Compensation and Benefits PDF

WEBC05 04/03/2017 10:14:35 Page 245 A Guide to The Human Resource Body of KnowledgeTM (HRBoKTM), First Edition. Sandra M. Reed.  2017 by Human Resources Certiﬁcation Institute, Inc. Published 2017 by John Wiley & Sons, Inc. 5 Compensation and Beneﬁts CASE STUDY: ORGANIZATIONAL JUSTICE The Case for Organizational Justice Contributed by Katrina P. Merlini, PhD Assistant Professor, Florida Institute of Technology Learning Objectives 1. Describe the concept of organizational justice. 2. Identify beneﬁts and consequences of organizational justice in the workplace. 3. Based on the information presented in the case studies, recognize how employee organi zational justice perceptions may be impacted. 4. Describe strategies to increase perceptions of organizational justice in the performance management context of each case study. Brief Organizational Justice Overview Organizational justice refers to individuals’ perceptions of fairness in the workplace (Cropan zano and Discorfano 2007). Organizational justice is a widely researched construct that has several implications for the workplace, from employee performance (e.g., Colquitt et al. 2001) to the prevalence of retaliatory behaviors (e.g., Skarlicki and Folger 1997). Thus, it is an important construct to examine in the human resource domain. (continued ) 245 WEBC05 04/03/2017 246 10:14:35 Page 246 A Guide to the Human Resource Body of KnowledgeTM (continued ) Organizational justice perceptions consist of three primary dimensions, distributive, procedural, and interactional justice, each associated with important organizational outcomes (Bies and Moag 1986; Colquitt et al. 2001). Distributive justice refers to the appraisal of the fairness of outcomes, such as pay, given in an organization (Colquitt and Greenburg 2003). These distributive fairness appraisals are based on subjective perceptions of equality, equity, and need (Colquitt 2001). Distributive justice perceptions of economic outcome distributions in particular (such as pay) are thought to be fostered when organizations base decisions for distribution on varying levels of employee performance or contributions (Cropanzano, Bowen, and Gilliland 2007). Procedural justice refers to the perceived fairness of processes that result in outcome decisions and allocations (Thibaut and Walker 1975). This dimension of organizational justice can be achieved through adhering to fair and ethical process criteria and by allowing employees to have an inﬂuence in decision making processes and/or a voice during the decision making process. Finally, interactional justice focuses on the treatment received when processes are implemented, and includes interpersonal aspects of respect and propriety as well as informational aspects of truthfulness and justiﬁcations (Bies and Moag 1986). More speciﬁcally, interactional justice involves the human side of organizational processes, includ ing the treatment individuals receive when procedures are implemented (Cohen-Charash and Spector 2001; Colquitt et al. 2001). Interactional justice may be fostered through treating people with respect and through thorough and timely explanations of reasons for decisions (Colquitt 2001). Studies have shown that examining justice perceptions in the workplace is valuable due to their effects on important job attitudes and behaviors. For instance, organizational justice perceptions have been found to relate to several important outcomes, such as trust in decision makers, outcome satisfaction (e.g., satisfaction with pay), organizational commitment, helping behaviors, and better performance (Colquitt et al. 2001). Additionally, low perceptions of organizational justice have been associated with various negative consequences, such as retaliatory behaviors (e.g., Skarlicki and Folger 1997) and withdrawal behaviors (e.g., turnover, absenteeism; Colquitt et al. 2001). Although all aspects of organizational justice are important to maintain, perceptions of justice are expected to interact in a way where the negative impact of injustice can be mitigated (at least partially) as long as at least one form of justice is perceived (Cropanzano, Bowen, and Gilliland 2007). Ultimately, organizational justice is an important topic area for human resources as HR professionals can take an active role in inﬂuencing employee perceptions of justice through their involvement in fair employment practices, such as wage and promotion distributions, and through guiding and training supervisors on how to communicate and discuss these practices with employees (Folger and Cropanzano 1998). The following case studies highlight events that impact justice perceptions in performance management contexts. Case Study 1 Company A A retail company in the Northeastern portion of the United States recently conducted its annual performance reviews and accompanying raises. This year, employees all received a 2 percent raise. Each employee was given a notiﬁcation letter of the percent increase in pay, which stated the following: WEBC05 04/03/2017 10:14:36 Page 247 Compensation and Beneﬁts 247 Dear [Employee Name]: This letter notiﬁes you of an increase in wage in the amount of 2 percent of your base pay. The effective date of this increase is October 1, 2016, and the increase in pay will appear in the pay received on October 10, 2016. We hope this increase will act as an incentive for your continued performance put forth for achieving business goals and future objectives. The day after the last performance review meeting was held, a high-performing employee reached out to her supervisor to inquire about her raise. She expressed to her supervisor that she had heard that other noticeably lower-performing employees received the same amount increase as she did. In reply, her supervisor simply stated, “That’s just the way it is this year” and “We didn’t want to make any waves.” Company B A small Southeastern distribution center recently conducted its annual performance reviews. Employee raises ranged from 0.5 percent to 3 percent. During the annual performance reviews, Michelle, the distribution center manager, went over performance appraisals and accompany ing performance and developmental goals with each employee. At this time, Michelle also distributed raises, which were directly tied to employee performance ratings. At the end of each performance review, Michelle asked the employee if the person had any questions or concerns. During this time, one employee, Allison, voiced her frustrations with her raise amount. She expressed that she was hoping for a higher raise than she had received the previous year because of her increase in responsibilities and her achievement of various performance goals. After listening to Allison, Michelle stated that she completely understood Allison’s concerns and reiterated how valuable Allison was to the company. Michelle explained how Allison’s raise was a direct result of speciﬁc performance aspects, which were also identiﬁed in her performance appraisal. Michelle then gave Allison speciﬁc strategies to help her improve her performance ratings, and thus her raise, for next year. Case Study Questions 1. Compare and contrast the organizational justice elements of Companies A and B. a. What dimensions of organizational justice were present or deﬁcient in each company? b. Describe strategies to increase perceptions of organizational justice in the performance review process. 2. Describe potential beneﬁts and/or consequences that these perceptions of organizational justice could have in each company. Instructor Answer Guide 1. Companies A and B differ on the distributive justice dimension of organizational justice. Although Company A has an equal distribution of raises (2 percent), this outcome is not equitable. In other words, the employee raises and quantitative performance appraisal results do not correspond to their differences in contribution to the company. Therefore, Company A’s employee perceptions of distributive justice are likely to be low for those who feel as if they contributed more to the company than their coworkers who received (continued ) WEBC05 04/03/2017 248 10:14:36 Page 248 A Guide to the Human Resource Body of Knowledge (continued ) the same raise amount. Alternatively, Company B’s distributive justice perceptions may be more likely to be high, as its raises, although different, are equitable in that employees with greater company contributions received higher outcomes than employees with smaller company contributions (based on the information that they were tied to the performance appraisal results). Although distributive justice perceptions are often subjective in nature (e.g., what employees think is equitable may depend on the social comparisons they make), each company can foster these perceptions by basing distributions of pay and raise amounts on varying levels of employee contributions. Companies A and B differ on the procedural justice dimension of organizational justice. Company A lacks a clear performance management process for determining pay raises, whereas Company B bases raise amounts on the results of annual performance appraisals. Thus, there is a clear process in place for determining employee raises in Company B, which should result in higher perceptions of procedural justice than in Company A. Perceptions of procedural justice in both companies may be increased if employees are able to have a say in or voice their opinion on the criteria used to determine raise distributions. This may be achieved through an open discussion of performance appraisal criteria at the beginning of each performance review cycle where employees are allowed to express any concerns about the criteria, and by allowing employees to have input in establishing the criteria and/or jointly setting performance goals. Companies A and B differ on the interactional justice dimension of organizational justice. Managers at Company A did not provide clear justiﬁcations or information regarding how raises were determined. Alternatively, the manager at Company B displayed inter personal consideration by listening to employee concerns and showing appreciation for the employee. Further, the manager provided thorough explanations for raise-related deci sions. Ultimately, the respectful interpersonal treatment and clear information presented in Company B should result in higher perceptions of interactional justice than in Company A. Perceptions of interactional justice may be fostered in these settings by respectful and empathetic treatment toward all employees and through timely and adequate explanations of how raise amounts are determined and linked to performance appraisal ratings. 2. Various outcomes may be listed. For example, Company A may have a greater likelihood of outcomes such as increases in lateness, absenteeism, and turnover, and lower satisfaction with pay. Company B may be more likely to have greater employee trust in the company, greater satisfaction with pay, higher employee commitment, and increases in organizational performance and helping behaviors. Case Study 2 Applied Science Tech (AST) is the research division of a training company in the American Northwest. Among other employees, AST employs 12 research analysts, two project managers, and a director. The managers have a fairly hands-off approach when it comes to overseeing dayto-day work. Typically, employees work well together in strategizing and planning to accom plish business goals. However, in the past several months, performance has been declining and morale seems to be at an all-time low. The director of AST has asked an organizational climate consultant, Lisa, to investigate why these changes have occurred and to suggest strategies for improvement. Lisa begins her investigation by conducting one-on-one interviews with the research analysts. She interviews James, who is a relatively new research analyst and was recently told that he would be the lead on a new effort to develop a training program for workplace WEBC05 04/03/2017 10:14:36 Page 249 Compensation and Beneﬁts 249 diversity and inclusion (D&I) initiatives for organizational leaders. While James never wants to decline an opportunity, he is unsure why he was selected for this role. Although he is not the lead on any current project, he is a vital and active member on other efforts of the company, which gives him a fairly heavy workload. Taking on this opportunity means that he will have to take a less active role in the other efforts, which may cause their progress to suffer. Additionally, he knows that his coworker, Christa, has expertise in D&I and would potentially be a better match for leading this initiative. When speaking to the other research analysts, Lisa learns that they don’t know how management makes decisions but assume that they’re made arbitrarily. One analyst expressed that he guesses management often distributes opportunities based on who they think is due for a lead role rather than considering current individual workloads and expertise. All of the analysts express their ongoing frustrations with this issue. One coworker divulged that she lacks motivation to perform to her highest potential because it ultimately does not result in any recognition in terms of additional opportunities. Lisa inquired about whether anyone has expressed this to the managers. The analysts state that they have tried but their managers fail to offer clear explanations and often sidestep the issue. Case Study Questions 1. Based on your review of Case Study 2, identify the dimensions of organizational justice that are deﬁcient at AST. Explain your rationale. 2. What should Lisa tell the director of AST for strategies to increase perceptions of organiza tional justice of the research analysts? Instructor Answer Guide 1. Although each analyst seems to be given opportunities to lead a project, the process for deciding who gets which opportunity is very unclear. The opportunities don’t seem to be based on each analyst’s expertise or contributions; thus, perceptions of distributive justice may be low. Not having clear processes in place (procedural justice) or explanations for how outcomes are determined (interactional justice) has resulted in the analysts drawing their own conclusions about managerial processes, leading to feelings of frustration and a lack of motivation. 2. Lisa could advise the director of AST to ensure that management takes into account each analyst’s area of expertise, current workload, and developmental goals when distributing opportunities to lead projects. These practices should help each analyst perceive an equitable distribution of outcomes. To increase perceptions of procedural justice, management should inform all analysts that decisions are based on these factors, as well as any other criteria management ﬁnds important (such as performance), and allow analysts opportunities to provide input on the criteria. Additionally, for analysts to feel heard and respected (aspects of procedural and interactional justice), managers should be coached on how to actively listen to the analysts when they bring up concerns, and acknowledge and address concerns as appropriate. Further, upon giving analysts oppor tunities, the rationale for why each opportunity was given should be explained. All interactions between management and analysts should be conducted in a respectful manner. (continued ) WEBC05 04/03/2017 10:14:36 250 Page 250 A Guide to the Human Resource Body of Knowledge (continued ) References Bies, R. J., and J. F. Moag. 1986. “Interactional Justice: Communication Criteria of Fairness.” In R. J. Lewicki, B. H. Sheppard, and M. H. Bazerman (Eds.), Research on Negotiations in Organizations, Vol. 1, 43–55. Greenwich, CT: JAI Press. Cohen-Charash, Y., and P. E. Spector. 2001. “The Role of Justice in Organizations: A MetaAnalysis.” Organizational Behavior and Human Decision Processes 86(2): 278–321. Colquitt, J. A. 2001. “On the Dimensionality of Organizational Justice: A Construct Validation of a Measure.” Journal of Applied Psychology 86:386–400. Colquitt, J. A., D. E. Conlon, M. J. Wesson, C. O. L. H. Porter, and K. Y. Ng. 2001. “Justice at the Millennium: A Meta-Analytic Review of 25 Years of Organizational Justice Research.” Journal of Applied Psychology 3:425–445. Colquitt, J., J. Greenberg, and C. Zapata-Phelan. 2005. “What Is Organizational Justice? A Historical Overview.” In J. Greenberg and J. Colquitt (Eds.), Handbook of Organizational Justice, 3–56. Mahwah, NJ: Erlbaum. Cropanzano, R., D. E. Bowen, and S. W. Gilliland. 2007. “The Management of Organizational Justice.” Academy of Management Perspectives, 34–38. Cropanzano, R., and S. M. Discorfano. 2007. “Organizational Justice.” In S. G. Rogelberg (Ed.), Encyclopedia of Industrial and Organizational Psychology, Vol. 2, 570–574. Thousand Oaks, CA: Sage. Folger, R., and R. Cropanzano. 1998. Organizational Justice and Human Resource Manage ment. Beverly Hills, CA: Sage. Skarlicki, D. P., and R. Folger. 1997. “Retaliation in the Workplace: The Roles of Distributive, Procedural, and Interactional Justice.” Journal of Applied Psychology 82:434–443. Thibaut, J., and L. Walker. 1975. Procedural Justice: A Psychological Analysis. Hillsdale, NJ: Erlbaum. Introduction Raise your hand if you are paid what you are worth. If you didn’t move a muscle, you aren’t alone in your belief! Many employees tie their personal value directly to the amount of their paychecks, making this an important management function for the HR professionals of today. The functional area of compensation and beneﬁts (CAB) addresses the operational activities of paying employees and the more strategic themes of attracting and retaining key talent all while maintaining a competitive position in the marketplace. The CAB efforts led by human resource professionals include: Establishing and maintaining CAB programs for all employees Creating pay structures that maintain internal and external equity Designing compensation and beneﬁts programs that reward and engage the workforce Building and communicating legally compliant total rewards programs WEBC05 04/03/2017 10:14:36 Page 251 Compensation and Beneﬁts 251 Identifying global best practices in international compensation and beneﬁts programs and administration Strategic Compensation Similar to job analysis, an employer’s total reward system impacts all other areas of HR. Pay rates and beneﬁts offerings affect individual decisions to apply for open jobs. Performance-based and variable pay systems have a direct impact on employee productivity levels. Many American labor laws have compliance elements related to compensation and beneﬁts, and international compensation practices must be accounted for in a robust global total rewards program. The decisions around a company’s total compensation strategies are critical for HR performance across the board. This requires regular planning and program reﬁnement as the needs of the workforce—both internal and external—are continually identiﬁed. Total Rewards All the tools available for attracting, motivating, and keeping employees Financial and nonﬁnancial beneﬁts that the employee sees as valuable Performance-Based Pay Earnings based on merit or how well the employee meets goals Pay linked to how well the employee meets expectations; better performance results in more pay. Variable Pay Plan Compensation that is less predictable than standard base pay Proﬁt sharing, incentives, bonuses, or commissions that align compensation with performance Compensation Salary and beneﬁts Everything that an employee receives for working, including pay and nonmon etary beneﬁts (continued ) WEBC05 04/03/2017 10:14:36 252 Page 252 A Guide to the Human Resource Body of Knowledge (continued ) Total Compensation Complete pay package An employee’s complete pay package, including cash, beneﬁts, and services Compensation Philosophies There are several questions employers must ask before embarking on a process of pricing jobs, but the most important is to establish their compensation philosophy. For some, an entitlement philosophy in which employees are given pay increases to reward loyalty is preferred. Examples include automatic annual increases calculated as a percentage of overall pay, seniority-based pay, and cost-of-living adjustment (COLA). In other cases, a pay for performance system in which part of an employee’s monetary wages are at risk makes more sense. Examples include merit increases linked to performance targets and bonuses for goal achievement. The primary difference between these two philosophies is that employees expect pay increases in entitlement-oriented companies whereas employees know their pay is tied to outcomes in the other. Note that the examples all refer to how pay increases are calculated. When establishing compensation for new jobs, or during strategic planning, HR supports the job pricing process by conducting market surveys. A company with an entitle ment orientation will calculate pay using industry comparisons of wages only. In a company with a performance orientation, the company will cast a wider net to make broader industry comparisons and collect data related to variable pay plans, bonuses, and other types of incentive pay. Internationally, HR will address pay philosophies to create an appropriate blend of compensation and beneﬁts based on the practices of the countries where employees are based. The second question that is addressed during the philosophy discussions is “Will we lead, lag, or match the labor market?” Employers must deﬁne their strategic approach to paying for positions in their relevant labor markets. It is not unusual for some positions to be paid below the market rate, particularly those with an abundance of available workers. For other positions, there may be a need to pay above market rates to attract the highest-quality talent. The decision to lead, lag, or match markets is fundamentally about supply and demand and is tied directly to the workforce planning efforts covered in the Workforce Planning and Employment (WPE) chapter. The market data collected will serve as the baseline for wage and salary scales. The scales may then be used to account for individual differences in education, experience, or other job competencies or location variables. Figure 5.1 further illustrates this competitive strategy. WEBC05 04/03/2017 10:14:36 Page 253 Compensation and Beneﬁts 253 Figure 5.1 Quartile Compensation Strategies HR must also help companies avoid pay compression, which occurs when the pay levels of current employees do not increase at pace with the external market. When pay differences between incoming workers and incumbents become small, pay compression has occurred. HR tools to avoid this demotivating effect include conducting regular wage surveys and advocating for market-based pay increases while still balancing the need to contain overhead costs. See the feature for a special issue regarding pay compression. Cost-of-Living Adjustment (COLA) Pay change due to economic conditions An increase or decrease in pay based on changes in economic conditions in a geographic location or country Pay for Performance Salary based on merit or on meeting goals A payment strategy where management links an employee’s pay to desired results, behaviors, or goals (continued ) WEBC05 04/03/2017 10:14:36 254 Page 254 A Guide to the Human Resource Body of Knowledge (continued ) Merit Increase Pay raise for meeting performance goals An increase in wages for meeting or exceeding the performance goals of a job PAY COMPRESSION AND STATE MINIMUM WAGE INCREASES Many states are adopting higher minimum wage standards than called for by the Fair Labor Standards Act (FLSA). As these laws are passed and step increases occur each year, employers must also consider increases for their current workforce. For example, a California employer currently paying a customer service representative with 10 years’ incumbency $17 an hour will be forced to pay new staff a minimum wage of $15 in 2021. By then, the incumbent will have 15 years invested with only a $2 hourly differential. HR can help by building in performancebased opportunities for the incumbent to raise his or her total pay rate while still helping the employer balance the rising cost of labor. Pay Equity As highlighted in the introduction, many employees do not feel that they are paid what they are worth. It is up to HR to help employees understand that jobs are priced using a competency-based pay approach—pay based on job tasks, duties, and responsibilities (TDRs). A range may also account for knowledge and experi ence, but only as they relate to the needs of the position. However clear and objective a competency-based approach may be, there are still very legitimate fairness issues that must be addressed via an employer’s compensation strategy. The perceived fairness of the amount of employee effort when compared to the reward for said effort is at the heart of compensation justice issues. Procedural justice is the perceived fairness of the processes used to calculate pay rates and increases. Addressing procedural justice concerns of employees is why HR should share with workers the data used to price jobs as a means of achieving internal equity. Distributive justice is the perceived fairness of how rewards are distributed throughout the workforce. In an entitlement-oriented company, if all employees receive the same across-the-board increase at the end of the year, the higher performers will feel aggrieved that employees with attendance or attitude problems received the same pay treatment. External equity issues are just as important to consider, especially in labor markets that tightly compete for certain employee skill sets, such as nursing and technology. High turnover and low job satisfaction levels are just two examples of negative outcomes for employers that fail to price jobs comparable in the WEBC05 04/03/2017 10:14:36 Page 255 Compensation and Beneﬁts 255 relevant market. In addition to retaining key talent, an employer’s ability to attract qualiﬁed applicants is very often founded upon the employer’s total reward system. The degree of pay transparency behaviors of the employer is another area where HR lends expertise. Closed systems are those in which employees are discouraged from discussing their pay or beneﬁts. However, many states as well as court interpretations of the National Labor Relations Act make it unlawful for employers to prohibit employees from discussing pay information. This includes a prohibition of policies that identify disciplinary action for employees who share their pay rates, or requiring employees to sign a document in which they agree to not disclose pay information. See the feature for a special issue related to antitrust laws and recruitment practices in the tech industry. SILICON VALLEY “NO COLD CALL” AGREEMENTS Between 2010 and 2013, class action lawsuits were ﬁled against several prominent Silicon Valley tech companies by the Department of Justice (DOJ) and other private entities. Charges against high-proﬁle companies such as Apple, Google, Intel, and Pixar claimed that the companies’ “no cold call” agreements—agreements in which each ﬁrm agreed not to poach via telephone tech talent from competitors—amounted to collusion. The suit also described practices in which the companies agreed that “when offering a position to another company’s employee, neither company would counteroffer above the initial offer.” This in effect suppressed market wages, a clear violation of Section 1 of the Sherman Antitrust Act. According to the DOJ, “The complaint alleges that the companies’ actions reduced their ability to compete for high tech workers and interfered with the proper functioning of the price-setting mechanism that otherwise would have prevailed in competition for employees.” Most of the suits have since been settled. Competency-Based Pay Salary based on demonstrated skills and knowledge Pay based on the skills and knowledge that make an employee valuable to an organization Internal Equity Fairness in pay and beneﬁts for similar jobs Making sure that employees with jobs of similar value to the organization receive equal compensation WEBC05 04/03/2017 256 10:14:36 Page 256 A Guide to the Human Resource Body of Knowledge Budgeting for Compensation and Beneﬁts Compensation and beneﬁts (CAB) budgets are reviewed on an annual basis, often during the company’s strategic planning process or as part of the annual budget preparation activities. CAB budgets account for current salaries plus projected increases in wages and beneﬁts costs. Adjustments in accordance with external market conditions are also factored in. Top-down budgets are set by the executive team, and individual depart ments must take steps to meet the budget requirements. These steps may include hiring freezes, layoffs, or job task blending when a CAB budget is low or unchanged. Bottom-up approaches to budgeting build upon department forecasts for labor needs, and are a less reliable method as there are no cost control measures built into the CAB budgets. Federal, state, and city laws do have requirements for paying the prevailing wage—the obligation of employers to pay a wage above minimum where required. Prevailing wage laws most often apply to jobs with federal contracts or subcon tracts, whereas living wages are required in some cities with a higher cost of living. HR practitioners must know when these laws apply to their employers and incor porate them into annual budgets where possible. Prevailing Wage Usual wage paid to workers in an area The hourly wage, usual beneﬁts, and overtime that most workers receive in a certain location Internal Revenue Service Employment tax obligations exist on the part of both the employer and the employee. Social Security taxes, Medicare taxes, and state taxes such as disability are all types of employment-related taxes that have to be paid (either by the employer, by the employee, or shared). While these programs are discussed in more detail in Appendix A, they represent the inﬂuence the IRS has on employer pay systems. Any time employers plan to make changes to their pay systems, they must be sure to understand any tax or reporting requirements. In some cases, a private letter ruling may be requested from the IRS to ﬁnd out what the tax implication of any change may be. WEBC05 04/03/2017 10:14:36 Page 257 Compensation and Beneﬁts 257 Fiduciary Responsibilities HR has a ﬁduciary responsibility to comply with government reporting require ments, but also to hold itself to high standards of ethical compensation practices. HR could breach this obligation by creating programs that serve self-interests, and must address conﬂicting duties by making data-driven decisions whenever possi ble. HR managers must not proﬁt from the information they have access to, such as using salary survey information to position themselves for a higher pay rate. These types of activities erode trust and compromise the advisory nature of HR’s role in CAB management. Controlling Costs of CAB Programs The cost of payroll and beneﬁts is hands down one of the most expensive line items on a company’s proﬁt and loss statement. While high salaries may attract and retain qualiﬁed workers, they can diminish a company’s ability to compete with other businesses offering similar products for less. As with any employee program, HR is responsible to help employers balance employee needs for beneﬁts with the need for employers to control costs. Strategies such as the use of employee copayments, changing eligibility time lines, and the increase in the use of managed care programs all may help defray the increasing costs of many programs. Technology has greatly contributed to an employer’s cost containment tool kit. Using direct deposit for paycheck processing or autodelivering pay statements and beneﬁts summaries are two examples of how technology may streamline the costs associated with payroll and beneﬁts administration. The savings brought by these types of systems range from simple reduction of the amount of paper necessary to print various documents, all the way to meaningful reductions of hourly worker time to administer. Employee self-service technologies have grown in popularity. Using personal identiﬁcation numbers to give employees access to personnel documents related to pay and beneﬁts reduces the amount of time HR must invest in meeting the more simple of employee needs. Items such as changing the number of depen dents claimed on tax forms, home address changes, autoenrolling during open enrollment when no changes are necessary are just some examples of the types of services employees may conduct on their own behalf. A word of caution: The use of technology comes with its own price tag. From the initial investment of software, training costs for employees, setting up ﬁles for workers to access, and then maintaining said ﬁles can really add up. Bank fees, user subscriptions, and help desk support also come with their own fee structures. For this reason, HR WEBC05 04/03/2017 258 10:14:37 Page 258 A Guide to the Human Resource Body of Knowledge should be clear on the return on investment (ROI) of the initial costs and ongoing fees to balance out any potential savings. With the continuing uncertainty of state and federally mandated health insur ance, employers know one thing for sure—health insurance costs have continued to rise over the past several years. As a result, many employers have chosen to increase the amount of burden employees must bear for their health insurance deductibles and/or premiums. Other employers have shrunk the offerings of employer-spon sored health programs, or eliminated ancillary options such as dental or vision programs that are underutilized by employees. HR is responsible for driving employee health and wellness programs to improve the overall well-being of workers. Programs include rewarding employ ees for losing weight or stopping smoking. Companies may offer healthier options in the employer cafeteria or eliminate soda pop from the on-site vending machines. HR may also partner with its insurance broker or occupational health clinic to educate workers on healthy behaviors, offer annual ﬂu shots, or pay for early-detection/preventive procedures to create a healthier, more productive workplace. HR can help employers contain the cost of CAB by establishing pay ranges that are built from market data. A manager who is given discretion within a range can make hiring or salary increase decisions that are appropriately controlled. It also allows HR to properly forecast based on anticipated hiring needs. HR may also develop pay for performance or shared rewards programs in which employees are paid when the company achieves its goals. HR must also keep up with the changing landscape of beneﬁts administration. This includes monitoring the political, economic, and social forces shaping the beneﬁts of today. One relevant example from the past is the Social Security Act of 1935. Passed under President Roosevelt, this security beneﬁt program sought to address the economic pressures brought on by the Great Depression. It addressed social responsibility needs to older and disabled Americans. The program was met with political skepticism and obstruction from those who were against forced savings and those who did not want the government to tax businesses more than it already was doing. By understanding the political, economic, and social pressures of today, HR may not only respond to but also anticipate ways in which employers must build their programs. Political strategies to control costs include educating employees on the advantages of health savings accounts. Social cost containment strategies may include allowing leave-sharing programs, in which employees are allowed to donate personal paid time off to help a coworker in need. Economically, HR can direct employer resources toward beneﬁts that are most desired by employees (such as paying 100 percent of an employee health insurance premium) and offering nonsponsored options for the less used (such as having a retirement plan that the employer does not match). WEBC05 04/03/2017 10:14:37 Page 259 Compensation and Beneﬁts 259 Eligible Qualiﬁed To be qualiﬁed to participate in a program or apply for a job Premiums Payments or incentives Payments for insurance; also, payments employees receive for meeting goals by a certain time Communicating Total Rewards Compensation and beneﬁts programs can have a signiﬁcant effect on employee engagement and retention, but only if the employees know about the value of the programs and how to best take advantage of the offerings. Many employees do not understand the value of their total rewards. Lack of clarity regarding compensation programs also inhibits an employer’s ability to attract and retain talent. Employers that are conducting regular employee surveys are more likely to have the data about what employees expect from their compensation programs. This increases the likelihood that a company’s pay practices are hitting the right targets. Having one-on-one meetings with employees is a personalized way to help them understand their compensation and beneﬁts programs, and provides them with resources for questions they may have. Meeting one-on-one gives HR the opportu nity to connect the dots between compensation and performance, or give written FAQs about program eligibility time lines, health insurance, or leave beneﬁts. Never underestimate the value of training. Small groups are best when com municating about total rewards so speciﬁc questions can be answered where possible. Holding brown bag meetings, where experts are available during employee lunch breaks, is an informal way to make compensation programs more visible and increase the degree of transparency an employer has about pay practices. Technical training for self-service systems will also beneﬁt the portion of the workforce that is less computer savvy than peers. External resources such as the company’s insurance broker, ﬁnancial adviser, or tax planner is another way to engage employees with their total rewards, increasing the likelihood that they will understand and take advantage of program components. HR should take steps to communicate the company’s compensation philosophy so employees know what to expect regarding salary rates and other pay decisions. WEBC05 04/03/2017 260 10:14:37 Page 260 A Guide to the Human Resource Body of Knowledge Sharing market wage surveys with management and employees helps them see that the company is competitive. If a company’s base pay is not competitive, the employer may compile a total rewards statement that shows the employee the total value of the compensation program as opposed to only the base salary. This is a useful tool, especially when an employer offers generous health insurance beneﬁts, a 401(k) matching program, or above-average leave beneﬁts that help employees balance work and life responsibilities. Many employees are concerned about job security. While employers must avoid making lifetime statements about employment, they can communicate with the workers the company’s vision and plans for the future and create programs that clearly tie compensation factors to the achievement of goals and objectives. This allows employees to see how their performance and rewards connect directly to the company’s momentum, and helps ease any business security concerns that may be lingering from the global economic instabilities of the past several years. One-on-One Meetings Direct interaction between two people Person-to-person communication, such as a conversation between an HR man ager and an employee Designing Pay Systems Employers (translation, HR) must design a comprehensive system to reward employ ees for their hard work. Components of these systems most often include: Direct compensation Payments made to employees to include base salary. Direct pay includes exempt (employees who are exempt from overtime wage laws) and nonexempt (hourly paid) workers, and may be tied to minimum wage laws and other regulated components of direct pay programs. Indirect compensation All other rewards not associated with direct pay, including incentives, inducements, time-off beneﬁts such as sick time or holiday pay, and pension plan payments. As discussed in the WPE chapter, a job family consists of a group of jobs with similar tasks, duties, and responsibilities. Pay structures are often built for each job family, and may be organized by hourly versus salaried, administrative, executive or professional, clerical, production, sales, or any other grouping that makes business sense. These job families make up the structure of an employer’s pay system from which decisions about pay can be made. WEBC05 04/03/2017 10:14:37 Page 261 Compensation and Beneﬁts 261 Base Salary A ﬁxed amount of money paid for work performed Compensation that does not include beneﬁts, bonuses, or commissions Exempt-Level Employee Employee whose position is not bound to hourly job rules A U.S. term that describes employees who work however many hours are necessary to perform the tasks of their position. They do not receive overtime pay, unlike hourly workers. Minimum Wage Least amount paid for work The lowest hourly, daily, or monthly salary that employers must legally pay to employees or workers Incentive Motivation, inducement A monetary or nonmonetary reward to motivate an employee (for example, a bonus or extra time off) Inducement Incentive A beneﬁt that management offers to employees as motivation for producing speciﬁc results Job Evaluation Pricing jobs is a complex process that requires dedication and skill. There are a few widely accepted methods HR may draw upon to complete the task with conﬁdence: Point method This method depends upon the identiﬁcation of compensable factors shared by jobs in a job family and assigns a weight (point) to each factor. WEBC05 04/03/2017 262 10:14:37 Page 262 A Guide to the Human Resource Body of Knowledge These points have an assigned value based on skill, responsibility, effort, working conditions, knowledge, degree of problem solving, levels of importance, or any other job-content-based factor. The purpose of the point system is to quantify individual elements of a job. Ranking The job ranking method of evaluation places jobs in order of importance from highest to lowest. The most important job has the highest salary. Classiﬁcation In this method of evaluation, job classes are created by grouping positions with common characteristics. The job classes are then graded, with a minimum and maximum pay range established for employee salaries. The job classiﬁcations are then referred to as grade 1 or grade 2, with shared educational or experiential characteristics deﬁned and valued. Factor comparison This model is a complicated hybrid of the ranking and point job evaluation methods. It involves ranking each job using compensable factors, and then assigning a monetary value to each factor to build a pay rate for each job. Note that each of these methods is used to price jobs according to their worth within the company: How valuable are the tasks, duties, and responsibili ties to an organization’s competitive ability? A market-based job evaluation uses external comparisons to properly price jobs within a company. Market pricing is successful when jobs for comparison are good matches with external job classiﬁcations. This goes beyond simple job titles, and must include geographic boundaries, proﬁt versus nonproﬁt status, and company competi tive strategies. Job evaluation helps employers make objective decisions about how to pay their people, and helps employees understand that pay rates are established based on job worth, not personal worth. Systems that don’t place enough emphasis on knowledge, skills, abilities, and other job characteristics may be less legally defensible. Market-based pricing in an organization that fails to keep pace with external conditions can unintentionally contribute to a lagging com pensation philosophy. Regardless of the selected approach, HR must carefully draw from both internal factors, and external market conditions to equitably price jobs at work without compromising an organization’s ability to remain competitive. Job-Content-Based Job Evaluation Method to decide an employee’s salary A way of estimating how much people should be paid based on what they do WEBC05 04/03/2017 10:14:37 Page 263 Compensation and Beneﬁts 263 Job Ranking A way to compare all jobs based on their value A job evaluation method that compares jobs to each other based on their importance to the organization Range The difference between the most and least The amount covered, or the amount of difference (for example, a salary range is the difference between the lowest and highest amount paid for a particular job) Market-Based Job Evaluation Comparison of current salaries for a speciﬁc job An evaluation that compares the salaries for particular jobs offered on the external job market Pay Ranges and Comparisons Salary ranges set the minimum, midpoint, and maximum base pay rates for a pay grade. Both internal equitability and external competitiveness are important, so HR must use the data collected during the job evaluation process plus external pay information to build each grade. HR does this by conducting or commissioning a market salary survey. Often, employers establish the wage band using the minimum rate for a position at 80 to 85 percent of the midpoint, and the maximum rate for the position between 115 percent and 120 percent. This allows for some ﬂexibility when hiring or promoting someone into a role with varying qualiﬁcations and capabilities. Internal and external data are also used to help HR identify pay equity issues. A comparison of internal pay rates to external market rates is done using a compa-ratio (comparison ratio) formula: dividing the pay rate by the midpoint, and then multiplying the number by 100 to get a percentage. For example, a job paying $75,000 per year with a salary midpoint of $95,000 has a compa-ratio of 79 percent. Similarly, an internal comparison can be made by auditing an employee’s range penetration—where an incumbent’s pay is when compared to the range. Someone with 100 percent penetration would be at the top of the range, whereas someone with 20 percent penetration would be 20 percent above the minimum WEBC05 04/03/2017 10:14:37 264 Page 264 A Guide to the Human Resource Body of Knowledge level for the job. This is calculated by: Pay Range minimum Range maximum Range minimum The result must be multiplied by 100 to calculate the percentage. Finally, HR will calculate the range spread, which is the difference between minimum and maximum salaries in a range. This is done by subtracting the range minimum from the range maximum, and then dividing it by the minimum. The spread may vary for different job classiﬁcations. For example, executive positions may have a range spread of 60 percent or more, whereas hourly workers may have a range of only 40 percent. Once these activities are complete for all jobs being compared, the positions may be mapped on a chart or by using a matrix structure to look for any pay equity issues, or to talk with employees about their room for salary growth. This information is frequently used to make decisions about pay adjustments, which are discussed in more detail next. Salary Range Wage band, pay scale, compensation rate The lowest and highest wages paid to employees who work in the same or similar jobs Salary Midpoint The center point of the middle range paid for a certain job The amount of money halfway between the highest and lowest amount paid for a particular job Market Salary Survey Research summary of fair wages Review of median pay for speciﬁc positions in the same labor market Wage Band Salary range, pay scale, compensation rate The lowest and highest wages paid to employees who work in the same or similar jobs WEBC05 04/03/2017 10:14:37 Page 265 Compensation and Beneﬁts 265 Compa-Ratio Math formula for comparing salaries A number comparing a person’s salary to other salaries for the same job; the comparison ratio is calculated by taking a person’s salary and comparing it to the midpoint of other salaries (if a person earns $45,000 per year in a job where the salary midpoint is $50,000 per year, the compa-ratio is $45,000/$50,000 = 90%). Range Penetration An employee’s pay compared to the total pay range An employee’s pay compared to the total pay range for the same job function Pay Adjustments There are several conditions under which employee pay adjustments may be necessary. As illustrated previously, internal and external equity issues may drive the need to make changes, often based on an organization’s decision to lead, lag, or match market rates. Once a pay range has been established, HR must identify where each person within the range is placed, and make salary recommendations where appropriate. In one method, green-circled employees are those whose pay rate is below the range minimum, whereas red-circled employees have pay rates above the range maximum. Frequent base pay increases may be necessary to bring green-circled employees into range; freezing a red-circled employee’s pay increases may be used until the range catches up to the incumbent’s pay. Rarely would HR recommend that a red-circled employee’s pay be reduced, but HR can advocate for small lump-sum increases or a bonus structure to continue to reward employee contributions without increasing base pay. Other pay adjustment needs are dependent upon company strategy. In a performance-oriented environment, HR may help craft policies to give pay raises when an employee completes training or obtains a degree. Piece rate programs may be used to reward individual output, provided they meet minimum wage standards. In an entitlement-oriented environment, seniority systems are often used to calculate pay increases. Cost-of-living adjustments (COLAs) are increases tied to an external economic indicator like the consumer price index (CPI). COLAs are calculated as a percentage of an employee’s base pay; for example, let’s assume that all employees will receive a 2 percent COLA increase. An employee with an annual salary of $45,000 will receive a $900 increase per year, whereas a $90,000 WEBC05 04/03/2017 10:14:37 266 Page 266 A Guide to the Human Resource Body of Knowledge employee would receive an $1,800 increase per year. COLAs’ main disadvantage is they fail to reward employees for individual performance. An advantage is that they help employers keep pay rates current over time. For a company trying to control expenses, lump-sum increases may be a better way to go, as they do not increase an employee’s base pay. This strategy slows the progression of pay range increases over time, and has an impact on other programs calculated on an employee’s base pay such as overtime and pension contributions. A lump-sum strategy may be used to pay out a COLA or any other type of pay increase. Another cost-saving strategy is to hire per diem workers in industries where work ﬂow is less predictable and thus it is difﬁcult for employers to plan (and compensate) a full-time staff. This of course can quickly become an expensive route if HR does not conduct a cost-beneﬁt analysis to ensure that the increased costs and reimburse ments for per diem workers do not offset the savings from a pay-as-you-go employment situation. As with any strategy affecting the absolute right of worker payment, HR must understand any relevant legal issues under the Fair Labor Standards Act or union contract obligations. Pay adjustments must also be accounted for in an employer’s payroll management system, which is covered next. Per diem translates into “day rate.” This term may apply for a type of worker, or as an employee allowance for company-paid travel expenses associated with meals and lodging. Raise Salary increase An increase in salary that an employee receives, often for good performance Piece Rate Payment determined by the amount produced A wage system in which the employee is paid for each unit of production at a ﬁxed rate Lump-Sum Compensation A single payment made at one time An extra amount of money paid at one time rather than on a regular basis (for example, an expatriate may receive a lump-sum payment to cover the extra WEBC05 04/03/2017 10:14:37 Page 267 Compensation and Beneﬁts 267 costs of the assignment related to housing, taxes, dependent education, and transportation) Overtime Time worked in addition to regular paid work hours Extra time worked beyond the normal hours of employment or the payment for extra time worked Per Diem Daily expenses or reimbursements for an employee The amount of money a person receives for working for one day, or the amount an organization allows an employee to spend on expenses each day (for example, meals and hotels on a business trip) Reimbursements Compensation paid for money already spent Payments made for money already spent (for example, a company pays an employee for the cost of travel or supplies after the employee has spent his or her own money) Allowance Amount of money Money for a speciﬁc purpose Managing Payroll The operational and administrative nature of payroll-related tasks has a signiﬁcant impact on an organization as a whole and HR as a department. Companies need HR to build and manage a payroll system with activities that include: Maintaining and storing accurate timekeeping records Integrating technology with other company software programs Complying with federal and state laws Completing tax collection and payments Processing pay adjustments Protecting employee conﬁdential information WEBC05 04/03/2017 268 10:14:37 Page 268 A Guide to the Human Resource Body of Knowledge Employees need HR to get their paychecks processed on time and accurately. Inefﬁcient or inadequate payroll systems will have a negative effect on all of the aforementioned activities, so this section takes a look at payroll best practices for program administration and management. Get the Right Hardware A computerized payroll system’s usefulness is signiﬁcantly dependent upon the selection of the right hardware. Depending on an employer’s need, the system may be as simple as inputting employee time into a packaged software program such as Quickbooks. Larger organizations may choose to have a networked or online system as part of a larger human resource information system (HRIS) or enterprise resource planning (ERP) system. Still others choose to partner with payroll or business process outsourcing groups to perform some or all of the pay-related tasks, requiring timekeeping system installation and reports management. With so many technological options for this important task, HR must help the company navigate the choices, lead the implementation efforts, and train affected employees in the system’s use. Know How to Complete a Paycheck Experienced HR professionals know that getting an employee paid on time and accurately is a function with many, many steps. Fundamental to the process is calculating gross earnings, which includes all regular wages from base pay, over time, cash incentives, paid time off, and shift differentials. Voluntary deductions may also be required to be processed on behalf of employees. These include payments for health insurance premiums, union dues, and contributions to retirement plans. Involuntary deductions, like garnishments, are court-ordered deductions from an employee’s pay. Employers must comply with the orders, and do not have the authority to alter them in any way. Tax calculations are fundamental to processing paychecks. From employee withholding to employer payroll taxes, calculating Social Security and Medicare taxes, calculating an employer’s match obligations—all require a working (and current) knowledge of the changing requirements of the Internal Revenue Service (IRS). The ﬁnance and tax components of payroll have created debate within the HR industry as to whether payroll is a true human resource function or a function of accounting. When questions such as these arise, HR must take steps to ﬁnd out the goals, needs, and skill sets of the workers to determine how to best integrate this critical function into operations. WEBC05 04/03/2017 10:14:37 Page 269 Compensation and Beneﬁts 269 The paycheck stub is also of interest to HR for compliance purposes. Federal laws such as the Fair Labor Standards Act do not currently require an employer to provide a paycheck stub to employees, whereas various state laws do. That being said, the FLSA and other laws do have strict regulations regarding payroll record keeping. Many of these are covered in the labor law appendix at the end of the book (Appendix A). Employee Beneﬁt Programs A total rewards beneﬁt program includes both direct compensation and indirect compensation in the form of employee beneﬁts. Framed as an advantage for working for an employer, these programs serve to attract qualiﬁed workers and keep employees from leaving. They also serve the more culturally sensitive goals to help employees live longer and have more balanced lives through health beneﬁts, leave beneﬁts, and other work/life balance programs. Strategically, beneﬁts are a means for employers to differentiate themselves from their competition. They serve employees as well in terms of tax advantages, as a dollar paid in beneﬁts is not taxed the same as a dollar offered in compensation. These are the objectives covered in the next section. Beneﬁt Programs Compensation in addition to wages Workers’ entitlements in addition to base salary (for example, health insurance, life insurance, disability pay, retirement pension, and so on) Beneﬁts Noncash compensation provided to employees Compensation that the employee receives in addition to a base salary (for example, health insurance, company housing, company meals, clothing allow ance, pension, and gym membership) Needs Assessments Many employee beneﬁts are voluntarily offered by employers, so it makes sense that they should understand what their people need if they hope to satisfy those WEBC05 04/03/2017 270 10:14:37 Page 270 A Guide to the Human Resource Body of Knowledge needs. Additionally, some beneﬁts are mandated by federal and state govern ments, which means HR must know what is required in order to achieve compliance. Other beneﬁts are negotiated via the collective bargaining process with labor unions or works councils. For these reasons, a beneﬁts needs assessment is often the ﬁrst step to designing employee beneﬁts programs. Beneﬁts benchmarking is the act of comparing current or possible beneﬁts with what other employers are offering in the relevant labor market. This data may be collected independently, or as part of a wage survey. Note that HR should help employers choose industry-speciﬁc or geographically oriented wage survey data in order to ensure that the data being compared are relevant to their needs. Asking employees what they need is another effective method to use when designing beneﬁts programs. Using employee surveys, HR may collect data about what is most valuable to the workforce, and seek to design a program that best represents those components. Managing employer risk is also a focus of conducting a needs assessment. This includes complying with both federal and state laws regarding minimum wage, overtime, and what time must be compensated, such as time to change into a uniform if required. Both benchmarking and employee surveys can help HR spot trends based on past use and future needs. Taking into consideration what the relevant labor market is offering will help HR craft programs that are competitive while incorporating what employees are asking for. It will also help employers comply with laws mandating certain types of beneﬁts. Beneﬁts Offerings As discussed earlier, an employer has many reasons for offering employer-paid beneﬁts, including attracting a qualiﬁed workforce, retaining key talent, matching host country CAB practices, and complying with labor laws and union contracts. Whether voluntary or mandatory, paid or unpaid, it is very likely that an employ er’s program has some sort of legal compliance component that HR must manage. For example, employers are not required by law to offer fringe beneﬁts such as 401(k) retirement plans to employees, but if they do, the plans must be compliant with the highly complex rules of the Employee Retirement Income Security Act (ERISA) and Securities and Exchange Commission. Regulations regarding who may be designated as beneﬁciaries and guidance for employers regarding blackout periods are just two examples of areas about which HR must have some understanding. Voluntary beneﬁts are those that employers may choose to offer to their people. Statutory beneﬁts are those mandated by laws. Types of beneﬁts include: WEBC05 04/03/2017 10:14:37 Page 271 Compensation and Beneﬁts 271 Social and Security These are the most common types of mandated beneﬁts. Retirement security such as Social Security program participation, health care beneﬁts such as Medicare programs and offerings under the Patient Protection and Affordable Care Act, and workers’ compensation insurance are examples of employee security beneﬁts. Financial While not mandated by any particular labor law, once an employer chooses to offer ﬁnancial beneﬁts they tend to be regulated. Examples include life insurance, credit unions, and ﬁnancial counseling. Personal and Family Family-style beneﬁts may be both voluntary and involuntary. Offering unpaid leave under the Family Medical Leave Act (FMLA) and the extension of eligibility to domestic partners are two examples of family laws required by laws. Voluntary programs such as employee assistance programs are offered to help employees who are struggling with personal challenges or challenges within their families. Time off Often highly valued by employees, time off beneﬁts serve to both comply with labor laws and enhance employee work/life balance. Employers are required to provide employees with protected time off to serve a military commitment or to vote, but may choose to offer additional time off because of the death of a loved one or to observe various holidays. Medical beneﬁts Health insurance is coveted to some degree by most employees at all stages of life and in all areas. Managed care program premiums are set by providers based on use, similar to the experience rating in workers’ compensation insurance. These include programs such as health maintenance organizations (HMOs) in which the focus is on preventive care and use of a gatekeeper to determine when individuals may need to see a specialist. Preferred provider organizations (PPOs) are a type of managed care plan in which a network of health care providers is contracted to provide services to member employees, with out-of network or premium pricing being paid by the patient. Note that multinational ﬁrms may have to offer specialized insurance for expatriates, particularly if home country insurance policies have territorial clauses. Employee Beneﬁts Compensation in addition to salary Payments or allowances that organizations give to their employees (for example, medical insurance, Social Security taxes, pension contributions, education reim bursement, and car or clothing allowances) (continued ) WEBC05 04/03/2017 10:14:37 272 Page 272 A Guide to the Human Resource Body of Knowledge (continued ) Employer-Paid Beneﬁts Something extra that employees receive in addition to salary Beneﬁts that an organization gives its employees in addition to salary (for example, medical insurance, payments to retirement funds, and allowances for cars or clothing) Voluntary Beneﬁts Programs offered to and paid by employees Extra beneﬁts or discounted services offered to employees with little extra cost to the employer (for example, additional life insurance, gym memberships, and concierge services) Mandatory Beneﬁts Laws that require certain beneﬁts to protect workers Laws that outline beneﬁts to provide economic security for employees and their dependents Fringe Beneﬁts Payments other than, or in addition to, salary Payments that the employee receives other than or in addition to a salary, such as for health insurance Beneﬁciary Receiver of beneﬁts A person who is eligible to gain beneﬁts under a will, insurance policy, retirement plan, or other contract Blackout Period Temporary denial of access A brief period in which employees cannot access or change things about their retirement or investment plans WEBC05 04/03/2017 10:14:37 Page 273 Compensation and Beneﬁts 273 Statutory Beneﬁt Employee beneﬁts that are required by law Employee beneﬁts mandated by federal or local laws, such as Social Security and unemployment insurance Health Care Beneﬁts Medical support plans provided to employees Company-sponsored medical plans that help employees pay for the cost of doctor visits, hospitalization, surgery, and so on Employee Assistance Program Services and counseling that employees receive to help them solve problems that could affect their work productivity Examples include counseling for drug or alcohol problems or family issues Leave Beneﬁts Employers are required to protect workers’ jobs when they take time off to vote, are called to jury duty, have a pregnancy-related disability, or are called back to active duty in the military. None of these are currently required to be paid, although states such as California have more strict requirements. In addition to leave rights granted by law, such as the Family Medical Leave Act (covered in Appendix A on legal issues), employers may offer voluntary beneﬁts to their workers needing to take time off for various reasons. Standard paid time off for sick time, vacations, holidays, and bereavement is still commonly offered by employers. Trends in time-off programs by companies such as Netﬂix and Salesforce have made recent headlines. In 2015, Netﬂix announced “unlimited time off” for new parents in the ﬁrst year after birth or adoption. Other programs such as those at Salesforce offer partial pay while on leave, gradual return to work schedules, sabbaticals, and time off to volunteer. These programs are increasing in popularity in order to retain critical talent and satisfy the work/life balance needs of a 24/7-connected workforce. WEBC05 04/03/2017 274 10:14:37 Page 274 A Guide to the Human Resource Body of Knowledge Retirement Beneﬁts Pension programs to help employees save for retirement are still a popular beneﬁt used by employers as part of a strategic total rewards plan. In a contributory plan, both employers and employees may make contributions to these voluntary pro grams. In noncontributory plans, only the employer pays into the retirement accounts. Employees do have vesting rights, in which they become owners of any employer contributions after a certain period of time has passed. Once employees are vested in their accounts, they have portability rights in which they can take their money with them if they change jobs. A deﬁned beneﬁt plan is a pension program that the employer funds where the employee receives a set payment amount upon retirement (lump sum or regular payments); the beneﬁt amount is deﬁned based on age and years of service. Many of these plans have been replaced by deﬁned contribution plans because of the complexity of appropriately funding deﬁned beneﬁt plans. Under a deﬁned contri bution pension plan, the employer makes an annual contribution to the employee’s pension account, usually calculated as a percentage of employee earnings. Employers may offer a deferred compensation plan to workers as well, helping them take advantage of U.S. tax laws that may be more beneﬁcial to them when their income is lower during retirement. Individual retirement accounts (IRAs) and 401(k) plans remain popular for employees, particularly if an employer chooses to match employee contributions to these tax-deferred retirement savings accounts. A Roth IRA differs from a 401(k) and other IRAs in that the employee is taxed in the contribution year as opposed to when the funds are withdrawn at retirement. With all pension programs, HR must reach out to subject matter experts to help an employer craft a legally compliant plan. Deﬁned Beneﬁt Plan A retirement plan with predetermined payments A retirement plan that tells participants exactly how much money (lump sum or regular payments) they will receive on a speciﬁc later date (usually the day they retire) Deferred Compensation Plan An employee pension program A pension program that allows an employee to contribute a portion of income over time to be paid as a lump sum at retirement when the employee’s income tax rate will probably be lower WEBC05 04/03/2017 10:14:37 Page 275 Compensation and Beneﬁts 275 Compensation and Beneﬁts Outsourcing Let’s face it—sometimes the best advice from HR to executive management is to outsource a complex or time-consuming practice. Payroll is one of the most commonly outsourced functions by companies, and for good reason. Cost savings by leveraging size, decreasing errors, and improving processing times are just a few of the advantages of outsourcing employee payroll. The decision to outsource payroll services still requires time, attention, and maintenance. The use of technol ogy to capture time data, combined with reporting and documentation require ments are important elements of a legally sound and compliant outsourced payroll function. Most employees depend on their paychecks to be delivered accurately and as promised. Many do not have the ability to wait for mistakes to be corrected, making payroll a signiﬁcant link in employee-employer relations and trust. It is important that HR selects a third-party payroll administrator with care, and offers regular oversight and audits to ensure vendors are delivering quality service to all stakeholders. The detailed notiﬁcation requirements and complexity of the Consolidated Omnibus Budget Reconciliation Act (COBRA) makes COBRA administration another popular CAB outsourcing function. Tracking notiﬁcation time lines, sending notices, reinstating eligible workers, and helping employees understand their rights are just a few of the headaches managed by expert COBRA administrators. Technical tools may also be provided by third-party vendors. Employee recognition providers will track employees’ anniversary dates and then offer a variety of rewards they may choose from on the company website. As with any other outsourcing activity, employers are not off the hook if an error is made. Care must be taken to ensure that all practices conducted on behalf of the employer are legally compliant and ethically sound, and balance the rights and responsibilities of both the employer and the employee. Failing to comply with COBRA regulations, for example, can cost employers upwards of $100 per day, or long-drawn-out and expensive lawsuits for improper administration. For these reasons, written contracts reviewed by corporate attorneys for any third-party administrator are recommended. Expatriate Compensation Expatriates are citizens of one country working on assignment in another country for their home country employer. Properly compensating expatriates is a function of an experienced HR professional, but generalists should have a basic understanding to offer support. WEBC05 04/03/2017 276 10:14:37 Page 276 A Guide to the Human Resource Body of Knowledge The traditional model for expatriate compensation plans is the balance-sheet approach, which attempts to equalize any cost differences between what an expatriate would be earning at home versus while on the international assignment. The goal of balance sheet approach is to keep the expatriate “whole” when abroad—the incumbent neither gains nor loses, but is able to maintain an equiv alent standard of living while on assignment. Under this model, employees continue to receive home country compensation and beneﬁts programs, and are given additional allowances for differences in cost of living, housing, and taxes, as well as other allowances such as annual home leave trips, children’s schooling costs, and relocation expenses. Some organizations follow a localization compensation strat egy where they will include expatriates in the local compensation program of the country where they are on assignment, often with additional pluses such as housing and tax assistance. In split pay practices, the employer agrees to pay the expatriate partly in the currency of the home country and partly in the currency of the host country. Deciding how to pay international assignees and at what rate can be difﬁcult, especially because pay and beneﬁt practices and scales vary so widely around the world. Accessing competitive wage data can be achieved through the U.S. Department of Labor, which publishes the International Labor Comparisons. HR may also purchase wage data for larger markets through companies, such as AON’s Total Compensation Center. The Hay Group is another credible source for information related to international compensation, including a bank of videos from which practitioners may begin to understand the complex nature of this HR function. International models to determine COLAs exist as well. A goods and services allowance may need to be built into an expat’s total compensation package to give the assignee time to adjust to the buying power of the currency and lack of familiarity regarding host country items. An allowance may be granted at the time an assignment begins, and subsequently adjusted using the Efﬁcient Purchaser Index (EPI) as the assignee acclimates to the new location. The EPI may also be factored into the overall compensation prior to assignment to avoid the perception of a decrease and to communicate clear expectations for both the multinational enterprise (MNE) and the employee. Balance-Sheet Approach A model for international compensation A way to set the salary and living allowances for employees on international assignments WEBC05 04/03/2017 10:14:37 Page 277 Compensation and Beneﬁts 277 Localization Compensation Strategy Expatriate salary based on the salary structure of the host country Salary for an international assignee that is the same as the salary that a local employee receives for a similar job Split Payroll A method of paying expatriates A method of paying expatriates that gives part of their salary in the currency of the home country and part in the currency of the host country Tax Issues There are special tax considerations for employees agreeing to be staffed as expatriates. While HR practitioners must be careful to never position themselves as tax experts, it is still necessary to understand a few of the basic concepts. At minimum, this knowledge may be used to select subject matter tax experts to advise on how to address expatriate tax issues. A tax equalization policy attempts to compensate for any variance on an employ ee’s global tax bill that would result in the expatriate paying more in taxes than if he or she had stayed in the home country. This addresses territorial rules, which require expatriates to follow the tax rules of the host country. Depending on the countries, a totalization agreement may be in place that limits the amount of social tax payments to the host country only, helping the expatriate avoid double social taxes. Tax Equalization Policy A policy ensuring that the expatriate assignment is tax-neutral A policy that makes sure that expatriates’ combined home and host taxes are no more than they would have paid if they remained in their home country. The expatriate’s company pays for any additional taxes. Tax Bill Amount of money owed for taxes A document that lists the tax money owed to a government or legal body (continued ) WEBC05 04/03/2017 10:14:37 278 Page 278 A Guide to the Human Resource Body of Knowledge (continued ) Territorial Rule A tax law A rule that employees must follow the tax laws of the country where they are working Totalization Agreement Arrangement to avoid double social taxes of expatriates An agreement between countries that says an expatriate needs to pay social taxes to only the country in which he or she is working Pay Premiums Other international compensation program elements revolve around the unique challenges of sending expats to other countries. A hardship premium is frequently paid to expatriates assigned to locations where living conditions are difﬁcult and challenging, creating hardships. A danger premium may be paid as additional compensation to employees who are assigned to highly risky global locations. The U.S. Department of State describes these locations as those with civil unrest, terrorism, or war conditions that threaten physical harm. Recruiting for expatriate talent, especially at a senior level, often requires creative compensation strategies. A foreign service premium may be added to a total rewards offer to make the assignment more attractive to key talent. Similarly, a lump-sum mobility premium may be used to encourage employees to accept out of-country positions. Hardship Premium Extra compensation for difﬁcult living conditions Extra payment or beneﬁts that an expatriate receives on assignment in a country where the living and working conditions are challenging Hardships Difﬁcult living or working conditions for expatriates Situations in a country that cause political or economic uncertainty that make it challenging for expatriates to live and work there. Often, expatriates receive extra hardship pay. WEBC05 04/03/2017 10:14:37 Page 279 Compensation and Beneﬁts 279 Danger Premium Additional pay for high-risk work Extra pay that employees receive for working in dangerous jobs or places (for example, environments that are hazardous or politically unstable) Foreign Service Premium Financial reward for moving to a foreign country Extra pay that an employee receives for accepting an international work assignment Mobility Premium Financial beneﬁt for expatriates Extra salary paid to expatriates to encourage them to move to a new country It is important to note that international compensation and beneﬁts laws and practices vary from country to country. For example, the prevalence of labor unions in Europe has a signiﬁcant impact on the pay practices of companies doing business there. Policies that integrate expatriates into local pay and beneﬁts programs must account for these variances. Executive Compensation Few employment issues have received more attention than the gap between executive and worker pay across all industries. In 2015, the median compensa tion for the 200 highest-paid executives at public companies was estimated at $19.3 million per year compared to average worker pay of less than $85,000. But are executives to blame? Many argue that it is the responsibility of the compensation committee and board of directors to act with moral absolutes, applying standards of reasonableness and fairness when building total reward packages for executives. Committees will have access to reliable data soon: beginning in 2017, the SEC will require that public companies disclose the ratio of executive pay to median worker pay, allowing for a glimpse into the pay practices of some of the world’s largest enterprises. Additionally, many local governments are considering plans that tax a business for executive compensation ratios that unreasonably exceed worker pay. In Portland, Oregon, publicly traded companies will have to pay an additional 10 percent in taxes if executives’ pay WEBC05 04/03/2017 280 10:14:37 Page 280 A Guide to the Human Resource Body of Knowledge is greater than 100 times that of the median pay of their workers, and an extra 25 percent for pay ratios greater than 250 times the median pay. These executive pay surcharges will be added to what a company owes for a business license tax, generating an additional $2 million to $3 million per year for the city’s general fund. Critics charge that these types of programs will cause companies to move out of areas to more business-friendly environments, causing loss of jobs. Proponents suggest that communities will beneﬁt, as the general funds are how police and ﬁreﬁghters and other critical services are funded. How to compensate C-suite executives (CEO, COO, CFO, etc.) is a very real activity for human resource departments around the world. In some cases, such as at Fossil, the CEO claims $0 in annual salary, preferring to beneﬁt from the increased stock price that is a benchmark of the CEO’s performance. While Fossil notes that the CEO has refused all of the more traditional forms of executive compensation, stock ownership represents equity-based compensation practices that can be highly lucrative. For this reason, HR must understand the individual components of executive pay packages. Employment Contracts HR is responsible for administering executive employment contracts. This includes gaining the necessary approvals from a board of directors, legal counsel, or the CEO directly regarding base pay, perquisites (perks), incentives, and beneﬁts. These written contracts outline the general terms and conditions of employment that are discussed in more detail in the WPE chapter. Other Executive Contract Clauses In addition to base pay, incentives, and terms of separation, there are a few unique clauses related to executive contracts. These include: Golden handshakes These provisions conﬁrm in writing the terms of a severance agreement should the executive voluntarily or involuntarily separate from the company. Golden parachutes Used to minimize the risk of an executive losing his or her position in the event of a change of control such as a merger or acquisition. Golden handcuffs Used to ensure a length of service from an executive by making it difﬁcult to leave the company without a signiﬁcant loss of earnings. Golden life jackets Offered to an executive after a merger to entice him or her to remain with the reorganized company. WEBC05 04/03/2017 10:14:37 Page 281 Compensation and Beneﬁts 281 Clawbacks These provisions allow a company to take back payments made to executives under certain conditions, such as fraud or accounting errors. Moral Absolutes Beliefs that are right or wrong The idea that there is a clear deﬁnition of what is right and wrong Perquisites (Perks) Beneﬁts and special treatment Special nonmonetary privileges (such as a car or club membership) that come with senior job positions; also called executive perks or fringe beneﬁts Severance Separation payment An additional payment (other than salary) given to an employee when employ ment termination occurs Base Salary An executive’s remuneration generally has some portion of it that is secure. Base salary is negotiated for a period of time and is not dependent upon speciﬁc performance outcomes of the individual or the company. In some cases, CEOs and other top executives forgo a base salary or take $1 (or even $0) per year in exchange for equity compensation. In other companies, executives’ salaries may make up 90 percent of their total rewards packages. HR’s role is to undertake remuneration surveys and present the data to decision makers in order to make compensation decisions regarding current executives, and to make competitive offers in recruitment and selection activities. Remuneration Pay or salary Money paid for work, including wages, commissions, bonuses, overtime pay, and pay for holidays, vacations, and sickness (continued ) WEBC05 04/03/2017 10:14:37 282 Page 282 A Guide to the Human Resource Body of Knowledge (continued ) Remuneration Surveys Gathering information on salary and beneﬁts Surveys that gather information on what other companies pay employees and what kinds of beneﬁts they provide Perks Perquisites, or perks, are executive compensation elements that include nonmon etary rewards such as housing, company cars, club memberships, and ﬁrst-class travel accommodations. These are attractive to high-level workers not only for status, but for the tax advantages they may provide. Executive Beneﬁts In addition to the beneﬁts plans offered to all workers, supplemental beneﬁts may make up a portion of an executive’s total compensation. Key person life insurance in which both the company and the executive’s family are paid in the event of the executive’s death are growing as a risk management tool. Estate planning and tax planning are also options to offer to highly paid workers with complex tax or ﬁnancial circumstances. Incentives Both discretionary and performance-based incentive programs may be used in total rewards planning for senior talent. With an average CEO tenure of just seven years, there is much discussion of the true ROI of executive incentive plans. Short-term incentives such as quarterly bonuses can help with some of the challenges that rewarding highly paid workers brings to the budget. The key is to understand what the company needs and to design incentive programs that motivate senior talent to perform. Hybrid plans that attempt to link executive pay to outcomes over multiple periods of performance are more complicated. There is a growing belief, however, that these multiperiod, dynamic plans more accurately reﬂect the real impact that the leaders of a company have on organizational outcomes. Stock Options Employee stock ownership plans (ESOPs) are designed to give selected employees equity ownership in the companies they work for. The underlying strategy to WEBC05 04/03/2017 10:14:37 Page 283 Compensation and Beneﬁts 283 offering ESOPs is to help employees develop an ownership mentality in their work, which in turn improves performance, which in turn increases stock value. While a publicly traded company may offer equity compensation to all em ployees, it is more often than not a portion of an executive compensation package. Under some stock option plans, employees are given the opportunity to purchase company stock at the strike price—the price of the stock when the option was granted. This opportunity is available within a speciﬁed period of time, and is favorable if the stock value increases over time. Restricted stock is granted to employees as actual shares, not as opportunities to purchase. It carries the value of a real wage that is executed over a period of time deﬁned by a vesting schedule. Once the employee is fully vested, he or she may choose to sell the stock or hang on to it to see if it increases in value over time. Phantom stock is used by companies to give employees the beneﬁt of stock ownership without actually granting equity. Also following a vesting schedule, executives are granted “shares” that follow a company’s performance. For many companies, phantom stock is a good solution when they don’t want to increase the number of shareholders they are accountable to, but still want to tie payments to market performance. For employees, it is a way to ﬁnancially beneﬁt when the company’s market performance is high. A potential beneﬁt to executives is the favorable tax treatment of some of the stock purchase plans. Incentive stock options may also have some favorability, but require companies to navigate a complex set of rules by the IRS. HR best serves the company by resourcing tax experts to ensure that a plan is properly developed and executed. Reporting Complying with the Securities and Exchange Commission (SEC) creates special issues, particularly for employers with employee stock ownership and executive reward programs. The SEC requires that companies annually report the compensation for the top ﬁve executives, including cash compen sation such as wages and bonuses, long-term or deferred awards, and information about executive pensions. Additionally, these companies must provide to their investors a description of the compensation objectives, the existence of employment or severance agreements, and share ownership guidelines for executive pay. WEBC05 04/03/2017 284 10:14:37 Page 284 A Guide to the Human Resource Body of Knowledge ESOP Employee stock ownership plan A tax-qualiﬁed beneﬁt plan with deﬁned contributions that allows employees to own shares in a company Equity Compensation A type of payment that gives employees an ownership interest in a company Noncash payment that represents an ownership interest in a company (for example, stock options and restricted stock) Stock Option An employee’s right to buy or sell shares in the company A beneﬁt that gives employees the right to buy or sell stock in their company at a certain price for a speciﬁc period of time Restricted Stock Stock with rules about its transfer Stock with rules about when it can be sold (restricted stock is usually issued as part of a salary package, and has a time limit on when it can be fully transferred) Phantom Stock Arrangement An employee incentive plan A technique in which a company gives its employees the beneﬁts that come with owning stock, including dividends, but does not actually give them stock in the company Global Executive Compensation On a global scale, organizations may adjust different components of a total rewards package to account for the pay customs and the competitive landscape of the particular countries where executives are employed. It is up to HR practitioners to help their companies research relevant data to build executive compensation plans for each country that reﬂect the importance of senior roles but also reﬂect the company’s mission, vision, and values, as well as the social mores of the host country. WEBC05 04/03/2017 10:14:37 Page 285 Compensation and Beneﬁts 285 For expatriates, agreement on choice of law codes may also be necessary for employment contracts. This clause allows the parties to agree on which laws—home or host—will apply should a contract dispute arise. Metrics As stated earlier, compensation and beneﬁts account for one of the largest overhead costs of employers. For this reason, quantitative data collected by HR can help employers identify trends and forecast future needs. Among the most popular are: Compensation as an percentage of operating expense Calculated by dividing the total cost of compensation (base, variable, and deferred) by the total operating expenses company-wide. When multiplied by 100, a percentage can be reviewed during workforce planning and budgeting activities. Beneﬁts as a percentage of operating expense Similar to the preceding calcula tion, the beneﬁts percentage is calculated by dividing the total cost of beneﬁts offerings by total operating expenses. Many employers ﬁnd that beneﬁts account for a large portion of employee compensation, so calculating the total cost of beneﬁts as a percentage of payroll per full-time equivalent and by employee group may be of value in decision making. Utilization review An audit of health care provider services and costs to ensure accurate billing. Employee burden The total cost of having an employee, including salary, beneﬁts, and taxes, to calculate actual employment cost. Generally communicated as an hourly or annual rate, this allows HR to forecast the true cost of adding or replacing staff. Hidden paychecks A communication tool delivered as an annual statement to employees that identiﬁes the total value (beyond base pay) of an individual’s employment when taxes, beneﬁts, training, and other perks of a job are factored in. Suggested Study or Organizational Audit Activities Select three key positions at the organization for which you work, and conduct salary surveys using O∗NET online or any other state or federal resource. Establish a pay minimum that is set at 85 percent of the midpoint, and a pay maximum of 115 percent of the midpoint. Plot all three positions, and compare for internal and external equity. (continued ) WEBC05 04/03/2017 286 10:14:37 Page 286 A Guide to the Human Resource Body of Knowledge (continued ) Using the Fair Labor Standards Act deﬁnitions of exempt and nonexempt workers, conduct an exemption audit of an entire class of workers. What data did you use to measure eligibility? What changes would you recommend to your employer? How would you communicate any changes to the employee? Write or audit an existing standard operating procedure to comply with a wage garnishment order received from the courts. Investigate applicable legal issues, and work with accounting to formalize the process. Where would you store these orders? Conduct research online for companies that offer COBRA management services. Write a request for proposals that outlines what services would be provided and addresses potential liabilities. What are the priorities of executive compensation programs at your place of work? How have these priorities been represented at your or another’s place of work? What equity and transparency issues had to be addressed?

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