After studying this chapter, students should be able to understand the following:
A. Total Compensation
B. Employee Benefits
We begin the chapter with a discussion of benefits, both mandated and voluntary.
Then, legislation related
to benefits and the proper communication of information about benefit packages
is discussed. Next, we
present various types of incentive compensation and describe non-financial compensation
and the job as a
total compensation factor.
A. Total Compensation
Total compensation constitutes of
two types of the rewards which are
direct rewards and indirect rewards.
Direct rewards include the salaries
wages, commis-sion, bonuses and
gain sharing all of these rewards are
directly paid to employees in
monetary or financial terms, second
type of the rewards are benefits
provided by organization. Benefits are
not direct payments in financial terms.
B. Employee Benefits
Benefits are all financial rewards that generally are not paid directly to an
employee. Benefits absorb social
costs for health care and retirement and can influence employee decisions about
I. Benefits (Indirect Financial Compensation)
Most organizations recognize that they have a responsibility to provide their
employees with insurance and
other programs for their health, safety, security, and general welfare. These
benefits include all
rewards that generally are not paid directly to the employee.
Ii. Mandated Benefits (Legally Required)
Although most employee benefits are provided at the employer’s discretion, others
are required by law.
Legally required benefits include Social Security, unemployment compensation,
and workers’ compensation.
a) Social Security—It is a system of retirement benefits
that provides benefits like disability
insurance, survivor’s benefits, and, most recently, Medicare.
b) Unemployment Compensation—An individual laid off by an
organization covered by the Social
Security Act may receive unemployment compensation for up to 26 weeks. Although
government provides certain guidelines, unemployment compensation programs are
by the states, and the benefits vary state by state.
c) Workers’ Compensation—Workers’ compensation benefits
provide a degree of financial
protection for employees who incur expenses resulting from job-related accidents
d) Family And Medical Leave Act Of 1993 (FMLA)—The Family
and Medical Leave Act applies
to private employers with 50 or more employees and to all governmental employers
the number of employees. The act provides for up to 12 workweeks of unpaid leave
per year for
absences due to the employee’s own serious health condition or the need to care
for a newborn or
newly adopted child or a seriously ill child, parent, or spouse.
III. Discretionary Benefits (Voluntary)
Organizations voluntarily provide numerous benefits. These benefits may be classified
as (1) payment for
time not worked, (2) health and security benefits, (3) employee services, and
(4) premium pay. Generally
speaking, such benefits are not legally required.
a) Payment For Time Not Worked—In providing payment for time not worked,
recognize that employees need time away from the job for many purposes, such
as paid vacations,
payment for holidays not worked, paid sick leave, jury duty, national guard or
other military reserve
duty, voting time, and bereavement time. Some payments are provided for time
off taken during
work hours, such as rest periods, coffee breaks, lunch periods, cleanup time,
and travel time.
• Paid Vacations: Payment for time not worked serves important compensation
vacations provide workers with an opportunity to rest, become rejuvenated, and
become more productive.
• Sick Leave: Each year many firms allocate, to each employee, a certain
number of days of
sick leave, which they can use when ill.
b) Health Benefits—Health benefits are often included as part of an
employee’s indirect financial
compensation. Specific areas include health, dental, and vision care.
• Health care: Benefits for health care represent the most
expensive and fastest-growing cost in the
area of indirect financial compensation. Many factors have combined to create
this situation: an
aging population, a growing demand for medical care, increasingly expensive medical
lack of price controls, and inefficient administrative processes. In addition
to self-insurance and
traditional commercial insurers, employers may utilize one of several options.
organizations (HMOs) are one option in which all services are covered
for a fixed fee; however,
employers control which doctors and health facilities may be used.
Point-of-service (POS) permits
member to select a provider within the network, or, for a lower level of benefits,
go outside the
network. Preferred provider organizations
(PPOs) are a more flexible managed care system. Although
incentives are provided to members to use services within such a system, out-of-network
may be utilized at greater cost.
Exclusive provider organizations (EPO)
offer a smaller PPO provider
network and usually provide little, if any, benefits when an out-of-network provider
• Capitation: Typically, the reimbursement method used by
primary care physicians is an approach
to health care where providers negotiate a rate for health care for a covered
life over a period of
time. It presumes that doctors have an incentive to keep patients healthy and
to avoid costly
procedures when they are paid per patient rather than per service.
• Defined-Contribution health care system: Companies give
each employee a set amount of money
annually with which to purchase health care coverage.
• Utilization Review: A process that scrutinizes medical
diagnoses, hospitalization, surgery, and
other medical treatment and care prescribed by doctors.
• The Health Insurance Portability and Accountability Act of 1996:
Provides new protections
for approximately 25 million Americans who move from one job to another, who
or who have preexisting medical conditions.
• Dental and Vision Care: Relative newcomers to the list
of potential health benefits. Both types of
plans are typically paid for entirely by the employers.
c) Security Benefits—Security benefits include retirement plans, disability
insurance, life insurance,
and supplemental unemployment benefits.
• Retirement Plans: Private retirement plans provide income
for employees who retire after
reaching a certain age or having served the firm for a specific period of time.
In a defined benefit plan,
the employer agrees to provide a specific level of retirement income that is
either a fixed dollar
amount or a percentage of earnings. A
defined contribution plan is
a retirement plan that requires
specific contributions by an employer to a retirement or savings fund established
for the employee.
A 401(k) plan is a
defined contribution plan in which employees may defer income up to a
maximum amount allowed. An employee
stock ownership plan (ESOP) is a defined contribution plan in
which a firm makes a tax-deductible contribution of stock shares or cash to a
• Disability Protection: Workers’ compensation protects
employees from job-related accidents and
illnesses. Some firms, however, provide additional protection that is more comprehensive.
• Supplemental Unemployment Benefits (SUB): Supplemental
unemployment benefits are
designed to provide additional income for employees receiving unemployment benefits.
• Life Insurance: Group life insurance is a benefit commonly
provided to protect the employee’s
family in the event of his or her death. Although the cost of group life insurance
is relatively low,
some plans call for the employee to pay part of the premium.
d) Employee Services—Organizations offer a variety of benefits that
can be termed employee
services. These benefits encompass a number of areas including relocation benefits,
educational assistance, food services/ subsidized cafeterias, and financial services.
• Relocation Benefits: Include shipment of household goods
and temporary living expenses,
covering all or a portion of the real estate costs associated with buying a new
home and selling the
previously occupied home.
• Child Care: Another benefit offered by some firms is subsidized
child care. Here, the
provide an on-site child care center, support an off-site center, or subsidize
the costs of child care.
• Educational Assistance: According to a recent benefits
survey, 81 percent have educational
benefits that reimburse employees for college tuition and books.
• Food Services/ Subsidized Cafeterias: Most firms that
offer free or subsidized lunches feel that
they get a high payback in terms of employee relations.
• Financial Services: One
financial benefit that is growing
in popularity permits employees to
purchase different types of insurance policies through payroll deduction.
• Unique Benefits: A tight labor market gives birth to creativity
in providing benefits.
e) Premium Pay—Compensation paid to employees for working long periods
of time or working
under dangerous or undesirable conditions.
• Hazard pay: Additional pay provided to employees who work
under extremely dangerous
• Shift differentials: Paid to employees for the inconvenience
of working undesirable hours.
f) Benefits for Part-Time Employees—Recent studies indicate that employers
are offering this
group more benefits than ever. Growth in the number of part-timers is due to
the aging of the
workforce and also to an increased desire by more employees to balance their
lives between work
IV. Other Benefit-Related Legislation
a) Employee Retirement Income Security Act Of 1974 (ERISA)—The
Income Security Act of 1974 (ERISA) was passed to strengthen existing and future
programs. Mismanagement of retirement funds was the primary factor in the need
b) Older Workers Benefit Protection Act (OWBPA)—The Older
Workers Benefit Protection Act
(OWBPA) is a 1990 amendment to the ADEA and extends its coverage to all employee
The act has an equal benefit
or equal cost principle.
V. Communicating Information about the Benefits Package
Employee benefits can help a firm recruit and retain a quality workforce. Management
depends on an
upward flow of information from employees in order to know when benefit changes
are needed, and,
because employee awareness of benefits is often severely limited, the program
information must be
vi. Incentive Compensation
Compensation programs that relate pay to productivity.
a) Individual Incentive Plans—A specific form of performance-based
pay is an individual incentive
plan called piecework.
In such a plan, employees are paid for each unit produced.
b) Team-Based Compensation Plans—Team performance consists
of individual efforts. Therefore,
individual employees should be recognized and rewarded for their contributions.
However, if the
team is to function effectively, a reward based on the overall team performance
should be provided
c) Companywide Plans—Companywide plans offer a feasible
alternative to the incentive plans
previously discussed. They may be based on the organization’s productivity, cost
• Profit Sharing: A compensation plan that results in the
distribution of a predetermined
percentage of the firm’s profits to employees. There are several variations,
but the three
basic forms are current, deferred, and combination.
Current plans provide payment
employees in cash or stock as soon as profits have been determined.
Deferred plans involve
placing company contributions in an irrevocable trust to be credited to the account
individual employees. The funds are normally invested in securities and become
to the employee (or his/her survivors) at retirement, termination, or death.
plans permit employees to receive payment of part of their share of
profits on a current
basis, whereas payment of part of their share is deferred. Profit sharing tends
employees to the economic success of the firm.
• Employee Stock Option Plan (ESOP): A defined contribution
plan in which a firm
contributes stock shares to a trust.
• Gain Sharing: Plans that are designed to bind employees
to the firm’s performance by
providing an incentive payment based on improved company performance. The first
sharing plan was developed by Joseph Scanlon during the Great Depression, and
continues to be a successful approach to group incentive, especially in smaller
• Scanlon Plan: Provides a financial reward to employees
for savings in labor costs that
result from their suggestions.
Vii. Non-financial Compensation
Compensation departments in organizations do not normally deal with non-financial
non-financial compensation can be a very powerful factor in the compensation
Viii. The job
Some jobs can be so exciting that the incumbent can hardly wait to get to work
IX. The Job as a Total Compensation Factor
The job itself is a central issue in many theories of motivation, and it is also
a vital component of a total
a) Skill Variety—The extent to which work requires a number
of different activities for successful
b) Task Identity—The extent to which the job includes an
identifiable unit of work that is carried
out from start to finish.
c) Task Significance—The impact that the job has on other
d) Autonomy—The extents of individual freedom and discretion
employees have in performing their
e) Feedback—The amount of information employees receive
about how well they have performed
f) Cyber-work—A possibility of a never-ending workday created
through the use of technology.
X. The Job Environment as a Total Compensation Factor
Employees can draw satisfaction from their work through several non-financial
a) Sound Policies—Human resource policies and practices
reflecting management’s concern for its
employees can serve as positive rewards.
b) Competent Employees—Successful organizations emphasize
continuous development and assure
that competent managers and non-managers are employed.
c) Congenial Coworkers—Although the American culture has
historically embraced individualism,
most people possess, in varying degrees, a desire to be accepted by their work
d) Appropriate Status Symbols—Organizational rewards that
take many forms such as office size
and location, desk size and quality, private secretaries, floor covering, and
e) Working Conditions—The definition of
working conditions has been
broadened considerably during
the past decade.
XI. Workplace Flexibility
Flexible work arrangements do more than just assist new mothers’ return to full-time
work. They comprise
an aspect of non-financial compensation that allows many families to manage a
a) Flextime—The practice of permitting employees to choose,
with certain limitations, their own
b) Compressed Workweek—Any arrangement of work hours that
permits employees to fulfill their
work obligation in fewer days than the typical five-day workweek.
c) Job Sharing—An approach to work that is attractive to
people who want to work fewer than 40
hours per week.
d) Flexible Compensation (Cafeteria Compensation)—Plans
that permit employees to choose
from among many alternatives in deciding how their financial compensation will
e) Telecommuting—Telecommuting is a work arrangement whereby
employees are able to remain
at home, or otherwise away from the office, and perform their work over telephone
lines tied to a
f) Part-Time Work—Use of part-time workers on a regular
basis has begun to gain momentum in
the United States. This approach adds many highly qualified individuals to the
labor market by
permitting both employment and family needs to be addressed.
g) Modified Retirement—An option that permits older employees
to work fewer than regular hours
for a certain period of time proceeding retirement. This option allows an employee
to avoid an
abrupt change in lifestyle and more gracefully move into retirement.
XII. Other Compensation Issues
Several issues that relate to compensation deserve mention. These issues include
comparable worth, pay
secrecy, and pay compression.
a) Severance Pay—Although some firms are trimming the amount
of severance pay offered,
typically, one to two weeks of severance pay is given for every year of service,
up to some
predetermined maximum. Severance pay is generally shaped according to the organizational
b) Comparable Worth—Requires the value for dissimilar jobs,
such as company nurse and welder, to
be compared under some form of job evaluation and pay rates for both jobs to
according to their evaluated worth.
c) Pay Secrecy—Organizations tend to keep their pay rates
secret for various reasons. If a firm’s
compensation plan is illogical, secrecy may indeed be appropriate because only
system can stand careful scrutiny. An open system would almost certainly require
explain the rationale for pay decisions to subordinates.
d) Pay Compression—Occurs when workers perceive that the
pay differential between their pay and
that of employees in jobs above or below them is too small.
Flextime: The practice of permitting employees to choose, with certain
limitations, their own working
Capitation: Typically, the reimbursement method used by primary care
physicians is an approach to health
care where providers negotiate a rate for health care for a covered life over
a period of time.
Disability protection: Workers’ compensation protects employees from
job-related accidents and illnesses.
Some firms, however, provide additional protection that is more comprehensive.
(ESOP):A defined contribution plan in which a firm contributes stock
shares to a trust.
Gain sharing: Plans that are designed to bind employees to the firm’s
performance by providing an
incentive payment based on improved company performance
Scanlon plan: Provides a financial reward to employees for savings
in labor costs that result from their
Telecommuting: Telecommuting is a work arrangement whereby employees
are able to remain at home,
or otherwise away from the office, and perform their work over telephone lines
tied to a computer
Autonomy: The extent of individual freedom and discretion employees
has in performing their jobs.