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All pay decisions should satisfy these 6 objectives:
- Be legal
- Be adequate: compensation must be large enough to attract qualified employees to join the organization and stay.
- Be motivating Be equitable: the employees should feel that their compensation is internally equitable relative to other employees in the organization and externally equitable relative to employees doing similar work in other organizations.
- Provide security: they need to feel that their pay is somewhat insulated from changes in employment, profitability, individual performance, and personal health.
- Be cost-benefit effective: the organization must administer the compensation system efficiently and have the financial resources to support it on a continuing basis.
Ethical principle maxim
- Employees should be compensated primarily according to the requirements of the jobs they perform and how well they perform them
- And secondarily, by labor market conditions (supply and demand) and the organization’s ability to pay.
Secret or open pay system for the following:
1) individual privacy
2) job satisfaction
- 1) individual privacy - secret pay system
- 2) job satisfaction - depends on the company
- 3) productivity - open pay system
3 categories of the major factors influencing pay:
- external factors
- organizational factors
- individual factors
3 wage decisions
- wage-level decision
- wage-structure decision
- individual wage decision
In situations where companies join an association (such as the chamber of commerce) and may share wage info. For these wage surveys to be useful, 4 conditions must be met:
- (a) Reciprocity: orgs conducting surveys must be willing to share their wage info in exchange for the info they collect from others.
- (b) Anonymity: the info should be reported in a way that does not identify the wages of individual orgs
- (c) Low cost: the method used to collect and analyze the data must be efficient and inexpensive.
- (d) Timeliness: the info must be current, especially in times of high inflation.
While collecting wage info, compensation specialists must carefully avoid collusion with other companies in setting wage rates or they are guilty of price fixing
3 methods usually used to conduct a wage survey:
- personal interviews
- mailed questionnaires
- telephone inquiries
The procedure for developing the point method of job evaluation includes 6 steps:
- 1) Identify key jobs
- 2) Identify job factors used to determine pay levels
- 3) Weight the factors according to their contribution to the overall worth of the job
- 4) Divide each job factor into degrees that range from high to low and assign points to each degree
- 5) Reach a consensus about degree assignments
- 6) Develop a wage curve using key jobs
The procedure for developing the factor comparison method of job evaluation includes 5 steps:
- 1) Identify key (benchmark) jobs
- 2) Identify job factors
- 3) Rank jobs
- 4) Assign monetary amounts to each job on each factor
- 5) Compare unique jobs with key jobs
2 basic approaches to generating compensation budgets:
- top-down method
- bottom-up method
top-down method for generating compensation budgets
Involves estimating the pay increase budget for an entire org and then allocating designated amounts to the different departments.
bottom-up method for generating compensation budgets
requires supervisors to monitor the number of people working in their units and to make careful wage increase decisions
The labor market is influenced primarily by 5 demographic forces:
- participation rates (refers to the percentage of people in a specified age category participating in the labor force)
Motivators vs Hygienes
(In Herzberg's Motivator-hygiene theory)
- * Motivators refer to factors that are related to the content of the job, such as recognition, achievement, and responsibility
- * Hygienes refer to factors that are related to the context of the job, such as salary, supervision, and company policies.
Satisfaction = without hygienes dissatisfaction occurs, if they are present, then no dissatisfaction, but increasing further does not increase satisfaction. Presence of motivators creates satisfaction, but abscense does not create dissatisfaction
Motivation = not affected by hygienes. Increased with motivators
- A motivation theory that examines the effects of extrinsic rewards, such as money and recognition awards, on intrinsic satisfaction.
- The argument is not that incentives do not work, because it is clear that well-designed incentive programs can have an immediate and substantial impact on behavior. The claim is that they work for all the wrong reasons.
The determinants of effort in expectancy theory
Expectancy in expectancy theory
Refers to the probability that effort will lead to performance
Instrumentality in expectancy theory
Refers to the relationship between performance and outcomes
Valence in expectancy theory
Refers to the value of the outcomes and the extent to which they are attractive or unattractive to the individual
Some descriptions of Expectancy Theory discuss 2 levels of outcomes:
- (a) First level outcomes usually refer to performance variables, such as quantity and quality of productivity and attendance.
- (b) Second level outcomes usually refer to all of the consequences of performance, such as pay, promotion, fatigue, and a sense of accomplishment.
- Where individuals expect certain outcomes in return for the contributions or investments they make.
- Comparison processes: individuals evaluate their inputs to the job relative to the outputs they receive.
4 major goal setting attributes:
- Goal specificity
- Goal difficulty
- Goal acceptance
- Goal commitment
Stair-step model of skill and knowledge based pay
Assumes that the requisite knowledge and skills can be arranged hierarchically, such that more complex skills or knowledge builds on earlier skills or knowledge. Employees begin on the first step and receive higher pay rates as they advance sequentially to higher steps.
Building blocks model of skill and knowledge based pay
Assumes that the various skills and knowledge are discrete and can be acquired in any order.
Job-point accrual method of skill and knowledge based pay
Typically used when there are many different skills or ideas employees may acquire and they are not equally valuable. Point values are assigned to each skill or knowledge area and employees accumulate points as they master them.
Main difference between gainsharing and profitsharing plans
- Gainsharing is when bonuses are based on improved productivity, whereas profitsharing plans are based on percent of profit.
- Gainsharing usually paid on monthly or quarterly basis, and profitsharing is usually an annual bonus (such as a holiday bonus)
The Dodd-Frank Act of 2010 requires executives to return ill-gotten bonuses. Applies to all of a company's executive officers.
4 basic types of insurance benefits are provided by the Social Security Act:
- 1) Old age or disability benefits: severely disabled may be eligible to receive a monthly SS check. The normal retirement age is currently 66 (but is scheduled to rise to 67).
- 2) Benefits for dependents of retired, disabled, or deceased workers: If a worker retires or is disabled, monthly payments can be made to unmarried children under the age of 18 (or 22 if full-time students), a spouse who is age 62 or older, and a spouse under the age of 62 if she or he is caring for the worker’s child.
- 3) Lump-sum death benefits: when a worker dies, a lump-sum payment is made to the worker’s survivors. In 2011 the lump-sum payment was $255.
- 4) Medicare
Plan A and Plan B, and Plan D of Medicare:
- Plan A: is the hospital insurance part that helps to pay the cost of inpatient hospital care and other related costs.
- - Everyone 65 and older who is eligible for SS benefits automatically receive Plan A hospital ins protection.
- Plan B: is the medical insurance part that helps to pay the costs of physician’s services,outpatient hospital services, and certain other medical items and services not covered by hospital insurance.
- - Everyone 65 and older must pay a monthly premium based on marital status and income for Plan B medical ins.
- Plan D: added in 2003 to assist senior citizens with the costs of prescription drugs.
Liability without fault
The basic concept underlying workers’ compensation laws is liability without fault, meaning that an injured employee is entitled to moderate and reasonable amount of compensation regardless of who causes the accident.
2 Types of qualified benefit plans:
- defined benefit plans
- defined contribution plans
- AKA salary reduction plans
- Can contribute up to $17,500/year
- Employers can match
- Tax deferred, but withdrawls are taxed as ordinary income
- Can't withdrawl until 59 1/2, but must start withdrawl by 70 1/2
- Investments that automatically adjust the allocation from riskier investments to more conservative investments the closer you get to retirement.
- AKA life-cycle funds
- Retirement savings plans for tax-exempt organizations such as public schools, religious groups, universities, and public charities.
- Can contribute up to $17,500 or 100% of their gross income (whichever is less).
- May be partially matched by employer
- Tax deferred
- May be invested in tax-sheltered annuities issued by life ins companies or custodial accounts that invest in mutual funds.
- Individual Retirement Acounts
- Can set aside 100% of earned income of $5,500, whichever is less
- Can't withdrawl until 59 1/2
Keogh (H.R. 10) plans:
Allow self-employed persons to place $51,000 or 25% of their income, whichever is less, in a tax sheltered investment.
Savings Incentive Match Plans for Employees (SIMPLE):
- For companies with 100 or fewer employees who earn at least $5,000 ro provide retirement plans
- A SIMPLE 401(k) plan is intended to appeal to small employers
- Can contribute up to $12,000/year
- Tax deferred
- Employers must match dollar for dollar up to 3% of their pay, or make a 2% contribution on behalf of each eligible employee
- Not tax deferred, but earnings are tax free (thus withdrawls are tax free)
- Can't withdrawl until 59 1/2
- Can contribute up to $5,500/year
- Available only to employers with fewer than 500 employees starting in 2010
- These combo plans are funded through a single trust paid by employer contributions and tax deferred contributions from employees.
- Amount of benefits paid to retirees = the defined benefit set by the plan plus the return on the investment from the contributions made by plan participants.
- The defined benefit portion of the plan must pay a retirement benefit = to 20% of the employee's final avg pay or 1% of final avg pay multiplied by years of service (whichever is less).
- The defined contribution portion requires employers to contribute 4% of pay to each participant's account; and participant contributions must be matched at a rate of 50%, with a maximum required match = to 2% of pay.
Patient Protection and Affordable Care Act of 2010 (PPACA)
Although it does not require employers to provide employee healthcare benefits, employers with over 50 employees are required to either provide affordable healthcare insurance for “essential health benefits” or pay a penalty.
3 primary types of HMOs:
- individual practice associations (IPAs),
- group model plans, and
- staff model plans (like group health cooperatives)
Individual practice associations (IPAs):
Are groups of physicians in private practice who provide some services to HMO subscribers, but most of their patients are not subscribers. They charge for the services they render but share the financial loss when the cost of providing covered health services to subscribers exceeds the subscription fees.
Group model HMO
They contract with physician groups to provide services to HMO subscribers. Physicians spend most of their professional time serving HMO subscribers. The physicians are paid for the number of subscribers they treat, but share in potential losses.
Group Health Cooperatives
- A special kind of HMO. They are a collection of physicians, hospitals, and clinics that combine to provide health care services for members. The members pay a capitated monthly fee that is the same regardless of how many times they need medical help. Staff members are paid a fixed salary rather than an amount based on the number of patients they see in a day.
- Members have only limited control over which physician attends to them
Consumer-directed Health Care
These 2 forces, cost increased and the demand for personal choice, have contributed to the creation of what are referred to as consumer-directed health-care programs. These programs qualify for special tax treatment, include flexible benefits, flexible spending accounts (FSA), health reimbursement accounts (HRA), and health savings accounts (HSA).
State-Sponsored Health Exchange
- A least 2 states (Massachusetts and Utah) have created a defined contribution health plan that is offered through a state-sponsored exchange.
- Employers decide how much they are willing to contribute each year toward each employee’s health benefit and this pre-tax money goes directly to the exchange.
- The system uses wire money transfers and is entirely paperless.
- Employees can access an internet site where they select from a variety of insurance options. This single shopping point allows them to evaluate their options and make informed comparisons.
- If they select a plan that costs more than their employer contributed, they pay the difference. But if they select a low-cost/high-deductible plan, the surplus money goes into their HSA. This system relieves employers from the burden of administering health-care benefits; the only decision they make is how much money they are willing to contribute.
4 methods have been developed for analyzing the costs of employee benefit plans:
- Annual cost method
- Cost per employee per year
- Percent of payroll
Ensure that those who are enrolled in benefit plans satisfy the requirements for being active employees or legitimate dependents who are entitled to participate.
Examines the procedures that are used to process claims to ensure that they are timely and accurate. Claims audits reveal discrepancies such as covering services not provided, paying for services not performed, and circumventing referral requirements. Audits should look for duplicate payments or unusual charges, such as excessive charges in a particular day or week or for a particular person.
Consists of examining how often each benefit is used by employees and the costs of providing each benefit program.
3 laws to protect employee's earnings
- Davis-Bacon Act of 1931
- Copeland Act of 1934
- Walsh-Healey Act of 1936
- 1) Sometimes called the Prevailing Wage Law
- 2) Requires orgs holding federal contracts to pay laborers and mechanics the prevailing wages of the locality in which the work is performed. Overtime must be paid at 1 ½ times the local rate.
- 3) Prevents contractors from importing cheap labor from other areas and from auctioning jobs to the lowest bidders.
- (a)Prohibits the unfair treatment of employees who needed jobs so desperately that employers could take advantage of them.
- (b)Authorizes the secretary of labor to make reasonable regulations concerning the deductions that a federal contractor can make from employees’ wages.
An amendment to the Copeland Act, making it illegal for a federal contractor to threaten or otherwise induce employees to give part of their rightful compensation to the contractor.
- 1)Officially called the Public Contracts Act
- 2) Extended the Davis-Bacon Act to non-construction federal contractors.
- 3) Sets basic standards and minimum wage rates for all work done under a federal contract exceeding $10,000.
- 4)The minimum wage standards, however, are industry minimums established by the secretary of labor rather than local prevailing rates.
- 5) Overtime to be paid at 1 ½ times the base rate for work exceeding 40 hours/wk
- Commonly referred to as the Wage and Hour Law
- The result of Congress’s decision to extend the provisions and controls of the Davis-Bacon Act and the Walsh-Healey Act to all orgs involved in interstate commerce.
- Sets minimum wage standards, overtime pay standards, and child labor restrictions. Administered by the Wage and Hour Division of the DOL, which tries to correct injustices.
To qualify for the executive exemption all of the following must be met:
- Pay not less than $455/week
- Primary duty must be managing the enterprise, or a recognized dept or subdivision of the enterprise
- Must customarily and regularly direct the work of at least 2 or more other full-time employees or their equivalent, and
- The employee must have the authority to hire or fire other employees, or the employee’s recommendations must be given particular weight.
To qualify for the administrative exemption all of the following must be met:
- Pay not less than $455/week
- The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general biz operations of the employer or the employer’s customers; and
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance
2 types of professional exemptions:
learned or creative professional
To qualify for the learned professional exemption all of the following must be met:
- Compensation of a salary or fee basis at a rate not less than $455 per week
- Primary duty must be the performance of work requiring advanced knowledge
- The advanced knowledge must be in a field of science or learning; and
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
To qualify for the creative professional exemption all of the following must be met:
- Compensation of a salary or fee basis at a rate not less than $455 per week
- Generally met by such people as actors, musicians, composers, soloists, painters, writers, ect.
- Journalists are creative professionals if their work requires invention, imagination, originality, or talent, but not if they only collect, organize, and record info that is routine or already public, or if they do not contribute a unique interpretation or analysis to a news product.
To qualify for the computer employee exemption all of the following must be met:
- Skilled workers in the computer field who are paid at least $455/wk on a salary basis or on an hourly rate not less than $27.63 an hour.
- To meet this exemption, the employee must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled computer worker whose primary duty must consist of:
- (a) The application of systems analysis techniques and procedures,
- (b) The design, development, documentation, analysis, creation, testing or modification of computer systems or programs,
- (c) The design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
- (d) A combination of the aforementioned duties which requires the same level of skills.
To qualify for the outside sales exemption all of the following must be met:
- (a) Primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
- (b) The employee must be customarily and regularly engaged away from the employer’s place or places of biz.
There are 3 acceptable actions that employers can take with respect to short-term layoffs without affecting an employer’s exempt status:
- An employer can require employees to take mandatory time off for an entire week and withhold that week’s salary
- An employer is not required to pay for an employee’s completely voluntary decision to take time off for personal reasons or other reasons not caused by the company’s operating requirements.
- When there is a permanent change in an exempt employee’s regular workweek schedule, such as going from a 5-day week to a 4-day week, the employer can make a corresponding change in salary provided it still exceeds the $455 salary min.
- Some employers give nonexempt employees compensatory time off (“comp time”) rather than paying cash for overtime hours.
- Must be accrued at time and a half for all overtime hours.
- Permissible in the public sector where state and local govt’s are allowed to substitute comp time for payment of overtime wages. Public employees can accumulate as many as 240 hours (480 for police and fire officers).
- Not permissible in the private sector. If a private sector employer has a 2-wk pay period and employees work more than 40 hours the 1st week, it is possible for the employer to keep their pay constant by reducing their hours sufficiently during the second week (similar to comp time).
- Nevertheless, private sector employees cannot accumulate comp time hours.
New employees under age 20 can be paid a rate of $4.25 per hour for the first 90 calendar days of work (as long as don't replace another regular worker with this one)
Jobs each age group can perform:
1) 18 or older
3) 14 and 15
4) 12 and 13
5) Under 13
1) 18 + = any jobs, whether hazardous or not, for unlimited hours
2) 16-18 = any nonhazardous job for unlimited hours, but they are not allowed to work in hazardous occupations, such as mining, meat-cutting, or logging
3) 14 and 15 = work outside school hours in various nonmanufacturing, nonmining, nonhazardous jobs under these conditions –no more than 3 hours on a school day, 8 hours on a nonschool day, or 40 hours in a nonschool week. Also, work may not begin before 7 am nor end after 7 pm except from June 1 through Labor Day, when evening hours are extended to 9 pm.
4) 12 and 13 = work on farm jobs outside of school hours in nonhazardous jobs.
5) Under 13 = nonhazardousjobs on farms with parent’s written consent outside school hours.
Youths of any age may be employed by their parents at any time and in any job on a farm owned or operated by their parents.
The FLSA requires employers to keep records of wages, hours, and other related items. The following info should be kept:
- (a) Personal info, including name, address, occupation, gender, and date of birth (if under age 19)
- (b) Hour and day when workweek begins
- (c) Total hours worked each workday and each workweek
- (d) Total daily or weekly straight-time earnings
- (e) Regular hourly pay rate for any week when overtime is worked
- (f) Total overtime pay for the workweek
- (g) Deductions from or additions to wages
- (h) Total wages paid each pay period
- (i) Date of payment and pay period covered
A four-factor test has been used by courts to determine whether the de minimis rule (work that is done but difficult to precisely record time spent) applies:
- 1) the amount of daily time spent on the additional work,
- 2) the practical administrative difficulty of recording the added time
- 3) the total amount of compensable time, and
- 4) the regularity of the additional work
WorkOpportunity Tax Credit (WOTC)
Allows employers a credit of a percentage of wages paid to qualified members. Qualifying employees are TANF (Temporary Assistance to Needy Family) recipients, ex-felons, high-risk youths, qualified summer youth employees, food stamp recipients, vocational rehabilitation referrals, and certain veterans. The 2009 Recovery Act added two new groups: unemployed veterans and disconnected youth.
The following tests are used to determine whether defined contribution plans discriminate in favor of HCEs:
- Minimum coverage tests
- Actual Deferral Percentage (ADP) test
- Actual Contribution Percentage (ACP) test
- Top-heavy test
Minimum Coverage Tests
- The percentage of NHCEs benefitting under the plan must be at least 70% of the percentage of HCEs who benefit under the plan.
- This is called the Ratio Percentage Test if a plan does not pass this test, it must pass the more complex Average Benefit Test, which compares the benefits received by NHCEs as a percent of compensation with the comparable figures for HCEs. These tests only need to be run every 3 years if the employer reasonably believes there has been no change in coverage.
Actual Deferral Percentage (ADP) test
- Must be done each year to determine whether HCEs defer (i.e. contribute) disproportionately more than NHCEs to 401(k) plans.
- Safe harbor provisions that satisfy this ADP test have been provided by the Small Business Job Protection Act of 1996 (SBJPA). These safe harbor provisions require adequate communication to all employees and a plan design that allows all employees to participate under similar terms and conditions.
Actual Contribution Percentage (ACP) test
- Must be done each year to determine whether employee post-tax contributions and employer matching contributions for HCEs are disproportionately more than for NHCEs.
- Likewise, there are similar safe harbor provisions that satisfy this ACP test.
This test is performed each year to determine whether a plan is top heavy, meaning that more than 60 percent of the firm’s assets are owned by key employees (defined as 5% owners, highly-compensated 1% owners, or highly-compensated officers).
The GS system used by the Federal gov't is an example of which job evaluation method?
Frederick W. Taylor, and other Scientific Management, advocated which type of pay incentive?
Differential piece rates
The health care option that maximizes freedom of choice of selecting a doctor with minimum cost control is:
Fee-for-service plans allow employees maximum control in selecting their health care services, such as whether they want to see a general practitioner or a specialist and whether they prefer a hospital or a clinic.
The 2 nonquantitative job evaluation methods are:
ranking and classification
Unemployment compensation was created as part of the:
Social Security Act
A MAJOR factor that contributed to the growth of employee benefit programs was:
Wage controls during WWII
3 variables combine to determine a firm’s labor costs:
- the # of employees,
- the average cash compensation, and
- the avg benefit cost.
Labor Costs =
Employment x (Average Cash Compensation + Average Benefit Cost)
compensation impact analysis
A) The assessment of a total compensation system involves comparing the outcomes of the firm against the 6 criteria described earlier for a compensation system: legal, adequate, motivating, equitable, secure, and cost-benefit effective. This assessment, sometimes called a compensation impact analysis, examines how well each of these strategic objectives is being achieved.