Compensation and Rewards

1
Compensation and Rewards

• Business 158
• Spring Semester 2007
• Tim Brown

Session 3a
2
Agenda

• This week in compensation
• QUIZ
• To this point in the course
• Benefits (chapter 12)
• Break
• Benefits (chapter 13)

3
5 Dimensions of Strategy

• Objectives
• Internal alignment
• External alignment/competitiveness
• Employee contributions
• Management

4
Key Steps to Formulating Compensation Strategy
Exhibit 2.5

• 1. Assess Total Compensation Implications
• Competitive Dynamics
• Core Culture / Values
• Social and Political Context
• Employee / Union Needs
• Other HR Systems

2. Fit Policy Decisions to Strategy Objectives
Contributions Alignment
Administration Competitiveness

• 4. Reassess the Fit
• Realign as Conditions Change
• Realign as Strategy Changes

• 3. Implement Strategy
• Design System to Translate Strategy
• into Action
• Choose Techniques to Fit Strategy

5
2 Approaches Contrasted

• Best fit
• Do what works in a specific situation
• Best practice
• Do what works best in other places

6
Dual Career Ladder
VP
Fellow
Principal Engineer
Director
Staff Engineer
Manager
Hire
Senior Engineer
Hire
Engineer
Hire
7
Perceived Equity of a Pay Structure
MY PAY My qualifications My work performed My
product value
OTHERS PAY Their qualifications Their work
performed Their product value
8
Benefits

• Benefit program design considerations
• Benefit program requirements
• If you offer this, you must offer/include that

9
Learning Objectives (Chapter 12)

• Identify reasons for growth in employee benefits
• Discuss major issues affecting benefit planning,
  design, and administration
• Discuss contributions that flexible benefits
  offer in employee satisfaction and cost
  containment
• Explain employer and employee perspectives
  regarding preferences and choices in benefits
• Understand how communications can increase the
  perceived value of a benefits program

10
What Are Employee Benefits?
The part of the total compensation package, other
than pay for time worked, provided to employees
in whole or in part by the employer Examples
life insurance, pension, workers compensation,
vacation, holidays . . .
11
Changes in Benefit Costs Over Time
Exhibit 12.1
Figures like these vary based on the
definition of benefits the trend is main
point
In 2006, average benefit costs per employee in
high-tech companies was over 25,000
12
Why the Growth in Employee Benefits?
Wage and Price Controls
Employer Impetus
Cost Effectiveness of Benefits
Government Impetus
Unions
13
Strategic Reasons for Offering Benefits

• Help attract employees
• Help retain employees
• Elevate the image of the organization with
  employees and other organizations
• Increase job satisfaction

Notice that motivation is not listed
14
Key Issues in Benefit Planning, Design, and
Administration
15
Benefit Planning and Design Decisions

• What is the relative role of benefits in a total
  compensation package?
• How much total compensation, including benefits,
  should be provided?
• What benefits are expected? What should be
  given/offered?
• What is an appropriate mix of benefits?
• How do benefits aid in minimizing turnover or
  maximizing recruitment and retention of
  employees?
• What strategies can be used to ensure that
  benefits areexternally competitive?
• Can benefits be cost justified?

16
Major Benefit Administration Issues
Who should benefit?
1
2
Should employees get benefit choices ?
3
How should benefits be financed?
4
Are benefits legally defensible?
17
Assessing Employee Preferences

• Demographic criteria
• Age
• Sex
• Marital status (domestic partnership recognition)
• Number and type of dependents (children/elders)
• Type of work performed (office vs manual PT/FT)
• Employee survey via questionnaire
• Survey of other employer offerings/promotions

18
Ranking Value of Employee Benefits
Exhibit 12.2
19
Advantages of Flexible Benefits
Exhibit 12.5

• Employees choose packages to satisfy their needs
• Flexibility better meet needs of diverse
  workforce
• Increased involvement improves understanding and
  perceived value by employees and families
• Flexible plans make introduction of new benefits
  less costly
• Aids with cost containment Organization sets
  dollar maximum employee chooses within the
  constraint.

20
Disadvantages of Flexible Benefits
Exhibit 12.5

• Employees may blame the company for their own bad
  choices or out of pocket expenses
• Administrative burdens and expenses increase
• Because employees pick benefits they use, high
  subsequent benefit utilization increases the cost
• Subject to non-discrimination requirements in
  Section 125 of the Internal Revenue Code.

21
Alternative Benefit Financing Plans

• Non-contributory
• Employer pays total costs
• Contributory
• Costs shared between employer and employee
• Employee financed
• Employee pays total costs for some benefits

22
Legislative Impact on Benefits
Exhibit 12.7

• Fair Labor Standards Act (FLSA)
• Employee Retirement Income Security Act (ERISA)
• Tax Reforms 1982, 1986
• Health Maintenance Act

• Age Discrimination in Employment Act
• Civil Rights Act
• Pregnancy Disability Act
• COBRA
• Family Medical Leave Act (FMLA)

23
Administering Benefits Programs
1
Communicating benefits programs
2
Claims processing issues
3
Cost containment strategies
24
Communicating Benefits Effectively
1
Spell out benefit objectives and ensure
communications achieve the objectives
2
Match the message with the appropriate medium
3
Communications must be complete, clear, and free
of complex jargon
25
Communicating Employee Benefits

• Methods of communication
• Employee handbook
• Personalized benefit statements
• Meetings with employees
• Multi-media presentations
• Intranet
• Required communications
• ERISA requirements
• COBRA requirements
• SEC requirements
• Posting requirements

26
Administration Trend Outsource

• Retain strategic functions and design
  recommendations internally
• Move benefits administration to outsourcing
  partners
• Offers some legal protection, cost controls

27
Cost Containment Considerations
1
Probationary periods (when)
Benefits limitations (maximum)
2
3
Co-payments (minimum)
4
Administrative cost containment
28
Break

• 15 minutes

29
Learning Objectives (Chapter 13)

• List seven categories of employee benefits with
  examples
• Explain which benefits are legally required of
  employers
• Discuss factors associated with the rapid cost
  increases with workers compensation programs.
• Discuss the problem of social security solvency
  and potential options to reform the social
  security program
• Explain the key differences between the defined
  benefit and defined contribution retirement plans
• Identify cost containment strategies available to
  control the escalating costs of health care

30
Categories of Employee Benefits
Exhibit 13.1
1
Legally required payments
2
Retirement and savings plan payments
3
Life insurance and death benefits
4
Medical and medical-related benefit payments
5
Paid rest periods, coffee breaks, lunch periods,
. . .
6
Payments for time not worked
7
Miscellaneous benefit payments
31
Legally Required Benefits
32
Workers Compensation

• Form of no-fault insurance
• Employer liable for providing benefits to
  employees that result from occupational
  disabilities or injuries, regardless of fault
• Disability must be work related
• Covered by state, not federal, laws

33
Workers Compensation Benefits

• Compensation for permanent injury
• Permanent total disability and temporary total
  disability
• Permanent partial disability (loss of use of a
  body part)
• Survivor benefits for fatal injuries
• Medical expenses
• Rehabilitation

34
Issues Workers Compensation
Increased costs of medical expenses
Cost increases due to . . .
Waste, fraud, abuse, Legal/investigative costs
Rising cost of replacing worker wages
35
Overview Social Security

• Provides a basic foundation of security for
  American workers and their families
• For tax purposes, system is split into two
  programs
• Social Security - 6.2
• Medicare - 1.45
• Social Security tax limited medicare tax is not
• Employer matches contribution of employees

36
Social Security and Medicare Benefits

• SOCIAL SECURITY
• Retirement income
• Dependent benefits
• Survivors benefits
• Lump-sum death benefits
• 6.2 of eligible earning
• Employee and employer funded

• MEDICARE
• Hospital insurance (Medicare, Part A)
• Medical Insurance (Medicare, Part B)
• 1.45 of eligible earnings (unlimited)
• Employee and employer funded

37
Issues Social Security

• Number of retired workers is rising without an
  increase in number of contributors to offset
  costs
• Currently, 3.5 workers pay into system for each
  person collecting benefits Within next 40
  years, ratio drops to 21
• Reform options
• Increase payroll taxes
• Decrease benefits
• Use general revenues
• Have social security go to an employees own
  account to be earmarked of his/her personal
  retirement

38
Unemployment Insurance Costs

• Benefits financed by federal and state taxes
  levied on employers under Federal Unemployment
  Tax Act (FUTA)
• Employers pay 6.2 on first 7,000 earned by each
  employee (434)
• 5.4 disbursed to state unemployment commissions
  (378)
• 0.8 used for federal administrative costs (56)
• Additional costs depend on prior unemployment
  rate
• Lower percentages charged to employers with fewer
  discharged employees

39
Unemployment Insurance Benefits

• Payments typically continue for 26 weeks
• Extended benefits paid when either of two
  conditions prevail
• Benefits based on a percentage of an individuals
  earnings over a recent 52-week period

40
Family and Medical Leave Act

• Coverage Employers with 50 or more employees
• Eligibility 12 months employment with employer
  in which employee works 1,250 hrs
• Qualifying events Specified family / medical
  reasons
• Conditions Employee must be able to return to
  same job or one with equal status
• Health benefits Continue while employee is on
  leave
• Notification 30 days

41
Consolidated Omnibus BudgetReconciliation Act
(COBRA)

• Coverage Employers with 20 or more employees
• Eligibility Provides current and former
  employees and their spouses and dependents with
  temporary extension of health care benefits
• Qualifying events Specified events (e.g.
  layoffs)
• Qualifying event coverage 18 to 36 months,
  depending on category of qualifying event
• Coverage stops When employee becomes eligible
  for medical insurance from new employer or gains
  Medicare coverage
• Cost Cost of insurance plus 2

42
Health Insurance Portabilityand Accountability
Act (HIPPA)

• Key provisions
• Lessens an employers ability to deny coverage
  for a preexisting condition
• Prohibits discrimination on the basis of
  health-related status
• Provides stringent privacy provisions

43
Retirement and Savings Plan Payments

• Defined benefit plans
• Defined contribution plans
• Employee Retirement Income Security Act
  (E.R.I.S.A.)

44
Defined Benefit Plans

• Employer provides a specific pension level
• Fixed dollar amount or
• Percentage-of-earnings that may vary with years
  of seniority
• Employer finances this obligation by
• Following an actuarially determined benefits
  formula and
• Making current payments that will yield the
  future pension benefit for a retiring employee
• Determination of benefit levels
• Average earnings at end of tenure (last 3 5
  years) or
• Average career earnings or
• Fixed dollar amount not dependent on earnings

45
Defined Contribution Plans

• Require specific contributions by employer
• Final benefit received by employees is unknown
• Dependent on investment success of plan manager
• Three popular forms of these plans
• 401(k) plan
• Employee Stock Ownership Plan (ESOP)
• Profit sharing (if distribution of profits is
  delayed until retirement)

46
Relative Advantages ofDifferent Pension
Alternatives
Exhibit 13.7
47
Employee Retirement Income Security Act (ERISA)

• Eligibility Employees at least 21 years old
• Employers may require 6 months of service as a
  precondition
• Vesting Length of time employee must work for
  employer before entitled to employer payments to
  plan
• Any contributions made by an employee to a
  pension fund are immediately and irrevocably
  vested
• Employers contribution must vest according to
  two formulas
• Portability Issue for employees moving to new
  companies
• Law does not require mandatory portability of
  private pensions
• An employer may voluntarily agree to permit
  portability
• Pension Benefit Guaranty Corporation (PBGC)
• Insures payment of certain pension plan benefits

48
How Much Retirement Income to Provide?

• What level of retirement income should be set as
  a target?
• Should social security benefits be factored in
  when considering level of retirement income?
• Should other post-retirement income sources be
  integrated with pension?
• How large a role should seniority play in
  determining pension level?
• What can a company afford?

49
Life Insurance

• One of the most common employee benefits
• 87 of medium and large companies offer life
  insurance
• Most companies offer term policies
• Value of one to two times an employees salary
• Most plan premiums paid completely by employer
• Varying amounts of additional coverage often an
  option at employee expense

50
Health and Medical Benefits
51
Types of Health Care Systems

• Traditional coverage
• Community-based system,such as Blue Cross
• Commercial insurance plan
• Self-insurance
• Health maintenance organization (HMO)
• Preferred provider organization (PPO)
• Point-of-service plan (POS)

52
Controlling Health Care CostsThree Strategies

• Motivate employees to change their demand for
  health care
• Change design or administration of policies
• Alter structure of health care delivery systems
  and participate in coalitions
• HMOs
• PPOs
• Promote preventive health programs
• No-smoking policies
• Healthy food in cafeterias and vending machines

53
Controlling Health Care CostsDesign and
administration

• Increase deductibles
• Change coinsurance rates
• Reduce maximum benefits
• Coordinate benefits with employees and spouses
• Audit health care charges
• Require preauthorization for visits to facilities
• Require mandatory second opinion for procedures
• Use intranet technology to allow employees access
  to online benefit information

54
Miscellaneous Benefits
Paid Time Off During Working Hours
Payment for Time Not Worked
Child Care
Elder Care
Domestic Partner Benefits
Legal Insurance
55
Paid Time Off During Working Hours

• Rest periods
• Lunch periods
• Travel
• Work prep time

56
Pay for Time Not Worked

• Vacation
• Holidays
• Sick pay
• Personal holiday
• Funeral leave
• Military leave
• Jury duty

57
Other Miscellaneous Services