Chapter 9 Compensation and Benefits Learning Objectives After studying this chapter, the student should be able to: 1. Describe the basic issues involved in developing a compensation strategy. 2. Discuss how organizations develop a wage and salary structure. 3. Identify and describe the basic issues involved in wage and salary administration. 4. Discuss the basic considerations in understanding benefit programs. 5. Identify and describe mandated benefits. 6. Identify and describe nonmandated benefits. 7. Discuss contemporary issues in compensation and benefits. Chapter Outline Opening Case: Innovative Compensation at Nucor Nucor is a pioneer in the steelmaking industry, one of the first to make new steel from scrap metal. Nucor has the best labor relations of any domestic steelmaker. Nucor also has an innovative compensation plan. Nucor gives generous bonuses that are tied to the quality and productivity of the entire shift. Compensation for managers is 75 percent to 90 percent of market average, but performance bonuses can double the amount. However, the hourly workers’ bonuses and profit sharing are not offered to managers, creating greater pay equality. Employment at Nucor can be lucrative, but high pay is not guaranteed. If a bad batch of steel is identified before leaving the factory, the workers get no bonus. If the bad steel gets to the customer, they give up three times that amount. Bonuses are also dependent on the cyclical steel market. The nonunion workforce is flexible and participative. Workers take the initiative to improve operations in their areas. In fact, worker suggestions are more important source of new ideas for the firm. Nucor has grown through more than a dozen acquisitions over the last decade, yet the culture and practices have spread to each newly acquired plant. Introduction Compensation is the set of rewards that organizations provide to individuals in return for their willingness to perform various jobs and tasks within the organization. Benefits are the various rewards, incentives, and other items of value that an organization provides to its employees beyond wages, salaries, and other forms of financial compensation. The term total compensation is sometimes used to refer to the overall value of financial compensation plus the value of additional benefits that the organization provides. I. Developing a Compensation Strategy Compensation should never be a result of random decisions but instead the result of a careful and systematic strategic process. A. Basic Purposes of Compensation Compensation has several fundamental purposes and objectives. First, the organization must provide appropriate and equitable rewards to employees. Individuals who work for the organization want to feel valued and be rewarded at a level commensurate with their skills, abilities, and contributions to the organization. In this regard, an organization must consider two different kinds of equity. In addition, compensation serves as a “signaling” function. Internal equity in compensation refers to comparisons made by employees to other employees within the same organization. In making these comparisons, the employee is concerned that he is equitably paid for his contributions to the organization relative to the way other employees are paid in the firm. External equity in compensation refers to comparisons made by employees with similar employees at other firms performing similar jobs. Problems with external equity may result in higher turnover, (because employees will leave for better opportunities elsewhere), dissatisfied and unhappy workers, and difficulties in attracting new employees. More commonly, much of the information concerning external equity comes from a pay survey, or a survey of compensation paid to employees by other employers in a particular geographic area, industry, or occupational group. Some such surveys, especially for executive and managerial jobs, are conducted by professional associations such as the Society for Human Resource Management, and the results are then made available to all members. Other organizations also routinely conduct wage surveys. Business publications such as Business Week, Fortune, and Nation’s Business routinely publish compensation levels for various kinds of professional and executive position. In addition, the Bureau of National Affairs and the Bureau of Labor Statistics also are important sources of government-controlled wage and salary survey information. Figure 9.1presents a sample section from a pay survey. A survey such as this one is sent to other organizations in a given region. In this case, the survey would go to organizations in various industries, but other surveys might be targeted to a specific industry.
HR in the 21st Century: Waging War over Wages The Fair Labor Standards Act (FLSA) of 1938 requires workers to be paid time-and-a-half for any hours worked beyond 40 each week. Employers must judge whether an employee is exempt from overtime, based on the uses of “discretion and independent judgment.” Some companies simply cheat their employees like Hollywood Video. Companies can also make good faith mistakes in classifying employees as exempt or nonexempt because of the complex and changing nature of work. Eighty-six percent of the U.S. Workforce—115 million workers—is covered by overtime laws. White-collar workers often resist the idea of are also hesitant to claiming overtime pay.
But when a female employee, for example, perceives internal inequity vis-à-vis a male employee, this can also lead to a lawsuit. The Equal Pay Act of 1963 stipulates that men and women who perform essentially the same job must be paid the same. If there are differences in the compensation paid to men and women, then such differences may be defensible if they are based on factors such as performance differentials. Compensation can also serve a motivational purpose—that is, individuals should perceive that their efforts and contributions to the organization are recognized and rewarded. Organizations must adequately and effectively manage compensation. The fundamental purpose of compensation, then, is to provide an adequate and appropriate reward system for employees, so that they feel valued and worthwhile as organizational members and representatives. B. Wages versus Salaries Wages generally refer to hourly compensation paid to operating employees. Time is the basis for wages—that is, the organization pays individuals for specific blocks of their time such as payment by the hour. Most jobs that are paid on an hourly wage basis are lower-level or operational jobs within the organization. These employees are typically paid every 1 or 2 weeks. Salary, on the other hand, describes compensation on a monthly or annual basis and compensates employees not for how much time they spend in the organization but for their overall contributions to the organization’s performance. In general, salaries are paid to professional and managerial employees within an organization. C. Strategic Options for Compensation Most organizations establish a formal compensation strategy that dictates how they will pay individuals. Several decisions are embedded within such a strategy. The first relates to the basis for pay. Traditionally, most organizations based pay on the functions performed on the job, but more recently they have begun to rely on skill-based pay and pay-for-knowledge programs. The second decision in developing a compensation strategy focuses on the bases for differential pay within a specific job. In some organizations, especially those with a strong union presence, differences in actual pay rates are based on seniority: With each year of service in a particular job, wages go up by a specified amount, so the longer one works on the job, the more a person makes, regardless of the level of performance on the job. Sometimes the relationship between seniority and pay is expressed as something called a maturity curve, a schedule specifying the amount of annual increase a person receives. In any event, the assumption under a seniority-based pay system is that employees with more experience can make a more valuable contribution to the organization and should be rewarded for that contribution. In other organizations, differences in pay are based on differences in performance, regardless of time on the job. These systems are generally seen as rewarding employees who are good performers rather than those who simply remain longer with the organization. For such systems to succeed, however, the organization has to be certain that it has an effective system for measuring performance. A third decision in dealing a compensation strategy deals with the organization’s pay rates relative to going rates in the market. As shown in Figure 9.2, the three basic strategic options are to pay above-market compensation rates, market compensation rates, or below-market compensation rates. A firm that chooses to pay above-market compensation, for example, will incur additional costs as a result. This strategic option essentially indicates that the organization pays its employees a level of compensation that is higher than that paid by other employees competing for the same kind of employees. In addition to attracting high-quality employees, an above-market strategy has other benefits. Above-market rates tend to minimize voluntary turnover among employees. Paying above-market rates also might be beneficial by creating and fostering a culture of elitism and competitive superiority. The downside to above-market compensation levels, of course, is cost. The organization simply has higher labor costs because of its decision to pay higher salaries to its employees. Once these higher labor costs become institutionalized, employees may begin to adopt a sense of entitlement, coming to believe that they deserve the higher compensation, making it difficult for the organization to be able to adjust its compensation levels downward. Another strategic option is to pay below-market rates. The organization that adopts this strategy is essentially deciding to pay workers less than the compensation levels offered by other organizations competing for the same kinds of employees. Organizations most likely to pursue a pay below-market rate are those in areas of high unemployment. Thus, the organization may able to pay lower than the market-rate and still attract reasonable and qualified employees. On the other hand, the organization will also experience several negative side effects. Morale and job satisfaction might not be as high as the organization would prefer. In addition, turnover may also be higher because better-paying jobs. Compounding the problem even further is the fact that the higher-performing employees are among the most likely to leave, and the lower-performing employees are among the most likely to stay. Finally, a third strategic option for compensation is to pay market rates for employees—that is, the organization may elect to pay salaries and wages that are comparable to those available in other organization. The organization will have higher turnover than a firm paying above-market rates but lower turnover than an organization paying below-market rates. An organization that adopts a market-rate strategy is likely to believe it can provide other intangible or more subjective benefits to employees in return for their accepting a wage rate that is perhaps lower than they might be paid elsewhere. Employees who perceive that they are being offered an unusually high level of job security may therefore be willing to take a somewhat lower wage rate and accept employment at a market rate. D. Determinants of Compensation Strategy Several different factors contribute to the compensation strategy that a firm develops. One general set of factors has to do with the overall strategy of the organization itself. In addition to these general strategic consideration, several other specific factors determine an organization’s compensation strategy. The organization’s ability to pay above-market wages and salaries. In addition, the overall ability of the organization to attract and retain employees is a critical factor. For example, if the organization is located in an attractive area, has several noncompensation amenities, and provides a comfortable, pleasant, and secure work environment, it might be able to pay somewhat lower wages. Union influences are another important determinant of an organization’s compensation strategy. If an organization competes in an environment that is heavily unionized, such as the automobile industry, then the strength and bargaining capacities of the union influence what the organization pays its employees. On the other hand, if the organization does not hire employees represented by unions or if the strength of a particular union is relatively low, then the organization may be able to pay somewhat lower wages and the union influence is minimal or nonexistent. II. Determining What to Pay Once a compensation strategy has been chosen, it is necessary to determine exactly what employees on a given job should be paid. The starting point in this effort has traditionally been job evaluation. A. Job-Evaluation Methods Job evaluation is a method for determining the relative value or worth of a job to the organization so that individuals who perform that job can be compensated adequately and appropriately. Classification System. An organization that uses a classification system attempts to group sets of jobs together into classifications, often called grades. After classifying is done, each set of jobs is then ranked at a level of importance to the organization. A third step is to determine how many categories or classifications to use for grouping jobs. Once the grades have been determined, the job evaluator must write definitions and descriptions of each job class. These definitions and descriptions serves as the standard around which the compensation system is built. Once the classes of jobs are defined and described, jobs that are being evaluated can be compared with the definitions and descriptions and placed into the appropriate classification. A major advantage of the job-classification system is that it can be constructed relatively simply and quickly. It is easy to understand and easy to communicate to employees. It also provides specific standards for compensation and can easily accommodate changes in the value of various individual jobs in the organization. On the other hand, the job classification assumes that a constant and inflexible relationship exists between the job factors and their value to the organization, which sometimes results in jobs within a grade not fitting together well. Figure 9.3 presents an example of a job-classification system. Point System The most commonly used method of job evaluation method is the point system. The point system requires managers to quantify, in objective terms, the value of the various elements of specific jobs. Using job descriptions as a starting point, managers assign points to the degree of various compensable factors that are required to perform each job—that is, any aspect of a job for which an organization is willing to provide compensation. For instance, managers might assign point based on the amount of skill required to perform a particular job, the amount of physical effort needed, the nature of the working conditions involved, and the responsibility and authority involved in the performance of the job. Point systems typically evaluate eight to ten compensable factors for each job. Not all aspects of a particular job may be of equal importance, so managers can allocate different weights to reflect the relative importance of these factors to a job. These weights are usually determined by summing the judgments of various independent but informed evaluators. Because the point system is used to evaluate jobs, most organizations also develop a point manual. The point manual carefully and specifically defines the degrees of points from first to fifth. These point manuals are then used for all subsequent job evaluation. Factor-Comparison Method A third method of job evaluation is the factor-comparison method. Like the point system, the factor-comparison method allows the job evaluator to assess jobs on a factor-by-factor basis. At the same time, it differs from the point system because jobs are evaluated or compared against a standard of key points; instead of using points, a factor-comparison scale is used as a benchmark. Although an organization can choose to identify any number of compensable factors, commonly used systems include five job factors for comparing jobs: responsibilities, skills, physical effort, mental effort, and working conditions. Managers performing a job evaluation in a factor-comparison system are typically advised follow six specific steps: The comparison factors to be used are selected and defined Benchmark or key jobs in the organization are identified The benchmark jobs are ranked on each compensation factors Part of each benchmark’s job wage rate is allocated to each job factor based on the relative importance of the job factor The two sets of ratings are prepared based on the ranking and the assigned wages to determine the consistency demonstrated by the evaluators A job-comparison chart is developed to display the benchmark jobs and the monetary values that each job receives for each factor The factor-comparison system is a detailed and meticulous method for formally evaluating jobs. On the other hand, the factor-comparison method is also extremely complex, difficult to use, time consuming, and expensive for an organization that chooses to adopt it. A fair amount of subjectivity is involved, and it is possible that people whose jobs are evaluated with this system may feel that inequities have crept into the system through either managerial error or politically motivated oversight. B. Pay for Knowledge and Skill-Based Pay Pay for knowledge involves compensating employees (usually managerial, service, or professional employees) for learning specific material. Pay-for-knowledge systems reward employees for mastering material that allows them to be more useful to the organization in the future and are based on mastering new technology or mastering information that relates to global issues. These systems tend to be fairly expensive to start because the organization needs to develop methods for testing whether the employee has mastered the information in question, but once in place, the costs are usually not excessive. Skill-based pay operated in much the same way as a pay-for-knowledge system, but these plans are more likely to be associated with hourly workers. Instead of rewarding employees who master new material, employees are rewarded for acquiring new skills. This approach affords management a great deal of flexibility in scheduling, and it benefits employees because they can rotate through different jobs (providing some variety) and acquire skills that may increase their market value if they choose to seek another job. III. Wage and Salary Administration Most organizations call this process wage and salary administration or compensation administration. Much of this administration involves making adjustments to wages and salaries as the result of pay rises or changes in job responsibilities. Also certain issues related to compensation must also be addressed as part of this administration process. Two of the most important involve pay secrecy and compression. A. Pay Secrecy Pay secrecy refers to the extent to which the compensation of any individual in an organization is secret or the extent to which it is formally made available to other individuals. On the other hand, advocates of pay secrecy maintain that what an individual is paid is his or her own business and not for public knowledge. They also argue that if pay levels are made known to everybody else, then jealousy or resentment may result. On the other hand, some organizations adopt a more open pay system in which everyone knows what everyone else makes. The logic is that this promotes equity and motivation. Many publicly funded organizations such as state universities and public schools have open pay systems whereby any interested individuals can look at budgets or other information to determine how much any employee is being paid. B. Pay Compression Pay compression occurs when individuals with substantially different levels of experience or performance abilities are being paid wages or salaries that are relatively equal. Pay compression is most likely to develop when the market rate for starting salaries increases at a rate faster than an organization can raise pay for individuals who are already on the payroll. As a result, an employee with experience may find him- or herself not making much more than an entry-level employee. In some cases, the external market can change so rapidly that new employees are actually paid more than experienced employees; this is known as pay inversion. IV. The Nature of Benefits Programs In addition to wages and salaries, most organizations provide their employees with an array of other indirect compensations, or benefits. Although these benefits were once called fringe benefits (and a few people still use this expression today), once managers began to fully realize that they were spending more than one-third of wages and salaries in additional expenses on benefits they decided that the word fringe might have been understating the true benefits. A. The Costs of Benefits Programs Data from the U.S. Chamber of Commerce provides some insights into the position of total compensation paid to a typical employee in the United States. According to these figures, the typical employee costs the company just over $50,000 a year in total compensation. Of this, just over $30,000 is paid for time worked, and the remainder paid is for something other than time worked such as vacation time, mandated benefits, pensions, insurance, and so forth. It also appears that many organizations are trying to hold the tide, or even reverse it, by asking employees to bear more of the costs of these benefits. However, the United States actually ranks rather low in terms of the relative costs of benefits around the world. These global differences result almost entirely from mandated benefits, which are based on the different social contracts (guarantees made by the government in return for high taxes) in place in the respective countries, and they are substantial. B. Purposes of Benefits Programs In general, benefit programs serve several purposes for the organization. First, many experts believe that organizations willing to spend more money on total compensation are able to attract better-qualified people and convince employees to work harder, saving the company money. The general concept underlying this approach is known as efficiency wage theory. Most experts argue that money spent on benefits affects job satisfaction and subsequent turnover. Even if employees do not work harder in response to better benefits, they are more likely to remain with a firm that provides better benefits and are more satisfied with that firm. As a result, the need to remain competitive with other firms in an industry is a major force driving up the price of benefits. In addition, various social, cultural, and political forces may promote the introduction of new and broader benefits programs. Because of the growth in the numbers of female workers, more and more companies offer on-site day care, dual-parent leave for birth of a child, and other benefits that make it easier for people to work and have productive careers. Finally, employee expectations are a driving force in determining what benefits a firm must offer. V. Mandated Benefits Specifically in the United States several laws have been passed that require organizations to offer certain types of benefits to their employees or that legislate the way benefit plans are administered. Protection plans are benefits designed to provide protection to employees when their income is threatened or reduced by illness, disability, death, unemployment, or retirement. Unemployment insurance was created in the United States as part of the Social Security Act of 1935. Unemployment insurance is intended to provide a basic subsistence payment to employees who are between jobs—that is, for people who have stopped working for one organization but who are assumed to be seeking employment with another organization. Employers pay premiums to unemployment insurance funds. The premium payment is increased if more than an average or designated number of employees from the organization are drawing from the fund at any given time. To be covered by unemployment insurance, an individual must have worked a minimum number of weeks, must now be without a job, and must be willing to accept a suitable position if one is found through a state’s unemployment compensation commission or department. Furthermore, if a covered employee must be out of work through no fault of his or her own (as in the case of lay-off), then benefits start almost immediately. If the employee quits or is fired for cause (e.g., for poor performance), there is usually a waiting period before the individual can collect unemployment benefits. Payment are generally about half of what individuals might have been earning on their former jobs, although an upper limit is placed on the benefit paid. A. Social Security A second mandated benefit created by the same law is Social Security itself. What most people think of as Social Security is officially the Old Age Survivors and Disability Insurance Program. The initial purpose of this program was to provide some limited income to retired individuals to supplement their own personal savings, private pensions, part-time work, and so forth. The Social Security program is funded through employee and employer taxes that are withheld on a payroll basis. Individuals are eligible for partial benefits at 62 and full benefits at 65. If an employee dies before reaching retirement age, then a family with children under age 18 receives survival benefits, regardless of the employee’s age at the time of her or his death. In addition, an employee who becomes totally disabled before age 65 is also eligible to receive insurance benefits; Medicare benefits are provided under this act. B. Workers’ Compensation Workers’ compensation is insurance that covers individuals who suffer a job-related illness or accident. Employers pay the cost of workers’ compensation insurance. The exact premium paid is a function of each employer’s past experience with job-related accidents and illnesses. C. Mandated Health Care The Patient Protection and Affordable Health Care Act (or the Affordable Care Act) was signed into law on March 23, 2010. The basic aim of the Act is to increase the quality and affordability of health-care insurance, lower the number of uninsured employees, and reduce the cost of insurance for all involved. Most of the Act deals with providing insurance for the uninsured, either through Medicaid (federally funded) or mandated employer policies. Funding for these provisions will come through higher Medicaid taxes on incomes over $250,000 (for joint filings), a special assessment on insurance companies with policies that charge more than $10,200 a year for an individual premium, various other taxes, and proposed reduction in Medicare and Medicaid spending. Estimates place the total cost of this overhaul of the health-care system at more than $1 trillion. It does appear, however, that some form of health-care insurance coverage is now mandatory for most U.S. firms. VI. Nonmandated Benefits A. Private Pension Plans In addition to the pension benefits guaranteed under the Social Security Act, many companies elect to establish private pension plans for their employees. These prearranged plans are administered by the organization that provides income to the employee at her or his retirement. Contributions to the retirement plan may come from either the employer or the employee, but in most cases they are supported by contributions from both parties. Different retirement plans are available, including individual retirement accounts (IRAs) and employee pension IRAs. In addition, 401(k) plan allows employees to save money on a tax-deferred basis by entering into salary deferral agreements with their employer. There are two basic types of pension plans: defined basic plans and undefined contribution plans. Under defined benefit plans, the size of the benefit is precisely known and is usually based on a simple formula using input such as years of service and salary. Under defined contribution plans, the size of the benefit depends on how much money is contributed to the plan. This money can be contributed by the employer alone (noncontributory plans) or by the employer and the employee (contributory plans). B. Paid Time Off No U.S. laws mandate this type of benefit, but most employees now expect it. Most full-time employees receive about ten paid holidays per year. In addition, religious holidays (in addition to Christmas) are also often given. Organizations have to be careful with this practice, however, because, growing diversity in the workplace is accompanied by an increasingly diverse set of religions and thus religious holidays, requiring clear policies about religious holidays, which are enforced equitably. Paid vacations are also common but are likewise not required by law. Most organizations vary the amount of paid vacation according to an individual’s seniority with the organization, with newer employees receiving 1 week of paid vacation and the most senior employees receiving as many as 4 weeks of paid vacation a year. But, as can be seen in Table 9.2, some countries actually mandate extensive benefits for all employees. Another common paid-off plan is sick leave. This benefit is provided when an individual is sick or otherwise physically unable to perform his or her job duties. Most organizations allow an individual to accumulate sick time on the basis of some schedule, such as 1 sick day per month. Some organizations require that employee’s submit a doctor’s note verifying illness in order to be paid for the day, but others do not. Also, some organizations require the employee to use his or her allocation of sick days within a certain period of time (such as by December 31) or lose them. Finally, another form of paid time off is personal leave. Sometimes an organization allows an employee to take a small number of days off for personal business such as funerals and weddings. C. Other Benefits Also, in an attempt to reduce health-care costs, some companies have introduced a different type of benefit known as a wellness program. Wellness programs concentrate on keeping employees from becoming sick rather than simply paying expenses when they do become sick. In some organizations, these programs may be simple and involve little more than organized jogging or walking during lunch breaks, but some organizations have full-fledged health clubs on site and provide counseling and programs for fitness and weight loss. These plans are either paid for by the company or heavily subsidized because they are attractive to employees who appreciate the ease and low costs; at the same time they can reduce costs by reducing the number of sick days, cut medical costs, and improve productivity as the organization gains a more physically fit workforce. An additional group of benefits is often referred to collectively as life-cycle benefits, or benefits targeted at different stages in an employee’s life. The most common are childcare and elder-care benefits. Child-care benefits are becoming more popular because the changing nature of the workforce and the fact that being considered a family-friendly organization is increasingly viewed as a competitive advantage in attracting talented workers. Elder-care benefits are also growing in popularity. These typically take the form of referrals for employees with a disabled parent or one who needs constant care. Long-term health-care insurance is also becoming a more common benefit, and these plans provide for nursing homes or at-home care. A somewhat different type of service is contained in what are referred to as employee assistance plans. These programs are designed to assist employees who have chronic problems with alcohol or drugs or serious domestic problems. These programs are typically voluntary, and referrals are confidential. Yet, the needs of the organization must be balanced with the needs of the individual to avoid any stigma attached to having the specific problem. Finally, employee perquisites are provided. A perquisite, or perk, as it is informally known, is an extra benefit that may or may not have any direct financial value but is considered an important reward by employees. A perk might include a bigger office, a company car, membership in a country club, stock purchase options, premium insurance coverage, and so forth. Although most benefits programs are designed for all the employees in an organization, Cafeteria-style benefits plans allow the employee to choose the benefits he or she really wants. Under these plans, the organization typically establishes a budget indicating how much it is willing to spend per employee on benefits. The employee is then presented with a list of possible benefits and the cost of each; they are free to choose the benefits in any combination they wish. Nonetheless these programs are not without problems. One challenge is the cost of administering such plans. Another problem is what is known as adverse selection. This refers to the fact that the employees most likely to select a benefit, such as children’s braces, is also most likely to use the benefit, which tends to drive up benefits costs. Finally, given a choice of benefits, employees are not always rational in their choices. One of the most controversial issues for benefits programs involves the question of whether to extend benefits to same-sex partners. Obviously, objections to such a plan are based on different points of view, but more organizations are coming to believe that it is simply fair to extend benefits to same-sex partners. VII. Contemporary Issues in Compensation and Benefits Three contemporary issues in compensation and benefits include executive compensation, growing legal issues, and how best to evaluate compensation and benefits programs. A. Executive Compensation Most senior executives receive their compensation in two forms: base salary and some form of incentive pay. The traditional method for incentive pay is in the form of bonuses, which can be exceed their base pay by some multiple. A stock-option plan is established to give senior managers the option to buy the company stock in the future at a predetermined, fixed price. The basic idea underlying stock-option plans is that if the executives contribute to higher levels of organizational performance, then the company stock should increase. Aside from stock-option plans, other kinds of executive compensation are also used by some companies. Among the popular are such perquisites as memberships in private clubs, access to company recreational facilities, and similar kinds of benefits. Some organizations occasionally make low- or no-interest loans available to senior executives. Furthermore, executive compensation in the United States seems far out of line with that paid to senior executives in other countries. Finally, there is some concern about the effects the huge gap between CEO pay and everyone else’s pay might have on those other employees. On the other hand, the typical employee may view this huge salary as a prize worth aiming for. From this perspective, pay structures are seen as tournaments, and the bigger the prize, the more intense the competition, and so the greater the effort and productivity. B. Legal Issues in Compensation and Benefits The Fair Labor Standards Act includes provisions for minimum wage, overtime, and child labor. It also specifies which employees are covered by the overtime provisions and which are exempt; this usually affects whether an employee is paid wages or a salary. Even nonexempt workers are sometimes asked to work more than 40 hours with no overtime pay; in exchange, they are offered time off, which is usually referred to as comp time. Comp time is often not as beneficial to the employee, who would otherwise earn more in total pay, but it is more cost-efficient for the organization. Organizations typically seek to ensure that their benefit plans are qualified; that is, where the employer receives an immediate tax deduction for any contributions made, the employee does not incur a tax liability at the time of the employer deduction, and investment returns (such as from stocks and bonds) are accumulated tax-free. Although the requirements for qualification differ for different types of benefit plans, it is critical that the plan be nondiscriminatory. Of course, the most legal issue in this area deals with the Employee Retirement Income Security Act (ERISA) of 1974. This law was passed to protect employees who had contributed to their pensions but were unable to collect those benefits later. This situation occurred primarily because of the restrictions that the organization had placed on employees before they could receive benefits. (Vesting rights are guaranteed rights to receive pension benefits.) Under ERISA, however, vesting rights become operational after 6 years at the most, and employees with less service are still usually eligible to receive some portion of their retirement benefits. ERISA also provides pension protection for the funding underlying the pension plan. The Pension Benefit Guarantee Corporation oversees how pension plans are funded, and it can seize corporate assets to support underfunded plans. In addition, ERISA also allows an employee to carry a portion of his or her benefits to another job. ERISA also imposes some minimum requirements for how pension plans are communicated to employees. C. Evaluating Compensation and Benefit Programs Given the enormous cost to an organization of compensation and benefit packages, its managers clearly must carefully assess the benefit of these packages for the organization. In any case, many organizations may find that their benefit programs do not seem to be as much as they could be simply because the organization has not communicated effectively with employees about these benefits. Instructor Manual for Human Resources Angelo Denisi, Ricky Griffin 9781285867571
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