Establishing Strategic Pay Plans Benefits and

Incentives
Lecture#9
Prof.Sidra
[email protected]
 List the basic factors in determining pay rates
 Explain in detail how to establish pay rates
 Describe how to price managerial and professional jobs
 Discuss current trends in compensation
 Establish a pay plan
  Employee compensation refers to all forms of pay or
rewards going to employees and arising from their
employment. It consists of 2 parts:

 Direct financial payments:

(Pay in the form of wages, salaries, incentives,
commissions, and bonuses.)
 Indirect financial payments :

(Pay in the form of financial benefits such as insurance)

 Legal considerations
 Union membership
 Company policy
 Competitive strategy
 Equity
 Fair Labor Standards Act (1938)
 This act provides for minimum wages, maximum hours,
overtime pay for nonexempt employees after 40 hours worked
per week, and child labor protection. The law has been
amended many times and covers most employees.
 Equal Pay Act (1963)
 An amendment to the Fair Labor Standards Act designed to
require equal pay for women doing the same work as men.
 What is the current ratio of men vs. women?

 The Family and Medical Leave Act

 Entitles eligible employees, both men and women, to take up
to 12 weeks of unpaid, job-protected leave for the birth of a
child or for the care of a child, spouse, or parent.
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 Article 37(e) makes provision for securing just and
humane conditions of work, ensuring that children and
women are not employed in vocations unsuited to their age
or sex, and for maternity benefits for women in
employment
 Article 38 well being irrespective of sex, caste creed or
race; Social Security
 Salary compression
A salary inequity problem, generally caused by inflation,
resulting in longer-term employees in a position earning less
than workers entering the firm today. Pay Raises Across-the-
board, Differential raises
 The equity theory of motivation
 States that if a person perceives an inequity, the person will try
to reduce or eliminate the tension and perceived inequity by
using unfair means.

Forms of Compensation Equity

External Internal Individual Procedural

equity equity equity equity
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 Aligned reward strategy
The employer’s basic task is to create a bundle of
rewards—a total reward package—specifically
aimed at eliciting the employee behaviors the
firm needs to support and achieve its competitive
strategy.
The HR department compensation manager will
write the policies in conjunction with top
management, in a manner such that the policies
are consistent with the firm’s strategic aims.
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  The 5 step process:
The salary
survey
Job
evaluation
Pay grade
grouping
Price pay grade-
wage curves
Fine tune
pay rates
 The salary survey is a survey aimed at determining
prevailing wage rates which include:
Formal
Informal
Sources of Wage and Salary
Information

Self-Conducted Consulting Professional Government The

Surveys Firms Associations Agencies Internet
 Formal written questionnaire surveys are the most
comprehensive, but telephone surveys and newspaper
ads are also sources of information
 Consulting firms
 Professional associations
 Government agencies
  Job evaluation is the formal and systematic
comparison of jobs in order to determine the worth
of one job relative to another
The comparison results in a wage or salary
hierarchy
 Compensable factors are fundamental elements of a
job
Identifying Compensable Factors

Working
Skills Effort Responsibility
conditions
 Two approaches in comparing jobs – Intuitive or via
compensable factors
 Intuitive based on decision that one job is more
important than another
 Compensability determined arbitrarily but some
metrics include:
Skill
Know-how
Effort Problem
Equal Pay solving
Responsibility
Act factors
Work Accountability
conditions
 A pay grade is composed of equally difficult jobs
 Committee will assign pay rates to each job based on
one of the job methods
 Ranking method grades fall in to a point range
 Point method grades fall within two-three ranks
 Factor comparison grades pay rate range
 Classification method puts into classes or grades
 Developing a wage curve involves the following:
 Find the average pay for each pay grade
 Plot the pay rates for each pay grade
 Fit the line called a wage line through the points just plotted
 Price the jobs

Wage curve
 Pay ranges are a series of steps or
levels in a pay grade, usually based on
years of service

Sample pay grade schedule

Correct pay for grade Too high – lower by
Too low – raise pay
Freezing wages,
transferring or
promoting
  ORGANIZATIONAL FOCUSED
 INDIVIDUAL FOCUSED

 Incentives
 Financial
rewards paid to workers whose production
exceeds a predetermined standard.
 Piecework Plans
 The worker is paid a sum (called a piece rate) for each
unit he or she produces. Older and most popular
incentive plan.
 Straight piecework: A fixed sum is paid for each unit the
worker produces under an established piece rate standard. An
incentive may be paid for exceeding the piece rate standard.
 Standard hour plan: The worker gets a premium equal to the
percent by which his or her work performance exceeds the
established standard.

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 Pro and cons of piecework
 Easily understandable, equitable, and powerful
incentives
 Employee resistance to changes in standards or work
processes affecting output
 Quality problems caused by an overriding output focus
 Possibility of violating minimum wage standards
 Employee dissatisfaction when incentives either cannot
be earned due to external factors or are withdrawn due
to a lack of need for output

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 Profit-sharing plans
 Cash plans
 Employees share in a portion of the employers

profit quarterly or annually.

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 Employee stock ownership plan (ESOP)
A corporation annually contributes its own stock—or cash
(with a limit of 15% of compensation) to be used to
purchase the stock—to a trust established for the
employees.
 Thetrust holds the stock in individual employee accounts
and distributes it to employees upon separation from the
firm if the employee has worked long enough to earn
ownership of the stock.

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 Employees
 ESOPs help employees develop a sense of ownership in
and commitment to the firm, and help to build
teamwork.
 No taxes on ESOPs are due until employees receive a
distribution from the trust, usually at retirement when
their tax rate is lower.
 Shareholders of closely held corporations
 Helps to diversify their assets by placing their shares of
company stock into an ESOP trust and allowing them to
purchase other marketable securities for themselves in
their place.

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 The company
A tax deduction equal to the fair market value of the
shares transferred to the trustee.
 An income tax deduction for dividends paid on ESOP-
owned stock.
 The Employee Retirement Income Security Act
(ERISA) allows a firm to borrow against employee
stock held in trust and then repay the loan in pretax
rather than after-tax dollars.
 Firms offering ESOP had higher shareholder returns
than did those not offering ESOPs.

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 Benefits
 Indirect financial and nonfinancial payments
employees receive for continuing their employment
with the company.
 Types of employee benefit plans
 Supplemental pay: sick leave and vacation pay
 Insurance: workers’ compensation
 Retirement: Pensions
 Employee services: child-care facilities

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 Vacations and holidays
 Number of paid vacation days varies by employer.
 Number of holidays varies by employer.
 Premium pay for work on holidays.
 Sick leave
 Providespay to an employee when he or she is out of
work because of illness.
 Costs for misuse of sick leave

 Pooled paid leave plans

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 Severance pay
A one-time payment when terminating an employee.
 Reasons for granting severance pay:
 Acts as a humanitarian gesture and good public
relations.
 Employee’s two week quit notice.
 Avoids litigation from disgruntled former
employees..
 Reassures employees who stay on after the
employer downsizes its workforce of employer’s
good intentions.

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 Types of pension plans
 Contributory: employees contribute to the plan.
 Noncontributory plans: employer makes all contributions to
the plan.
 Qualified plans: plans that meet requirements for tax benefits
for employer contributions.
 Nonqualified plans: plans not meeting requirements for
favorable tax treatment.
 Defined contribution: contributions of employees and
employers are specified; plan payouts are not.
 Defined benefit plans: plan payouts are specified; however,
contributions must be sufficient to insure payouts.
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 The cafeteria (flexible benefits) approach
 Eachemployee is given a benefits fund budget to
spend on the benefits he or she prefers.
 The fund limits the total cost for each benefits package.
 Core plus option plans establish a core set of benefits which
are mandatory for all employees.

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 Family-Friendly (Work Life)
Benefits such as child care and fitness facilities
that make it easier for employees to balance their
work and family responsibilities.
 Gratuity
 A fixed percentage of amount is deducted from the
salaries of employees every month and paid to
employees at the time of need, retirement and the death
of employee. In gratuity employer does no make any
contribution.

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 The “Balance Sheet Approach”
 Home-country groups of expenses—income taxes,
housing, goods and services, and discretionary
expenses—are the focus of attention.
 Theemployer estimates what each of these four
expenses is in the expatriate’s home country, and what
each will be in the host country.
 Theemployer then pays any differences such as
additional income taxes or housing expenses.

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