risking loss of market share. sociologically, and psychologically. as health, Insurance, clothing allowance, vacation etc. In this case, non-economic rewards such as - Mishandling the compensation allocation process -Perquisites of perks are benefits of a special promotions, job enrichment, and training programs would likely have a strong negative impact on category available to employees with special status in may assume greater importance in the pay scheme. employees and on the firm's performance. How much the organization, usually upper level managers. Fewer competitors increase flexibility in the design of is paid and who gets paid are crucial strategic issues -Common perks are a company car, company-paid the pay system because wage increases are for the company. country club membership fee, a special parking place absorbed into the cost of the product or service. - The cost of compensation in terms of basic pay and on company grounds etc. benefits and the importance of compensation to the COMPENSATION PLAN worker's quality of life makes compensation IMPORTANCE OF TOTAL COMPENSATION NATURE OF THE LABOR MARKET management a vital aspect of Human Resource Focuses on two issues: labor supply and demand and Management which is the process of evaluating To attract potential job applicants wage levels competitors pay to their employees. human resource needs, finding people to fill those To retain good employees needs, and getting the best work from each employee To motivate employees COMPENSATION PLAN GOVERNMENT by providing the right incentives and job environment, To administer pay within legal regulations REGULATIONS all with the goal of meeting the needs of the firm. To facilitate organizational strategic Labor laws and regulations place a lower limit on - Compensation should facilitate the effective objectives wages that can be paid, effects increases and utilization and management of an organization's incentive decisions, and requires that certain benefits human resources while contributing to the overall be paid for all employees. objectives of the organization. FOUR OF THE SALIENT INTERNAL USE VARIABLE PAY EVERYWHERE measured. Jobs are objectively rated and classified ENVIRONMENT FACTORS ARE: For positions that cannot be individually measured, according to their value to the company. use group measures (work group. location, division 1.CORPORATE STRATEGY and or corporate measures). For those that can be Employee differences Longer tenure or length of Provides the direction for the organization which focus individually measured, use a combination of individual service and individual work performance are is long term. The pay system should be designed to and group measures (individual measures to motivate recognized. support this focus individual effort, group measures to encourage cooperative behavior). Market differences - Demand and supply situations 2.MANAGEMENT PHILOSOPHY in the market and low profit margins generated by the One component of management philosophy is the KEEP THE PERFORMANCE MEASURES market. value it places on its human resources. This value is Keep the performance measures as simple as reflected in the relationship between management possible and limit their numbers, preferably to 2 or 3. COMPENSATION TRENDS and employees. An organization's culture is reflected Remember, what you measure is what you get. Pick Compensation practices are being shaped in its pay system. your measures carefully. by supply and demand Influences within the labor market as well as by an enlightened 3.TYPE OF JOB COMMUNICATE THE DETAILS OF THE PROGRAM pool whose issues include work Job differs in many ways and are valued differently by Communicate on an ongoing basis actual environment and learning opportunities as management performance vs. target performance well as salary and benefits. Companies are adapting more innovative 4.PRODUCTIVITY PRIMARY DESIGN CRITERIA FOR pay schemes like pay for performance. Is simply the ratio of outputs (product or service COMPENSATION PLANS Variable reward is considered with renewed provided by the company) to inputs (cost of labor, FACTORS INFLUENCING COMPENSATION interest. Some organizations are looking capital, energy, materials and machinery). Any DIFFERENCES into not only short term performance increase in labor costs decreases productivity unless incentives but long term incentives such as output increases or other cost decrease. How to Must be Internally equitable - pay people in share purchase plans. There is an minimize the impact of salary increases on proportion to the relative value of their job. emerging trend to pay incentive bonus to productivity requires careful consideration. Must be externally competitive - pay people employees based on company profitability in proportion to the market price for their and individual performance. 1. RECOGNIZE THAT MONETARY REWARDS job. CHANGE EMPLOYEE BEHAVIOR Must be achievement related - personally Self-employment trends more people are opting for The power of money is twofold. It not only is valued motivating to the employees. self-employment. The company engages skilled for itself for what it can buy, but it can also serve as a Must be easily administered - ease of worker at a fixed project or hourly rate without making powerful communication device. administration for staff. a long term commitment or paying benefits. D 2. STICK TO THE BASIC FACTORS INFLUENCING COMPENSATION NEW COMPENSATION MODEL Pay people at a reasonable market level for base DIFFERENCES Visible paycheck which reflects base salary, salary based on survey data. (What is reasonable will incentives and benefits depend on your ability to pay and the availability of Organization difference Organization determines Invisible paycheck which includes work-life and the talent you need.) Focus primarily on external pay compensation rates based on its philosophy. personal growth incentives. market data and maintain internal equity only with Company's ability to pay is based on its profitability. Customization of compensation is becoming more each separate pay market. For example. Internal popular. equity is important within Information. Technology, Work differences Using job analysis and job Accounting etc evaluation, internal value of jobs are systematically STRATEGIC APPROACH TO COMPENSATION TWO MAJOR STRATEGIC INITIATIVES THAT example, if long term employee Willingness to pay OCCUR IN BUSINESS TODAY: commitment is a strategic goal, the Unionization Growth Firms in growth mode would focus on organization should attempt to develop Desired quality of employes employee performance and external performance and strategies that will enhance retention like Tradition therefore pay attention to external competitiveness establishing a generous retirement plan for Employer prestige and equity. Compensation packages would be long service employees or adopting a profit Ratio of labor cost to total costs oriented toward incentives and driven by recruitment sharing system tied to tenure, Nature of the job needs. Developing a pay system requires the Retrenchment - Firms following retrenchment formulation of several policy decisions. COMMON GOALS OF COMPENSATION POLICIES strategy would be mainly concerned with over-all To reward employee's past performance costs and would seek ways to reduce the firm's PAY LEVEL POLICY To remain competitive in the labor market overall compensation costs. Hence non monetary This refers to how an organization's pay level To maintain salary equity among employees rewards would be used instead of monetary rewards. compares to its competitors' pay level. The concept of To motivate employee's future performance Firms' focus would be more internal i.e. survival external equity, the degree to which an organization's To maintain the budget instead of external competitiveness. wages are competitive with those of its competitors, is To attract new employees reflected in a firm's pay level policy To reduce unnecessary turnover STRATEGIC OBJECTIVES OF A COMPENSATION PROGRAM PAY STRUCTURE POLICY TO ACHIEVE COMPENSATION GOALS. THE Legal - consistent with Labor Code and This refers to the pay ranges, the range of wages FOLLOWING POLICIES MUST BE ESTABLISHED labor laws allowed by a specific wage classification and the TO GUIDE MANAGEMENT IN DECISION MAKING: Adequate large enough to attract amount of overlap between the ranges. An employees to join the organization and stay organization must decide on the minimum and The rate of pay within the organization Motivating-provide sufficient incentives to maximum pay for any job or set of jobs in the pay whether it is to be above, below or at the motivate employees to perform efficiently structure which is based on the worth of the job prevailing community Equitable-internally and externally determinable through a job evaluation. Internal equity rate. equitable is the objective of setting wage rates that conform to The ability of the pay program to gain Provide security-make income secure, the job's internal worth to the employer. employee acceptance while motivating predictable and insulated from changes in employees to perform to the best of their employment, profitability, individual TYPE OF REWARDS abilities. performance and health This refers to both financial and non-financial rewards The pay level at which employees may be Cost-benefit effective-administer the used in compensating employees. recruited and the pay differential between compensation efficiently and have the new and more senior employees. financial resources of the organization FACTORS AFFECTING PAY POLICY The intervals at which pay raises are to be support it on a continuing basis in the long EXTERNAL ENVIRONMENT granted and the extent to which merit run. Supply of labor and/or seniority will influence the raises. Demand for labor The pay levels needed to facilitate the COMPENSATION POLICIES Geographic location of company achievement of a sound financial position in It is a company pay policy that stipulates Economic conditions relation to the products or services offered. how well the company will pay its Product competition employees relative to the market. Demand for product DEVELOP AND ADMINISTER COMPENSATION Formulating compensation policy is a Union influence PLANS crucial step in the design of a pay system. INTERNAL ENVIRONMENT When setting pay policy, the strategic plan Size of organization of the company must be considered. For Characteristics of the workforce NEW APPROACHES TO COMPENSATION IN THE DETERMINATION OF THE MINIMUM TIME-BASED DISADVANTAGE TO MANAGEMENT ADMINISTRATION WAGE. THE REGIONAL TRIPARTITE WAGES AND No incentive for workers to increase output PRODUCTIVITY BOARDS ARE REQUIRED TO Extra efforts are not rewarded BROADBANDING CONSIDER THE FOLLOWING OUTPUT-BASED - ADVANTAGES TO Refers to sweeping positions traditionally The demand for having wages MANAGEMENT: covered by numerous pay ranges into a Wage adjustment vis à vis the consumer Lower cost per unit relatively few very wide job classifications price index Greater output (J.e. bands). Differences between functional The cost of living and changes or increases Pay related to efforts specialties are eliminated both to simplify therein Opportunity to earn more administration and to enhance a common The needs of workers and families purpose and a single team atmosphere. The need to induce industries to invest in OUTPUT-BASED DISADVANTAGES TO the countryside MANAGEMENT COMPETENCY-BASED PAY Improvements in standard of living Wage computation more difficult Refers to a salary structure where The prevailing wage levels Need to measure output employees are compensated based on their Far return of the caprpl invested and Quality may suffer knowledge, skills and abilities, rather than capacity to pay of employers Difficult to incorporate wage increases their job title or position. Effects on employmert generation and Increased problems with scheduling A competency-based compensation plan family income Pay fluctuates motivates individuals to improve their The equitable distribution of Income and Worker may be penalized because of abilities and efforts in order to achieve the wealth abng the imperatives of economic factors beyond their control pay rate they desire. and social developmen EQUITY OF PAY EXPANDED USE OF VARIABLE PAY BASIC PAY SYSTEMS APPROACHES Time-based (hourly or measured day INTERNAL EQUITY Any number of bonuses, incentives, work)-Compensate employees for the time the The objective of setting pay rates that conform to the commissions, and other cash compensation employee has worked during a pay period. job's internal worth to the employer. that is dependent on employee Output-based (Incentive)- Compensate employees performance. according to the amount of output they produce during EXTERNAL EQUITY a pay period, thereby tying pay directly to The degree to which an organization's pay rates are DETERMINANTS OF PAY performance competitive with those of its competitors. The relationship between jobs and wage rates. COMPARISON BETWEEN TIME-BASED AND CAUSES OF PAY INEQUITIES Qualifications required for the job OUTPUT-BASED PAY SYSTEMS Pressure of aggressive employees and Worker supply and demand supervisor The duties and responsibilities of the job Favoritism among supervisors The recognition of individual differences TIME-BASED - ADVANTAGES TO MANAGEMENT Seniority Level of pay in the community. Stable labor costs The feeling of being important Company's ability to pay Easy to administer Union pressure Type of industry Simple to compute Faulty classification of job Cost of living. Stable output Absence of job evaluation Collective Bargaining Stable pay Compensation plan not kept up to date Minimum wage fixing Less pressure to produce under output system INTERCOMPANY INEQUALITIES OF PAY  Differences in the nature of the business or almost the same if not lower pay than those View promotion as the highest form of industry in the lower category job. reward to an employee..Collective bargaining. Company ability to pay SUGGESTED SOLUTIONS TO ADDRESS PAY DEMONSTRATE Management's generosity COMPRESSION KNOWLEDGE OF VARIABLE PAY PLANS Re-examine how entry level people are TYPES OF PAY ADJUSTMENTS needed VARIABLE PAY PLANS Level Adjustment-given if differences are noted in Reassess recruitment salary alignments with respect to certain professional Focus on the job evaluation process Are compensation systems that pay cash bonuses to groups or with industry rates. Emphasize performance instead of a defined group of employees basedon predetermined CBA General Wage Increase-given to all eligible salary-grade assignment measures of group or organizational performance staff in accordance with the wage settlement Base increases on longevity contained in the collective bargaining agreement. Give supervisors and/or managers the TWO REASONS THAT HAVE MADE VARIABLE Cost of Living Allowance - increase given taking authority to effect equity adjustments for PAY A DESIRABLE AND EFFECTIVE APPROACH into account the cost of living which is determined on incumbents unfairly victimized TO COMPENSATION the basis of generally accepted official government Variable pay produces bonuses that are statistics more particularly the consumer price index APPROACHES TO CORRECT PAY DISTORTIONS funded by performance improvement and of the Bangko Sentral. Redesign salary scales as needed, to not taken from profitability. As a result, Merit Increase - given to an employee for a very maintain meaningful salary differentials companies are placing greater emphasis on satisfactory performance on his job. between pay grades. Adjust the pay rates of variable pay as a vehicle to deliver pay Promotional Increase-given because of a promotion all affected employees to the corresponding increases in highly competitive in position and is granted either upon assumption of minimum of the redesigned salary scales. environments. the position or upon confirmation of the promotion. Across the board adjustments. Alignment of compensation practices with Reclassification Increase - given to an employee Increases based on seniority. the business strategy and the new upon the reclassification of his current position to a Increases based on performance. management. philosophy high salary level. Based increase on some predetermined formula. PROGRAM FEATURES THAT MUST BE PAY ADMINISTRATION ISSUES ADDRESSED WHEN DESIGNING A VARIABLE PAY Pay secrecy or openness - access to pay CONCEPTS BEHIND THE SUGGESTED PLAN information APPROACHES Payout frequency Pay security-guarantee of income security Pay distortion can only be minimized, but Establishment of baselines or goals in times of economic difficulties like may not be totally eliminated especially Variable pay formula/measurement system guaranteed annual pay, supplementary within a job level. unemployment benefits, cost of living Total elimination of pay distortion is not INCENTIVE PAY SYSTEMS adjustments and severance pay. possible since pay of an overpaid employee Refers to incentive pay plans that relate wages of Pay compression-occurs when new hires cannot be reduced. employees to effort and output. It aims to reward are brought in at about the same pay rate or There is a need to build in more meaningful employees for their efforts and services rendered as even higher rate than the current pay differentials between lower and higher well as develop into the employee's attitudes of employees. level jobs, as inter-level distortions are involvement, participation and responsibility. Pay distortion-occurs when longer serving corrected. employees receive lower pay than less Future pay differences that may result from TYPES OF INCENTIVE PAY PLANS senior employees in the same job/job class an employee's promotion should not be Individual incentive plans - given to or when employees in a job grade receive considered as having a distortion effect. employees based on differences in individual performance. Payment is usually  based on a combination of time and output Halsey plan- gives the employee bonus for Deferred profits are credited to employee units according to an established formula output above standard based on some accounts to be paid at retirement or other (for example premium or bonus system) percentage of the time saved. stated circumstances. Group incentive plans involve the large Rowan plan calculates the bonus on the Combination - part of profit is paid out more comprehensive types of plans which relationship of time saved to standard time currently in cash and part is deferred. aim to develop a plant-wide incentive allowed for the job. system in which all employees participate in Bedaux plan - similar to the standard hour GAIN-SHARING PLANS an indirect basis. plan, it uses a percentage sharing Implies share with the employees the financial gains arrangement between labor and associated with improvements in measures of EXAMPLES OF INCENTIVE PLANS management and usually established a high organizational or team performance. The measures Straight piecework-rate paid for each unit task standard. employed are operating or performance measures produced Taylor Differential-Piece Rate plan - It rather than measures of profitability. Differential piece rate-rate paid to established a high task standard which employees whose production exceeds the pays low piece rates for below standard COST MEASURES IN THE GAIN SHARING standard amount of output which is higher productions and high piece rates for above FORMULA: compared to those who do not exceed the standard productions. It is labeled as "step" Costs as a percent of sales standard. amount plan because of the jump when moving Costs per unit of output Bonus-payment that is supplemental to from production below standard to Costs versus budget base wage production at standard. Rucker plan - It is based on the historic NON-FINANCIAL INCENTIVES EXAMPLES OF INCENTIVE PLANS relationship between the total earnings of Include records of achievement and Scanlon plan - bonus incentive plan using hourly employees and the production value employee recognition, opportunity for employee and management committees to created by the employees. advanced training, opportunity for gain cost-reduction improvements. Mainly promotion and other similar influences to encourage reductions in labor costs by PROFIT SHARING which stimulate performance. allowing workers to share in any reductions An agreement freely entered into by which the achieved. employees receive a share, fixed in advance, of the ADMINISTRATION OF PAY INCENTIVE PLANS Kodak plan - uses a combination of profits. The term profit sharing describes any plan in Grant incentives based on differences in premium wage levels and an annual bonus which the payout is determined by some measure of individual performance. The primary related to company profits instead of ore profits or returns such as the company's return on purpose of an incentive pay plan is not to traditional incentives. investment (ROI). pay off under almost all circumstances but Kaiser sharing plan - Aims to find a better rather to motivate performance. way of solving mutual problems and Annual salary budgets must be large generate interest and desire for the success BASIC TYPES OF PROFIT SHARING PLAN enough to reward and reinforce exceptional of the organization. It has no bargainable Cash/current-profits are paid directly to performance. factor that determines the incentive bonus employees in cash, check or stock as soon Determine overhead costs associated with and the procedures and sharing as profits are determined. plan implementation and administration percentages are fixed in advance Ex. A fixed percentage say 15% of after tax which may include the cost of establishing Lincoln plan includes profit sharing, job or fully accounted profits or share only performance standards and the added cost enlargement, and participative profits in excess of a threshold amount, for of record keeping. management. Main components come in example 25% of profits in excess of a 12% the form of a piecework system, an annual ROI. bonus, and a stock. purchase provision. CHARACTERISTICS OF AN EFFECTIVE Eases transition to an organizational unit It is used for two purposes: awareness and INCENTIVE PAY PLAN incentive plan. recognition. Awareness acknowledging the Accurate Helps introduce an objective driven or cost importance of an objective or goal. An Easy to apply reduction gross profit enhancement plan. excellent communication tool and reminders Consistent Recognizing outstanding performance, of the company's focus. Easy to understand non-monetary awards carry the element of Recognition - a way for employees to Fair recognition, and can be shown with pride to publicly display their accomplishments.. peers, family and friends - awards are Earned time off-time off with pay. NON-MONETARY AWARDS visible. In the 1990's various significant changes in Works well with most employee the employer-employee relationship were populations. observed, included is the change in how compensation plans were viewed. Multiple REASONS WHY NON-MONETARY AWARDS pay schemes were introduced besides just WORK base compensation. Trophy value The term compensation was even More promotable than cash expanded to "total reward opportunity' in More flexible than cash recognition of a broader spectrum of Less expensive than cash rewards being considered including Promotes family involvement and goal recognition and non-cash awards. setting In designing compensation plan, the Note: In planning, designing and or implementing a elements of alignment and integration were non cash award plan, tax laws must be considered or considered. The alignment of the overall risk being in violation of the law. reward system with the business strategy and objectives was determined to be critical in communicating and reinforcing desired behaviors. TYPES OF NON-MONETARY AWARDS Social Reinforcers - include pat on the COMPENSATION AND BENEFITS VS. TOTAL back, respect, training and various activities REWARDS OPPORTUNITY used as morale boosters and acknowledgement of the value the COMPENSATION AND BENEFITS more on organization puts on its employees. monetary incentives, salaries, bonuses, commissions, Merchandise Awards - given for improved salaries. Philosophy at reward and pay employees performance pre selected items or broad accordingly. offering of merchandise. TOTAL REWARDS OPPORTUNITY-compensation Travel Awards (Group incentive travel) It and benefits elements plus rewards and recognition, has a special motivational appeal to people work life balance, career opportunities. Philosophy is particularly when delivered as a group to attract and retain talent. incentive. It is a relaxed opportunity to lay the groundwork for networking and REASONS FOR USING NON-MONETARY AWARDS bolstering company loyalty. Supplements a fair compensation plan use Symbolic Awards - include plaques, non-monetary awards for reinforcing mementos, rings, pins, watch etc. the list is performance against specific objectives. endless. It usually has little financial value.