After studying this chapter, students should be able to understand the following:

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.

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.

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 employers.

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 financial

rewards that generally are not paid directly to the employee.

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 the federal

government provides certain guidelines, unemployment compensation programs are administered

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 or illnesses.

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 regardless of

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.

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, employers

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 goals. Paid

vacations provide workers with an opportunity to rest, become rejuvenated, and hopefully,

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 technology, a

lack of price controls, and inefficient administrative processes. In addition to self-insurance and

traditional commercial insurers, employers may utilize one of several options. Health maintenance

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 a

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 providers

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 is used.

• 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 are selfemployed,

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 trust.

• 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, child care,

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 firm may

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

conditions.

• 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

and home.

a) Employee Retirement Income Security Act Of 1974 (ERISA)—The Employee Retirement

Income Security Act of 1974 (ERISA) was passed to strengthen existing and future retirement

programs. Mismanagement of retirement funds was the primary factor in the need for this

legislation.

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 benefits.

The act has an equal benefit or equal cost principle.

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

communicated downward.

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

as well.

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 savings, or

profitability.

• 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 to

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 of

individual employees. The funds are normally invested in securities and become available

to the employee (or his/her survivors) at retirement, termination, or death. Combination

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 to tie

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 gain

sharing plan was developed by Joseph Scanlon during the Great Depression, and it

continues to be a successful approach to group incentive, especially in smaller firms.

• Scanlon Plan: Provides a financial reward to employees for savings in labor costs that

result from their suggestions.

Compensation departments in organizations do not normally deal with non-financial factors. However,

non-financial compensation can be a very powerful factor in the compensation equation.

Some jobs can be so exciting that the incumbent can hardly wait to get to work each day.

The job itself is a central issue in many theories of motivation, and it is also a vital component of a total

compensation program.

a) Skill Variety—The extent to which work requires a number of different activities for successful

completion.

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 people.

d) Autonomy—The extents of individual freedom and discretion employees have in performing their

jobs.

e) Feedback—The amount of information employees receive about how well they have performed

the job.

f) Cyber-work—A possibility of a never-ending workday created through the use of technology.

Employees can draw satisfaction from their work through several non-financial factors.

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 group.

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 title.

e) Working Conditions—The definition of working conditions has been broadened considerably during

the past decade.

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 stressful work/home

juggling act.

a) Flextime—The practice of permitting employees to choose, with certain limitations, their own

working hours.

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 be allocated.

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

computer.

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.

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 level of

the employee.

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 be assigned

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 a well-designed

system can stand careful scrutiny. An open system would almost certainly require managers to

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

hours.

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

suggestions

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.