Total Rewards Management Coursebook PDF

Total Rewards Management ® About WorldatWork WorldatWork is the leading nonprofit professional association in compensation and total rewards. We serve those who design and deliver total rewards programs to cultivate engaged, effe...

Total Rewards Management ® About WorldatWork WorldatWork is the leading nonprofit professional association in compensation and total rewards. We serve those who design and deliver total rewards programs to cultivate engaged, effective workforces that power thriving organizations. We accomplish this through education and certification; idea exchange; knowledge creation; information sharing; research; advocacy; and affiliation and networking. Founded in the United States in 1955, today WorldatWork serves total rewards professionals throughout the world working in organizations of all sizes and structures. (WorldatWork Society of Certified Professionals , the Certified Compensation Professional (CCP ), Certified Benefits Professional (CBP ), ® ® ® ® ® Global Remuneration Professional (GRP ), Well-Being Certified Professional (WLCP ), Certified Sales Compensation Professional (CSCP) , ® ® ® ® T1 v1.15.7 Copyright 2021 WorldatWork. All Rights Reserved. No portion of this publication may be reproduced in any form without express written permission from WorldatWork. WorldatWork Values and Protects Your Professional Development This book is your personal copy of the materials for this course, intended for your own use and professional development. To protect your and your company’s considerable investment of time and resources for this course, WorldatWork does not permit reproductions or sharing of course materials in any form, including photocopying and scanning. Questions or concerns may be directed to WorldatWork Customer Relationship Services, 877/951-9191 (toll-free) or 480/922-2020. Congratulations on your commitment to professional development and excellence. Thank you. The information in this publication, as prepared by the authors and reviewed by other experts in the field, represents various approaches to compensation and benefits management. WorldatWork strives to provide information and perspectives that will help readers apply appropriate practices in their own organizations, but does not provide prescriptive advice. Nothing herein should be construed as an attempt to aid or hinder the adoption of any pending legislation, regulation or interpretive rule, or as legal, accounting, actuarial or other such professional advice. Table of Contents MODULE 1 5 MODULE 5 105 Introduction to Total Rewards Development The Evolution of Rewards 7 Development 107 The Total Rewards Model 8 Development Opportunities 114 Drivers of Total Rewards Strategy 9 Types of Development Opportunities 116 Internal Influences 10 Measuring Effectiveness 120 Discussion 16 Pay for Performance 122 External Influences 17 Principles of Merit Pay Programs 124 The Total Rewards Strategy 18 The Base Pay Investment 126 The Total Rewards Approach 21 Exercise 128 Module Quiz 25 Example 129 Example 130 MODULE 2 27 Module Quiz 132 Compensation MODULE 6 133 Compensation 29 Factors Influencing Compensation 31 Recognition Base Pay 34 Recognition 135 Base Pay Structure Design 36 The Value of Recognition Programs 136 Base Pay Structure 43 Using Recognition to Drive Results 137 Differential Pay 48 Recognition Plan Types 138 Variable Pay 49 Recognition Programs 139 Module Quiz 59 Module Quiz 149 MODULE 3 61 MODULE 7 151 Benefits Total Rewards Benefits 63 Putting It All Together Factors Influencing Benefits 65 Revisiting the Total Rewards Model 153 Major U.S. Benefits Laws 67 The Total Rewards Design Process 154 Income Protection Programs 68 Total Rewards Design Considerations 155 Pay for Time Not Worked Programs 77 Communicating the Value of a Total Rewards Package 157 Module Quiz 80 Module Quiz 161 MODULE 4 81 APPENDIX 163 Well-Being Quiz Answers 164 Well-Being Effectiveness 83 Module 6 Well-Being Portfolio 85 Recognition Survey 165 Module Quiz 104 Module 7 Your Total Rewards Inventory 168 T1 3  T1 4  MODULE 1 Introduction to Total Rewards 5  Introduction Attraction, motivation, engagement and retention are key issues facing human resources professionals. Successfully addressing these issues begins with an understanding of the total rewards model and the five elements within the total rewards strategy. Module 1 introduces the total rewards model and the five elements that, when formulated in the appropriate mix, support the business strategy and lead to improved attraction, motivation, engagement and retention. The total rewards elements are briefly defined in Module 1 and will be examined in detail in subsequent modules. Various internal and external influences that impact an organization’s total rewards strategy are considered. The corporate vision and mission and how they lead to the business strategy is explained. The total rewards strategy and the key players involved in strategy development are introduced along with the total rewards approach and advantages of taking the approach. Objectives By the conclusion of this module, you will be able to accomplish the following: 1. Explain drivers of the total rewards strategy. 2. Discuss internal and external influences that impact an organization. 3. Define and explain the elements of total rewards. 4. Discuss the total rewards strategy and the key players involved in strategy development. 5. Identify and explain the total rewards approach and advantages of taking the approach. T1 MODULE 1 6 Rewards Continue to Evolve Throughout history, employers have been challenged with attracting, motivating, engaging and retaining employees. From the simplest barter systems of centuries past to the current complex incentive formulas of today, the organizational premise has been the same: provide productivity and results to an enterprise, and the enterprise will provide its employees with something of value. This is referred to as the employee value proposition (EVP). Throughout the past two decades, the profession has continued to mature. Increasingly, it has become clear that the battle for talent involves much more than highly effective, strategically designed compensation and benefits programs. While these programs remain critical, the most successful companies have realized that they must take a total rewards approach, emphasizing attraction, motivation, engagement and retention. They must deploy all of the elements of total rewards – compensation, benefits, well-being effectiveness, recognition, and development – to their strategic advantage. T1 MODULE 1 7  The Total Rewards Model 1.8 © WorldatWork The Total Rewards Model The total rewards model provides a framework for designing, implementing and assessing the rewards packages offered throughout the organization. Organizations must consider various influences, internal and external, that help shape an organization’s human resources strategy. Understanding these helps ensure alignment in the development of the total rewards strategy. HR strategy is the organization’s overall plan for attraction, motivation, engagement and retention of employees. The total rewards strategy considers the HR strategy and uses it to guide the design of programs for each of the five elements of total rewards. When effectively designed and successfully perceived as valuable, the strategy yields productive, inspired, and committed employees. T1 MODULE 1 8  Drivers of the Total Rewards Strategy 1.9 © WorldatWork Drivers of Total Rewards Strategy What goes into deciding what the total rewards strategy should look like? Organizations deploy rewards as the strategic tool to achieve business objectives. HR Strategy informs the Total Rewards strategy, which plays a leading role in the employee experience. Initiatives must be completely woven into the enterprise’s HR strategy, considering the human capital and societal influences that affect program design and strategy. There are many internal and external influences that inform the design and implementation of the HR Strategy. Internal factors encompass business strategy, culture, workforce, inclusion, and leadership External influences include social/cultural norms, the regulatory environment, advancements in AI and technology, and competitive (product and labor) markets A deep understanding of these factors provides the context required to build effective programs that attract and retain high-performing employees and drive business outcomes. This strategy determines what the total rewards mix for the organization will be. T1 MODULE 1 9  Internal Factors Internal Influences Business Strategy I Culture I Workforce I Inclusion I Leadership 1.10 © WorldatWork Internal Influences An organizations internal environment influences the total rewards strategy. When determining the total rewards strategy, organizations need to consider the internal influences. Strategy - Total Rewards strategies are a mechanism to make a strong business strategy come to life. Whether the goal is operational excellence, product/ service leadership, or customer engagement – rewards programs help communicate expectations, align efforts, and motivate the behaviors required to deliver results. Culture - Simply stated, organizational culture refers to a set of shared values and beliefs that form over time as people interact and work together. It encompasses an organization’s vision, values, norms, and ultimately influences workforce experiences and outcomes. Total Rewards offerings can help transform and re-enforce desired cultural norms, and significantly influence how work is performed and recognized in the organization. The Workforce - Rewards must be tailored to meet the needs of an increasingly diverse pool of employees that is defined by geopolitical trends, tech advances and talent demographics, including today’s up-to-five-generation workforce. Savvy Total Rewards pros see this as an opportunity to attract the highest performers and “best” the competition. Inclusion - In these hyper-accelerated times, diversity and inclusion strategies provide organizations with a competitive advantage in talent attraction and workforce productivity. Total Rewards professionals leaders can help organizations achieve greater diversity while building an inclusive culture by developing clear approaches for pay equity and transparency, career development, inclusive benefits and more. Leadership - Total Rewards programs are only effective when leaders play an active role to promote understanding and appreciation of the rewards programs. Total Rewards practitioners must work with organizational leaders to ensure that Total Rewards initiatives align with business goals and that they are well-understood, used and appreciated by workers for maximum impact. T1 MODULE 1 10 Internal Influences Business Strategy Vision Mission Business Strategy 1.11 © WorldatWork Business Strategy Business strategy is the broad framework of principles and approaches that guide the day-to-day decisions affecting the business. It is derived from the vision and mission of an organization. Understanding the importance of the relationship between vision, mission and the resulting business strategy will assist the human resources professional in becoming a strategic partner. Corporate vision – a statement about what the organization wants to become. It drives the direction of an organization. Corporate mission – a precise description of what the organization does, its reason for existence or its purpose for being. Business strategy – a company’s broad plan for competitively positioning its products or services with the intent to accomplish or support the company’s mission. T1 MODULE 1 11  Internal Influences Business Strategy Examples Operational excellence Product / service leadership Customer intimacy 1.12 © WorldatWork Business Strategy Examples The business strategy ensures that the business supports the organization’s mission, goals and objectives. Although organizations must employ many strategies to a certain degree, organizations will place primary focus on one of three strategies. Each strategy requires different actions or behaviors by employees. These represent the organization’s business objectives. Operational excellence – primarily a price/cost-based strategy This strategy often includes a combination of price, quality, dependability and ease of purchase that competitors cannot match. The corporate culture typically strives to minimize waste and reward efficiency. Product/service leadership – primarily an innovation-based strategy This strategy focuses on innovation, product development and market exploitation. The corporate culture encourages imagination and a mind-set driven by the prospect of creating the future. Organizations that use this strategy offer products and services that expand performance boundaries (the best products), leapfrog/replace technologies/products, create more/better ideas and commercialize them faster than their competitors. Customer intimacy – primarily a solutions-based strategy This strategy focuses on creating results for carefully selected customers (making them successful). The corporate culture encourages deep and lasting relationships with customers. Organizations that use this strategy build bonds with targeted customers; they meet or exceed customer needs to build customer loyalty. Adapted from Discipline of Market Leaders, by Michael Treacy and Fred Wiersema, Copyright 1995. Reprinted by permission of Basic Books, a member of Perseus Books Group. T1 MODULE 1 12 Internal Influences Business Life Cycle Affects Strategy 1.13 © WorldatWork Business Life Cycle Affects Strategy Business life cycle is the progression of steps an organization passes through from its creation to its decline. An organization’s focus will change as it moves through the various phases of the life cycle. Where an organization is in its life cycle can have a significant influence on total rewards design as organizations create programs that are best suited to meet organizational objectives. There are four stages of a business life cycle: Start-up – The organization is new with little or no formal policies or procedures. The organization’s focus is on obtaining capital, marketing products or services, initial sales growth and cash conservation. Growth – In this stage, the organization is highly focused on growing sales, increasing distribution capability and determining how to efficiently produce products or services to meet growing demand. Growth typically generates the need to begin standardizing procedures through policy creation. Mature – The mature stage is characterized by a focus on maintaining/increasing market share, improving productivity and otherwise reducing cost of sales. Improvements to products are more evolutionary than revolutionary. The organization typically has higher levels of bureaucracy and greater amounts of cash on hand than at other stages. Decline – At this point, the organization’s revenues are declining. It must decide whether to reinvest in current products, create new products or maximize profits with current products as long as possible. In which phase of the business life cycle is your organization now? Adapted from Discipline of Market Leaders, by Michael Treacy and Fred Wiersema, Copyright 1995. Reprinted by permission of Basic Books, a member of Perseus Books Group. T1 MODULE 1 13  Internal Influences Discussion Your Business Strategy Can you think of one or two elements of your organization’s business strategy? Can you think of any rewards programs that help you achieve that strategy? 1.14 © WorldatWork T1 MODULE 1 14 Internal Influences Organizational Culture Subject to internal and external influences Greatly influenced by organization’s leadership 1.15 © WorldatWork Organizational Culture Organizational culture is often difficult to describe and because of this, its impact is also difficult to understand. Culture determines how and why a company operates in the way it does. Typically, it includes a set of often unspoken expectations, behavioral norms and performance standards to which the organization has become accustomed. Subject to both internal and external influences Greatly influenced by organization’s leadership T1 MODULE 1 15  Internal Influences Discussion Organizational Culture Have you ever worked in two very different organizational cultures? If so, what was that like? What were main differences? Can you share a few examples? Internally focused 1 10 Externally focused Individualistic 1 10 Team focused Short-term focused 1 10 Long-term focused Information widely Information tightly managed 1 10 communicated Flexible and informal 1 10 Inflexible and formal Hierarchical 1 10 Flat structured Decentralized 1 10 Centralized Employees viewed as a cost 1 10 Employees viewed as assets Continuous improvement 1 10 Continuous innovation Risk oriented 1 10 Risk averse Autocratic 1 10 Participative Entrepreneurial 1 10 Professional management Efforts focused 1 10 Results focused Growth 1 10 Profit Financial 1 10 Operational High Tech 1 10 Low Tech Urban 1 10 Rural To evaluate culture with respect to rewards programs, ask questions that assess the characteristics above in the context of employee rewards. Examples: Short-term focused versus long-term focused – Are variable pay programs based on short-term or long-term results? Decentralized versus centralized – Are total rewards programs administered the same way across the organization or do they vary by division or region? Are rewards focused on the team or the individual or both? Is there high employee attrition, or do they stay with the organization long-term? T1 MODULE 1 16  External Factors External Influences Social Norms I Regulatory I Artificial Intelligence I Product Market I Labor Market 1.17 © WorldatWork External Influences Successful organizations understand that total rewards must be designed and administered in the context of not only an organization’s internal environment, but also influences external to the organization. These external influences often are out of the direct control of the organization. Social Norms TR professionals must have a grasp of the customs, social mores and drivers of the diverse makeup and expectations of the workforce to effectively tailor programs for maximum efficacy. Regulatory The regulatory and legal environment can vary widely and change quickly, affecting the design and implementation of total rewards in various ways. Programs should be assessed to ensure they can be legally applied in all locations and at all levels. This may require adaptation or even alternative programs to ensure compliance. Artificial Intelligence and Technology Leveraging data and technology allows TR professionals to identify retention risks and program opportunities. Product market The product market is continuously evolving. With more companies offering services as their product, various work arrangements have emerged, such as the gig economy. Labor market TR professionals must understand labor market trends and movements, including supply and demand of key talent, to balance the cost of attracting the necessary talent at a price that is affordable and sustainable. A deep understanding of these factors provides the context required to build effective programs that attract and retain high-performing employees and drive business outcomes. T1 MODULE 1 17  Elements of Total Rewards Strategy 1.18 © WorldatWork Elements of Total Rewards Strategy The Total Rewards Model encompasses five components, each of which includes programs, practices, and nuanced dimensions that collectively define an organization’s strategy to build a productive, inspired and committed workforce. Compensation – Pay provided by an employer to workers in exchange for services such as time, effort and talent. This includes both fixed and variable pay tied to overall contributions. Well-being – The state of a workforce that is productive, comfortable, happy, and healthy, considering physical, emotional/ mental, financial and environmental factors. Total Rewards professionals influence this state through organizational strategic influence and building programs that support workforce success inside and outside of work Benefits – Programs focused on health and welfare, income protection, financial preparedness, retirement and time off including leaves of absence, aimed to provide holistic well-being and security for the workforce and their families. Development – Encompasses the rewards and opportunities that employers offer their workers to advance their skills, competencies, responsibilities and contributions — in both their short- and long-term careers. Recognition – Formal or informal programs that thank, validate, recognize and celebrate workforce contributions while aligning and strengthening organizational culture. These elements represent the tool kit from which an organization chooses to offer and create an employee value proposition (EVP) that results in productive, inspired, committed employees who, in turn, create desired business performance and results. The elements are not mutually exclusive and can be deployed in various ways. The mix of elements creates a unique employee value proposition (EVP). T1 MODULE 1 18  The Total Rewards Strategy Identifies: The desired competitive market positioning The rewards programs that are offered and the optimal mix for each employee group The way each reward program will be earned and allocated 1.19 © WorldatWork The Total Rewards Strategy Most organizations consider the internal and external drivers to guide the design of programs for each of the five elements of total rewards. TR strategy development is the art of combining these elements into tailored packages to meet the needs of the organization and its employees. In order for the strategy to be successful, employees must perceive monetary and nonmonetary rewards as valuable. The desired competitive market positioning For example, many companies target a rewards program targeted at the 50th percentile of a chosen selection of competitors or of a defined peer group. Competitive positioning may vary by organization level (e.g., executives), functional area (e.g., sales) or geographic location. The rewards programs that are offered and the optimal mix for each employee group With dozens of rewards programs available, organization must decide which ones to offer and what the best mix is for different employee groups. The way each reward program will be earned and allocated For example, some programs are offered to all employees (e.g., vacation) while others are offered only to certain employee populations (e.g., incentive plans) Additionally, some organizations focus on collective or team performance, while other focus on individual performance, and some combine both. T1 MODULE 1 19  Key Players Involved in Total Rewards Strategy Development Senior management / board of directors Human resources leadership Employees Outside consultants 1.20 © WorldatWork Key Players Involved in Total Rewards Strategy Development Senior management/board of directors Senior management typically gives approval to the strategy. The board of directors typically approves officer compensation and may approve broad-based plan design. Involvement is important for buy-in and ownership. Human resources leadership Articulates the HR strategy HR staff is instrumental in designing and implementing total rewards. Employees Employee opinion or engagement surveys may provide guidance in identifying the relative importance of total rewards elements to various employee groups. A collective bargaining agreement or other employee groups may need to be considered if applicable. Outside consultants If outside consultants are used, they work closely with HR to develop the overall strategy and design. T1 MODULE 1 20  The Total Rewards Approach 1.21 © WorldatWork The Total Rewards Approach When HR strategy and Total Rewards programs are aligned, the result is productive, committed, and inspired employees who contribute their time, talent and efforts at their highest levels. In turn, this elevates performance of individuals and teams, and enhances the bottom line. The gap between what happens and what is possible is best impacted by thoughtfully designed Total Rewards programs. It is the most direct path to achieving organizational outcomes and ultimately delivering the highest value to your workforce. Using the total rewards approach, the human resources professional strives to find the appropriate mix of total rewards elements that will not only attract, motivate and retain employees, but lead to employee satisfaction and engagement as well. Attract – To attract is the ability an organization has to recruit and hire the talent necessary to achieve organizational success. Attraction of an adequate supply of qualified talent is essential for the organization’s success and survival. The talent acquisition function can often provide insight into which rewards are most desired and sought after by the targeted talent pool. Motivate – To motivate is the ability to cause employees to behave in a way that achieves the highest performance levels. There are two types of motivation: Intrinsic motivation – Linked to factors that include an employee’s enjoyment of the work, sense of accomplishment, and perception of contribution to a larger purpose. Intrinsic motivation consistently results in higher performance levels. Extrinsic motivation – Extrinsic motivation is often associated with rewards that are outside of the individual, which include tangible awards (such as pay) or status (such as job title). T1 MODULE 1 21  The Total Rewards Approach (continued) Engage – Engagement refers to the level of commitment or discretionary effort demonstrated by the employee. The employee typically experiences a positive emotional connection to the organization and its people. Examples of an engaged employee might be that he or she: – Demonstrates a strong commitment to the organization – Expresses values that align closely with the organization – Promotes the organization and its goals to others, both internally and externally Retain – To retain is an organization’s ability to keep desired employees who are valued contributors to organizational success. Retention can be achieved by offering rewards that are perceived as desirable and valuable as the employee moves through his or her career. What does engagement mean in your organization? How is engagement a business issue? T1 MODULE 1 22  Advantages of a Total Rewards Approach Greater flexibility More profitable Better place to work 1.23 © WorldatWork Advantages of a Total Rewards Approach With enhanced attraction, motivation, engagement and retention of employees, an organization may experience positive results such as: Greater flexibility Each company, given its own specific challenges, customizes its total rewards programs in unique proportions. This is called the total rewards mix. By approaching rewards as a “portfolio” to be managed, the organization can have flexibility with different groups and over time. Increased profitability A direct link exists between attracting the right talent, having engaged and motivated employees, and long-term business profitability. Organizations can direct resources to the rewards that employees value the most, scale back or eliminate rewards that aren’t as desired, thereby reducing overall costs. Better place to work Organizations that take a total rewards approach, and offer rewards that employees value, are often rated as best places to work. Highly rated companies usually offer desired rewards programs that go beyond just traditional compensation and benefit programs. T1 MODULE 1 23  Can You? Explain drivers of the total rewards strategy. Discuss internal and external influences that impact an organization. Define and explain the elements of total rewards. Discuss the total rewards strategy and the key players involved in strategy development. Explain the total rewards approach and its advantages. T1 MODULE 1 24 Module Quiz 1. Why is it important for total rewards professionals to understand labor market trends? A. To attract talent at an affordable cost B. To adapt alternative programs to ensure legal compliance C. To update the organization’s business strategy D. To change the vision and mission of the organization 2. Which of the following best describes the business strategy? A. A plan for the products that an organization will produce B. An organization’s reason for existence or its purpose for being C. A set of beliefs or values adopted by an organization D. A broad plan for competitively positioning products supporting the mission 3. Which of the following are three of the five elements of total rewards? A. Base pay, variable pay and performance management B. Development, recognition and benefits C. Recognition, health coverage and Well-Being effectiveness D. Attraction, motivation and retention 4. Which of these key players works most closely with HR to facilitate the process when developing the overall Total Rewards strategy? A. Customers B. Senior management C. Employees D. Outside consultants 5. What is one of the advantages of taking a total rewards approach? A. Ensures that the HR strategy will align with the business strategy B. Ensures compliance with legal and regulatory requirements C. Offers flexibility for customizing total rewards programs in unique proportions D. Offers more career opportunities for HR professionals T1 MODULE 1 25  T1 MODULE 1 26  MODULE 2 Compensation 27  Introduction Compensation programs are such an important aspect of total rewards that in many ways compensation serves as the foundation of total rewards. A well-designed and managed compensation system goes a long way in helping organizations attract, retain, engage and motivate employees. Properly designed compensation programs can inspire employees, drive business results, and provide for organizational success over the long run. When an employee thinks of total rewards, probably the first thought that comes to mind is compensation. Therefore, it is important to understand the basics of compensation to appreciate its true importance in the overall total rewards model. Objectives By the conclusion of this module, you will be able to accomplish the following: 1. Identify and define the two primary elements of compensation. 2. Discuss factors influencing compensation including pay-related laws. 3. Define and describe the steps involved in base pay structure design. 4. Discuss base pay structures including definition, objectives and components. 5. Discuss base pay adjustments and when they are typically used. 6. Identify and define the types of variable pay as well as when they are typically used. T1 MODULE 2 28  Compensation Pay provided by an employer to workers in exchange for services. The most common types of compensation are hourly wages, salaries, and bonuses. 2.29 © WorldatWork Compensation Compensation is perhaps the most visible element of the total rewards model and as such deserves a significant amount of attention and planning. Typically it is the first aspect of the employment agreement and calls for providing a monetary reward in exchange for the services and contributions the employee provides to the organization. Compensation – Pay provided by an employer to workers in exchange for services such as time, effort and talent. This includes both fixed and variable pay tied to overall contributions. T1 MODULE 2 29  Compensation Elements of Compensation Fixed pay Variable pay 2.30 © WorldatWork Elements of Compensation Compensation can be categorized into the following two primary elements: Fixed pay, also known as base pay, is nondiscretionary compensation that does not vary according to performance or results achieved. The terms base pay and fixed pay are used interchangeably. The most common forms of fixed pay or base pay are hourly wages and salaries. Variable pay, also known as bonus, incentive, or pay at risk, is compensation that is contingent on discretion, performance or results achieved. Much of the innovation in compensation is occurring in the variable pay element. T1 MODULE 2 30  Factors Influencing Compensation Compensation philosophy and strategy HR strategy Competitive environment Financial resources Regulatory and other requirements 2.31 © WorldatWork Factors Influencing Compensation Compensation strategy and philosophy Compensation philosophy – A defined compensation philosophy is a statement of what the organization believes about how people should be paid. It should support the business strategy and be a good fit with the organization’s culture. A key component is how the organization intends to pay relative to its competitors for people – i.e., the desired market position. Compensation strategy – The compensation strategy includes the principles that guide the design, implementation and administration of a compensation program in an organization. It may also specify what programs will be used and how they will be administered. HR strategy Compensation that considers the HR strategy leads to positive workforce experiences and ultimately organizational performance. This is done in conjunction with other total rewards programs, such as benefits or development, to make sure needed talent is available to the organization. Competitive environment Competition for talent has a significant influence on the organization’s compensation programs. This is particularly true when an organization is in a growth mode, experiencing heavy hiring, or competing for “hot jobs”. Organizations that are expanding their operations outside of their headquarters country need to determine the feasibility and the degree to which they want to replicate their base programs in other countries. T1 MODULE 2 31  Factors Influencing Compensation Factors Influencing Compensation (continued) Financial resources Corporate budgets influence the resources available for the various components. The health of the economy and the general business influence the level of total rewards elements utilized to ensure the organization has the talent it needs. Regulatory and other requirements Governmental and other organizations usually have requirements for compensation programs within their jurisdiction (e.g. minimum wage or pay equity, as well as acquired rights in some countries). The existence of bargaining unit employees inside the organization must be considered when designing compensation programs for nonunion employee groups. The prevalence of union activity outside of the company, within the industry, creates challenges. Compensation professionals should stay abreast of these regulations, which can be enacted at the federal level or only within certain states. For example, as of January 1st, 2024, there are eight states with active pay transparency laws, while more are set to take effect in 2025. T1 MODULE 2 32 Factors Influencing Compensation Types of Pay-Related Laws Minimum wage and overtime Pay equity and transparency Anti-competitive price fixing !" && !" #$%&'()#$%* Types of Pay-Related Laws Minimum rates of pay and overtime – Requires minimum pay rates for covered employees and payment of overtime beyond a certain number of hours per week. The Fair Labor Standards Act (FLSA) of 1938 in the U.S. established minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments. Covered, nonexempt workers are entitled to a minimum wage, but the FLSA does not require vacation pay, holiday pay or shift or weekend premium pay. Many U.S. cities and states have minimum wage requirements higher than the federal minimum. Pay equity and transparency – Employees must be paid fairly and consistently, without discrimination based on gender, race or other protected categories. Pay may reflect job-related factors such as education, experience, and tenure. Some U.S. states have pay equity requirements as well as legislation surrounding pay transparency. States such as Colorado, California, and New York now have active pay transparency laws, which require employers to disclose certain compensation information. The push for pay transparency is expected to gain an even greater momentum with more states voting to adopt such legislation. Anti-competitive price fixing – Price fixing, wage fixing, or entering an agreement or establishing a mechanism to set wages and benefits is prohibited in many countries, including the U.S. Most organizations rely on third-party independent compensation survey providers to guarantee confidential data gathering. T1 MODULE 2 33  Base Pay Definition of base pay can vary by country Monthly equivalent salaries vary by country Bottom line... fixed pay practices based on market practice and competitive strategy for each country 2.34 © WorldatWork Base Pay Base pay, or fixed pay, is the compensation paid to an employee for performing specific job responsibilities. An organization’s hierarchy and job evaluation methods determine how it establishes pay. The definition of base pay can vary by country. For example: India and South Africa use a Cost-to-Company approach to pay, and many countries include allowances in the calculation of base pay (e.g., housing, transportation, meals,) and may be considered part of base pay for benefits calculations. Base pay levels need to take into account variations in equivalent monthly salaries that vary by country – While annual salary may be constant, pay delivery varies with many countries’ pay practices, including smaller monthly salaries with a bonus paid out at certain times of the year. These differences may affect survey data. For example: Some countries deliver base pay monthly but also include a 13th or 14th check during the year. In some countries, base salary includes legally required bonuses, as well as other components. These differences may affect survey data. The bottom line …f ixed pay practices need to be based on market practice and competitive strategy for each country – Factors affecting base pay: Frequency of review due to: – Inflation – Government-imposed pay restraint – Cost-of-living adjustment (COLA) plus variable performance-related pay Allowances Government mandates (e.g., concept of acquired rights) T1 MODULE 2 34 Base Pay Types of Base Pay Salary Hourly wages Piece rate 2.35 © WorldatWork Types of Base Pay Once base pay structures are built, the organization must determine how employees will be paid. Salary – paid on a weekly, biweekly, semimonthly or monthly basis rather than by the hour, generally to higher level positions. In the U.S., exempt positions are typically paid a salary. Hourly wages – paid by the hour for a job being performed. An individual’s annual pay is dependent on the number of hours worked during the course of the year and the hourly rate of pay. In the U.S., nonexempt positions are typically paid an hourly wage. For example: $20/hour with a schedule of 40 hours a week for 52 weeks = 2080 hours $20 x 2080 = $41,600 per year. Piece rate – Payment is based on an individual employee’s rate of production. A payment is received for each piece or unit of work produced. Piece rate payment can be either in place of, or in addition to, hourly payment. Although it seems like an incentive or commission plan, it is considered base pay and therefore must comply with minimum wage laws. T1 MODULE 2 35  Base Pay Structure Design 2.36 © WorldatWork Base Pay Structure Design There are several steps involved in building a base pay program. Job analysis – a systematic, formal study of duties and responsibilities that comprise job content, provides key information about the nature and level of work performed. Many organizations include job analysis as part of the job documentation process, but job analysis must occur before jobs can be documented. Job documentation – includes written information about job content or the functions of the job and required knowledge, skills and abilities (KSAs) and behaviors. The job description is the most common form of job documentation. Job evaluation – a structured process to determine the value of an organization’s jobs relative to each other. Job worth hierarchy – to group or categorize jobs relative to other jobs (e.g., pay grades or job ladders). The job hierarchy is sometimes referred to as the job architecture. It is the final result of the job evaluation process. Base pay structure – After the job hierarchy is established, a base pay structure can be created and utilized as a framework for pay decisions. Job analysis and job documentation provide the information needed to complete the job evaluation process. The job evaluation process and job worth hierarchy lay the foundation for a base pay structure. T1 MODULE 2 36 Base Pay Structure Design Purpose of Job Analysis Creating job documentation, such as job descriptions Determining where a job fits in a ladder or family Supporting recruitment, training, performance management and other HR processes Providing a basis for regulatory compliance 2.37 © WorldatWork Purpose of Job Analysis Job analysis is the basis for job documentation, which is used for many HR programs and processes, including: Creating job documentation, such as job descriptions Determining where a job fits in a ladder or family Supporting recruitment, training, performance management and other HR processes Providing a basis for legal and regulatory compliance T1 MODULE 2 37  Base Pay Structure Design Types of Job Documentation Job profiles Job descriptions Job ladders 2.38 © WorldatWork Types of Job Documentation Job documentation consists of written information about job content, typically resulting from a job analysis effort. There are several types of job documentation: Job profiles Job profiles are typically shorter than job descriptions, and may only include a general one or two paragraph summary of the job, such as is often found in salary survey descriptions. Job descriptions A job description is the most frequently used form of job documentation. It is a summary of the most important features of a job. A job description should describe and focus on the job itself and not on any specific individual who might fill the job. Important features included on a job description: The general nature of the work Duties Responsibilities The level of the work to be performed Skill, effort, responsibility, working conditions and where the job fits in the hierarchy Job specifications Employee characteristics required for competent performance of the job Job ladders Information on multiple levels within the same job family. The may include a general summary of the family, and then specific level descriptors within the family (e.g., entry, intermediate, senior). T1 MODULE 2 38 Base Pay Structure Design Content-Based Job Evaluation Approach 2.39 © WorldatWork Content-Based Job Evaluation Approach Nonquantitative methods, or whole-job methods of job evaluation, view the job globally in terms of its importance to the company. Ranking is the simplest form of job evaluation. The process involves a whole-job, job-to-job comparison, resulting in an ordering of jobs from highest to lowest in relative worth to the organization. Ranking only gives an indication of order. It does not reveal anything about the relative degree of distance between jobs. The classification method also compares jobs on a whole-job basis. Predefined class descriptions are established, and then the job is placed in whichever classification best describes it. This is sometimes called “job slotting.” Examples of classes might be Professional 1, 2, or 3, or Manager 1 and 2. Quantitative methods, or factor methods of job evaluation, examine the importance of jobs in terms of compensable factors. The point factor method of job evaluation uses defined factors and degrees to establish job value. The corresponding points for that level are then awarded to the job and combined for all factors to derive a total score. The job component approach develops a job worth hierarchy by using statistical analysis. This analysis identifies the factors and factor weights that best explain the relative market pay levels of benchmark jobs. Nonbenchmark jobs can then be evaluated using the model produced from the statistical analysis. T1 MODULE 2 39  Base Pay Structure Design Market-Based Job Evaluation Approach Market Pricing Why should market data be collected? What is a benchmark job? Why use caution when comparing data? 2.40 © WorldatWork Market-Based Job Evaluation Approach Market pricing In today’s competitive market place, it is common to see pay structures designed using a market pricing technique. Market pricing requires collection and interpretation of market data external to the organization as well as identification of the prevailing rate for a job. In emerging markets, availability of data may be scarce. Why collect market data? Analyze pay competitiveness by collecting information on the prevailing rate for benchmark jobs. Identify pay trends by watching movement of salaries in the labor market. Identify competitive pay practices by gathering information on practices, programs, policies and procedures. What is a benchmark job? A standard job used to make pay comparisons The jobs selected should be easily defined and found in other organizations. At least 50% of jobs should be benchmarked when using market pricing to build a base pay structure. If 70% or more of the job content is similar, the data may be used for benchmarking purposes. Why use caution when comparing data? – The same statistics must be used in order to ensure that the data will be valid and reliable for comparison. It is important to ensure that reported salaries are in the same form (weekly salary, monthly salary). Local surveys may use different methodologies. Some vendors report figures as medians (middle number), others report means (averages). In order to have a valid comparison, the statistics must be reported in the same form. T1 MODULE 2 40 Base Pay Structure Design Job Hierarchy What is it? Grouping similar jobs as determined in the job evaluation process Why is it important? Indicates how various jobs can be categorized Forms the foundation of the base pay system Why is it used? To determine internal and external equity both among positions and groups of positions 2.41 © WorldatWork Job Hierarchy Once the job evaluation is completed, a job hierarchy can be established. What is it? A job hierarchy helps to establish a relationship between jobs by grouping similar jobs as established in the job evaluation process. Why is it important? By establishing a job hierarchy, compensation professionals can indicate how various jobs can be categorized within the organization. It can then be used to form the foundation of the base pay system. Why is it used? A job hierarchy is used to determine and ensure internal and/or external equity both among positions and groups of positions. Job grades/pay structures are then based upon that internal and/or external equity. T1 MODULE 2 41  Base Pay Structure Design Job Hierarchy...continued What does it look like? Job content approach (internal data) Market-based approach (external data) 2.42 © WorldatWork Job Worth Hierarchy (continued) What does it look like? The dotted lines represent grade breaks. (Internal Data) (External Data) Position Job Points Hierarchy Market DataHierarchy Director of Accounting 875 100,000 Director of Human Resources 866 95,000 Senior Manager of Advertising 764 88,000 Manager of Accounting 691 76,000 Senior Compensation Analyst 414 50,000 Senior Human Resources 410 47,500 Analyst Senior Financial Analyst 401 47,000 Financial Analyst 350 42,000 Supervisor, Accounts Payable 322 40,000 Accounts Payable Clerk 193 28,000 Human Resources Clerk 189 25,000 T1 MODULE 2 42  Base Pay Structure Definition Objectives Create alignment between work and rewards Help achieve organizational objectives Reflect desired competitive position 2.43 © WorldatWork Base Pay Structure Definition – The pay structure of an organization is a management tool that reflects the collection and organization of internal and external compensation data to support job values. A pay structure consists of a series of pay ranges that represent jobs of similar internal and/or external worth. Objectives Create alignment between work and rewards Help to achieve organizational objectives; effective compensation tools for supporting the organization Reflect the company’s desired position with respect to competitive pay at a certain point in time (compensation philosophy) T1 MODULE 2 43  Base Pay Structure Components of a Base Pay Structure Number of pay grades/bands Pay range Midpoint-to-midpoint differential 2.44 © WorldatWork Components of a Base Pay Structure When building a base pay structure, the following must be determined: Number of pay grades/bands – The purpose of pay grades/bands is to identify a compensation range within which multiple jobs are grouped that have similar value based on internal comparisons and external market data. The number of pay structures or bands may be affected by: – Diversity of jobs in the organization – Functional area (nursing, engineering, marketing) – Job level (administrative, professional, technical, executive, etc.) Pay range Grades typically have a maximum, midpoint, and minimum. The midpoint of the pay range typically reflects market rate for the positions in that pay range. Some organizations may choose to set midpoints above or below market rates. Pay grades/bands usually overlap. Minimums and maximums usually fall within adjoining grades. Pay grades/bands should distinguish between skill or responsibility, and supervisor/ subordinate relationships. Pay grades/bands should allow for career progression. Midpoint-to-midpoint differential – the difference in rates paid at midpoint of two adjacent grades. A midpoint represents the middle of a given salary range or pay grade. 10-15% differentials are common. T1 MODULE 2 44 Base Pay Structure Base Pay Structure Example 90,000 80,000 79,200 70,000 66,800 60,000 57,500 PAY 50,600 50,000 45,500 48,000 40,900 40,000 37,500 41,700 34,700 32,100 37,100 30,000 33,700 30,000 31,400 29,200 26,700 27,800 25,000 25,700 20,000 1 2 3 4 5 6 7 8 9 10 GRADE 2.45 © WorldatWork Base Pay Structure Example This is an example of an abbreviated base pay structure. Range Grade Minimum Midpoint Maximum M/P Diff. Spread 10 48,000 63,600 79,200 17.0% 65% 9 41,700 54,300 66,800 15.0% 60% 8 37,100 47,300 57,500 12.0% 55% 7 33,700 42,200 50,600 10.0% 50% 6 31,400 38,400 45,500 10.0% 45% 5 29,200 35,000 40,900 7.0% 40% 4 27,800 32,700 37,500 7.0% 35% 3 26,700 30,700 34,700 6.0% 30% 2 25,700 28,900 32,100 5.0% 25% 1 25,000 27,500 30,000 – 20% The graph above is not an actual pay structure. It is used for illustrative purposes only. The midpoint-to-midpoint differentials have been rounded. T1 MODULE 2 45  Base Pay Structure Most Common Base Pay Adjustments Merit increase Cost-of-living adjustment (COLA) Equity adjustments General increase Skill-based Lump-sum payment 2.46 © WorldatWork Types of Pay Adjustments Beyond the initial pay rate offered to a new employee, pay increases may be granted for a variety of reasons. Merit increase– Organizations may provide employees an annual increase in the form of a merit increase tied to individual performance and prevailing merit budget practices. Increases can be stated as an overall pool of money by department – such as 4% of current salary budget to be distributed based on individual performance – or there may be specific guidelines by performance level. Cost-of-living adjustments (COLAs) – usually made to keep up with the rate of inflation. They may be treated as a separate payment, in addition to the regular base pay. Equity adjustments - reflect internal compression issues (for example, between supervisor and subordinate, or between peers with dissimilar lengths of service or performance levels). General increases – often given to all or a significant percentage of employees when an organization finds its compensation program is behind competitive market rates. A set monetary amount or a percentage increase may be given. Skill-based or pay-for-knowledge approach – Individuals are paid for the skills they possess rather than their job responsibilities. Pay increases are given based upon increased knowledge, skill or ability. The employee may or may not use the skill. Lump-sum payment – often are provided in place of an annual increase to the base salary as a means of controlling annual fixed-cost increases. For example, a lump-sum payment may be made to an employee at the top of his/her salary grade maximum to keep the salary from going over the maximum. T1 MODULE 2 46 Base Pay Structure Discussion Pay Adjustments What are the most common pay adjustments your organization uses? 2.47 © WorldatWork Discussion – Pay Adjustments What pay adjustments does your organization use? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ T1 MODULE 2 47  Premium Pay Shift differential Weekend or holiday differential On-Call Pay Hazard Pay Expatriate differential Geographic differential Language differential Skill-Based Pay 2.48 © WorldatWork Differential Pay In addition to base pay, some employers pay differentials. Shift differential – paid to an individual to accommodate specific working conditions. It is most often called a shift differential when the individual is working hours other than the traditional 8 a.m. to 5 p.m. Weekend or holiday differential – paid in addition to the normal hourly rate to pay for working a holiday or weekend. It may take the form of an additional hourly rate or a flat monetary amount. On-Call Pay – paid for being available to work upon notice Hazard Pay – pay for working in hazardous conditions Expatriate differential – paid for the difference in costs between an individual’s home country and the assignment location (e.g., housing, goods and services, hazardous duty allowance) Geographic differential – pay differences established for the same job based on variations in costs of living or costs of labor among two or more geographical areas Language differential – paid to an individual fluent in more than one language who uses these skills in the work setting to meet organizational needs Skill-Based Pay – pay to an individual for possessing a particular skill T1 MODULE 2 48  Variable Pay Variable pay (or pay at risk) rewards for performance and is not part of base pay Individual, team, or organization performance Typically paid monthly, quarterly or annually Not guaranteed and must be re-earned each period 2.49 © WorldatWork Variable Pay The popularity and utilization of variable pay is not uniform throughout the world. The concept is popular in North America and has been adopted in some countries. In certain countries and regions (e.g., China, Central Europe and Eastern Europe), the concept of variable pay is not fully accepted. Variable pay rewards for accomplishments and results Organizational, group or individual results – aligns and focuses organizations, business units, teams and individuals on the accomplishment of key goals and objectives, assesses their performance, and rewards those who accomplish them Typically paid monthly, quarterly or annually– depends on common market practice, the availability of performance measures, and the goals of the plan. Not guaranteed – Variable pay is popular, in part, due to its ability to reward employees for performance without becoming a permanent part of their base pay. It can be increased, decreased or eliminated based on the performance of the organization and its ability to pay. Variable pay is Performance-based compensation – serves as a pay differentiator between those who achieve results and those who do not. Variable pay has become more popular, in part, due to its ability to reward employees for performance without becoming a permanent part of their base pay. It can be increased, decreased or eliminated based on the performance of the organization and its ability to pay. T1 MODULE 2 49  Variable Pay Most Common Types of Short-Term Variable Pay Plans Bonuses Incentives Commissions 2.50 © WorldatWork Most Common Types of Short-Term Variable Pay Plans Short-term incentive (STI) plans consist of plans for which desired results will be achieved in one year or less. There are several primary categories of short-term variable pay: bonuses, incentives, commissions. Within each of these categories there are specific types of variable pay plans. T1 MODULE 2 50 Variable Pay Commission Plans Percentage of sales Large portion of total pay Sales compensation 2.51 © WorldatWork Commission Plans Commissions are a type of short-term incentive plan specifically for sales employees. Commissions are cash payments, based on a predetermined performance and reward schedule that typically make up the larger portion of an individual’s total compensation. They are typically based on sales or profit margin on those sales. Commissions are typically paid as a percentage of sales Employees on commission typically receive a large portion of their total pay in the form of commissions Commissions are typically considered part of sales compensation, which is a specialized area of compensation design Compensation programs must match the mix of compensation to the skill set required of the job. The skill set required usually falls into one of three categories: Customer identification – analyze market, contact prospects, qualify leads Customer service – expedite orders, handle service problems, coordinate service efforts Customer persuasion (rain maker) – These employees select accounts to call on, identify buyers, make presentations, overcome objections and make sales. The more persuasion required, the higher the targeted at-risk percentage T1 MODULE 2 51  Variable Pay Bonus Plans More discretionary than incentives Typically not based on specific metrics or formulas May be individual, team, or organization performance-based 2.52 © WorldatWork Bonuses are less formula-driven and more discretionary than incentive plans. A bonus award might, for example, be based on an employee’s overall performance rating or other type of holistic measure. A bonus might be discretionary based on total company performance or management judgement. T1 MODULE 2 52 Variable Pay Other Common Types of Bonus Plans Hiring Referral Retention 2.53 © WorldatWork Bonus Plans Bonus plans typically refer to rewards given for the completion of a specific task or objective. Hiring (sign-on) bonus Payment to a prospective employee to induce acceptance of an employment offer It also can be used to buy out any compensation the employee will be walking away from in order to make a change in employment. Referral bonus Payment for recommending an applicant who is subsequently hired. Amounts are often based on the level of the person to be hired. Some plans will pay a portion upon hire and a portion at some milestone, such as completing training, passing a probation period or at a set period of time (e.g., 6 months or 12 months). Retention (stay) bonus Payment to certain critical employees in exchange for agreement to continue employment until a specified date or for a specified period of time Often used in mergers, acquisitions, bankruptcies, closing/ceasing operations The objective is to provide continuity when there is uncertainty. May be awarded to provide additional compensation to key or high performing employees T1 MODULE 2 53  Variable Pay Incentive Plans Short Term Incentives (STI) Criteria determined in advance Performance measures Weighting Payouts Monetary or non-monetary Self-funded or budgeted 2.54 © WorldatWork Incentive Plans Elements of an Incentive Plan Criteria determined in advance – The criteria and objectives for performance and the reward schedule are determined in advance and communicated to participants. Incentives must be re-earned each year or performance period. Performance measures – Typically based on specific performance measures Weighting – Performance measures can be weighted between individual, team, and total organizational performance Payouts – Amount of payment can vary with level of performance Monetary or non-monetary – Rewards are typically monetary (cash or equity) but may be non-monetary (merchandise, travel, etc.). Self-funded or budgeted – The plan is self-funded (generates its own savings) or budgeted. T1 MODULE 2 54 Variable Pay Most Common Long-Term Incentive (LTI) Plans Incentives Long-Term Equity-based Cash-based 2.55 © WorldatWork Long-Term Incentive (LTI) Plans Long-term incentive (LTI) plans include those for which desired results will be achieved in more than one year. The period of measurement is most often from three to five years. Types of LTI plans include: Equity-based Company stock is used to create an equity interest in the company and foster identification with shareholder interests. The value of the award is based on the performance of the organization’s stock. Actual awards may be in the form of stock or cash. Cash-based Long-term incentive plans in which the award is based in cash and not based on stock or equity. These may be used in addition to stock-based plans or in organizations that do not have stock. T1 MODULE 2 55  Variable Pay Equity Time period Types Stock/Share Options Stock/Share Grants Restricted Stock/ Restricted Stock Units Performance Shares/Performance Cash 2.56 © WorldatWork Equity Equity compensation programs typically are used as long-term incentives utilizing stock/ share or a stock/share equivalent for payments. Equity may be used to foster employee ownership in the organization. Time period – Long-term incentives are paid out based on performance extending past a 12-month period. Types – Equity incentives may include the following: Stock/share options – the right to purchase company stock/shares at a specified price over a specified time period after time requirements of continued employment are met Stock/share grants – stock/shares provided to employees at no cost to them Restricted stock/shares or units – stock/shares awarded to employees with prohibitions on sale or transfer until restrictions lapse Performance shares/Performance Cash – Units having a monetary value are awarded to employees based on the attainment of certain internal or external performance measures. T1 MODULE 2 56 Variable Pay Discussion Compensation What is working well with your compensation programs and what could be improved? 2.57 © WorldatWork Discussion – Compensation What is working well with your compensation programs and what could be improved? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ T1 MODULE 2 57  Can You? Identify and define the two primary elements of compensation. Discuss factors influencing compensation including pay-related laws. Define and describe the steps involved in base pay structure design. Discuss base pay structures including definition, objectives and components. Discuss base pay including types of pay adjustments and differential pay as well as when and why they typically are implemented. Identify and define the types of variable pay as well as when and why they typically are implemented. T1 MODULE 2 58 Module Quiz 1. Which of the following best describes the two primary elements of compensation? A. Profit sharing and incentive pay B. Financial and nonfinancial pay C. Fixed and variable pay 2. To ensure compliance, what is the safest course on which to base pay decisions? A. Manager recommendations B. Amount of overtime employees are willing to work C. The life cycle of the organization D. Job-related factors 3. Which job evaluation method involves collecting competitors’ data to identify the prevailing rate for a job? A. Market pricing B. Point factor C. Job component D. Ranking 4. Which statement is most accurate regarding pay grades? A. Pay grades rarely overlap. B. Pay grades should not allow for career progression. C. Pay grades distinguish between skill or responsibility. T1 MODULE 2 59  Module Quiz 5. Payment that is typically based on an individual employee’s rate of production is referred to as which type of base pay? A. Salary B. Piece rate C. Hourly rate D. Shift differential 6. Which of the following is an example of variable pay? A. Salary B. Commissions C. Competency-based pay D. Pay for performance T1 MODULE 2 60  MODULE 3 Benefits 61  Introduction Where as compensation creates a standard of living for individuals, employee benefits maintain and protect that standard. Employee benefits represent a considerable portion of the total rewards package and consequently, a significant expense to the organization. The importance of the benefits function is highlighted in its role of attracting and retaining employees and fulfilling employee needs. Regardless of the country, benefits supplement compensation by providing employees with a level of security related specifically to health and welfare, retirement and time off. While employee needs may be similar around the world, the degree to which those needs are met through other sources varies by country. Governmental programs and country culture contribute to a variance in the demand for certain benefits. Many of the differences in benefits practices relate to the extent of governments’ involvement in providing retirement and medical security to its citizens. In some countries, the influence of government is pronounced (e.g., Italy, Kuwait), with the government taking an active role in providing these services. In other countries, individuals and their employers have the primary responsibility (e.g., Chile, Malaysia). Consequently, the level of benefits provided by employers often is directly related to the level provided by or mandated by the government. Additionally, the influence of government, labor/trade unions and other factors tend to either augment or hinder the process of providing employee benefits. Objectives By the conclusion of this module, you will be able to accomplish the following: 1. Identify and define the two primary elements of benefits programs. 2. Identify and describe specific factors that influence benefits programs. 3. Identify and explain the various types of income protection benefits including health care, welfare and retirement. 4. Identify and explain the various types of pay for time not worked programs. T1 MODULE 3 62  Benefits Programs aimed to provide holistic well-being and security for the workforce and their families. These health, income protection, financial preparedness, retirement and time off programs provide security for employees and their families. 3.63 © WorldatWork Benefits Benefits are a core element of the total rewards model. Over time, employee benefits have evolved from basic fringe benefits of insurance coverage to a wide range of benefits designed to strike a balance between an employee’s personal and professional life. Benefits – Programs focused on health and welfare, income protection, financial preparedness, retirement and time off including leaves of absence, aimed to provide holistic well-being and security for the workforce and their families. Note: “Revenue” and “sales” are terms that are used interchangeably in this course. T1 MODULE 3 63  Benefits Elements of Benefits Income protection programs Mandatory Voluntary Pay for time not worked programs At work Not at work 3.64 © WorldatWork Elements of Benefits Benefits programs may be categorized into the following two elements: Income protection programs – designed to protect the standard of living of the employee and his/ her family as well as protect from catastrophic losses Mandatory – in some countries it is required by law to cover employees for: – Unemployment – Medical – Retirement Voluntary, or at the discretion of the employer – Many governments mandate benefits. However, many may be voluntary and offered at the discretion of the employer. Even in countries where some benefits are mandated, organizations may enhance such offerings in order to be more competitive and attract employees. Benefits that may be voluntary or discretionary include the following: Wellness Mental/behavioral health Life insurance Pay for time not worked programs – designed to protect the employee’s income during periods when the employee is not working At work – for example, training, breaks Not at work – for example, holidays, vacation T1 MODULE 3 64  Factors Influencing Benefits Competitive practices Employee demands Regulatory and taxation Corporate philosophy Costs and perceived value Changing workforce demographics 3.65 © WorldatWork Factors Influencing Benefits A variety of factors are influencing growth and change of employee benefits: Competitive practices – All of the five total rewards elements are influenced by competitive practices and may be geographically or employer-based. Competitive practices may result in richer benefits programs in some regions. They may also cause employers to re-evaluate the level of benefits in other regions if the employer’s package is significantly more generous than that of its competitors. Employee demands – Employees often request new or different benefits. Unions sometimes represent workers in negotiating with companies for benefits. Regulatory/legal environment – In many countries, the government is the major factor influencing growth and change of employee benefits. It is also the main provider of employee benefit programs. In other countries, the government mandates or encourages employers to provide certain programs. Taxation Benefits taxation affects: – Benefits levels through the imposition of benefits limits – The source of benefits (e.g., directly from company or through a pension fund) – The employee/company cost-sharing basis Corporate philosophy/business objectives – Influences outside the organization must be reconciled with the company’s philosophy and business objectives. T1 MODULE 3 65  Factors Influencing Benefits Factors Influencing Benefits (continued) Costs – Rising employee benefits costs are a substantial issue in many countries. Some organizations have tried to control their expenses by passing on more costs to employees through cost sharing and managing eligibility. Perceived value – Employers sometimes reconsider offering benefits that are not perceived by the workforce to be of value. Demographic changes – As the needs of a workforce change, employee benefits also need to change. The following are examples of several economic and demographic changes influencing international benefits structures today: The growth of multinational free trade areas – European Union – North American Free Trade Agreement (NAFTA) – Mercosur (Brazil, Argentina, Uruguay and Latin America free trade area) – Association of South East Asian Nations (ASEAN) Opening and globalization of economies Major additions to global skilled workforce Aging pop