Chapter 7: Compensation and Benefits
7.4 Other Types of Compensation
Learning Objectives
By the end of this section, you will be able to:
- Explain the various types of benefits that can be offered to employees.
As you already know, there is more to a compensation package than just pay. There are many other aspects to the creation of a good compensation package, including not only pay but incentive pay and other types of compensation. First, we will discuss benefits that are mandated by the federal government, and then we will discuss types of voluntary benefits, including both incentive pay and other types of compensation.
Voluntary: Incentive Pay Systems
As we discussed earlier, there are several types of incentive pay systems that can be tied directly to business objectives and the employees’ ability to help the company meet those objectives. They include commissions, bonuses, profit sharing, stock options, team pay, and merit pay.
Commissions are usually calculated on the basis of a percentage and earned based on the achievement of specific targets that have been agreed upon by the employee and employer. For example, many salespeople receive commissions from each item sold. Many commission incentive plans require employees to meet a minimum level of sales, who then are paid a commission on each sale beyond the minimum. A straight commission plan is one in which the employee receives no base pay and entire pay is based on meeting sales goals. Many plans, however, include a base pay and commission for each sale. Base pay is the guaranteed salary the employee earns. Remember that compensation can not go below the minimum wage established in law.
Several types of bonuses can be given to employees as incentive pay. Meeting certain company goals or successfully completing a project or other objectives can be tied to a bonus, which is a one-time payment to an employee. A spot bonus is an unplanned bonus given to an employee for meeting a certain objective. These types of bonuses do not always have to be money; they can be other forms such as a gift certificate or trip. Fifty-eight percent of WorldatWork members [1] said that they provide spot bonuses to employees for special recognition above and beyond work performance.
Some organizations choose to reward employees financially when the organization as a whole performs well, through the use of profit sharing as an incentive. For example, if an organization has a profit-sharing program of 2 percent for employees, the employees would earn 2 percent of the overall profit of the company. As you have guessed, this can be an excellent incentive for employees to both work as a team and also monitor their own personal performance so as not to let down the team. For example, in 2011, US automaker General Motors gave one of its highest profit-sharing payouts ever. Forty-five thousand employees received $189 million in a profit-sharing bonus, which equaled about $4,200 per person. [2] While profit sharing can be a great incentive, it can also be a large expense that should be carefully considered.
Employee ownership of the organization is similar to profit sharing but with a few key differences. In this type of plan, employees are granted stock options, which allow the employees to buy stock at a fixed price. Then if the stock goes up in value, the employee earns the difference between what he or she paid and the value of the stock. With this type of incentive, employees are encouraged to act in the best interest of the organization. Some plans, called employee stock ownership plans, are different from stock options, in that in these plans the employee is given stock as reward for performance.
In a smaller organization, team pay or group incentives can be popular. In this type of plan, if the group meets a specified goal, such as the increase of sales by 10 percent, the entire group receives a reward, which can consist of additional pay or bonus. Please note that this is different from individualized bonuses, discussed earlier, since the incentive is a reward for the group as opposed for the individual. In unionized organizations, performance-based pay is usually discouraged but unions look more favourably on group incentive plans than individual incentive plans.
Merit pay is a pay program that links pay to how well the employee performs within the job, and it is normally tied to performance appraisals. Merit base is normally an annual pay increase tied to performance. The problem with merit pay is that it may only be received once per year, limiting incentive flexibility. To make merit pay work, performance guidelines should be predetermined. Some organizations offer cost of living annual increases (COLAs), which is not tied to merit but is given to employees as an annual inflationary increase.
Fortune 500 Focus
While the cost of health insurance premiums may be going up for most Americans, these premiums do not hit the individual employee’s pocketbook at Microsoft. Microsoft, based in Redmond, Washington, finds itself once again on the Fortune500 Best Companies to Work For list in several areas, including paying for 100 percent of employees’ health-care premiums. [3] In addition to cutting this cost for employees, Microsoft also offers domestic partner benefits, one of the first Fortune500 companies to do so. In 2005, Microsoft also began to offer partial coverage for transgender surgery to its existing health-care coverage, which earned Microsoft the highest attainable score by the Human Rights Campaign (HRC) Equality Index. [4] Microsoft also promotes fitness and wellness as part of its health-care plan, providing an on-site fitness center and subsidized gym memberships.
Paid Time Off: Time off is a benefit we should address, since this type of benefit varies greatly, especially in other parts of the world. French companies, for example, are mandated by law to provide five weeks of paid vacation time to employees. [8] In Canada, minimums are established in each jurisdiction. Here are the general types of time off:
- Paid Holidays: Many companies offer paid holidays on top of statutory holidays (such as New Year’s Day, Labour Day, Christmas, Canada Day), which are mandated by law. For example, although Easter Sunday and Easter Monday are not statutory holidays in BC, many employers choose to recognize them as a holiday day. These are often referred to as “bank holidays”. In Ontario, there are certain days, like Remembrance Day, that are not officially statutory holidays but there are special provisions in Ontario’s employment standards laws to deal with “voluntary statutory” holidays.
- Sick Leave: The number of sick leave days can vary greatly among employers. The average in the United States is 8.4 paid sick days offered to employees per year. [9]
- Paid Vacation: With full-time employment, many organizations also offer paid vacation to employees, and it is generally expected as part of the compensation package. According to a survey performed by Salary.com, the average number of paid vacation days in the United States is nine days for one year of service, fourteen days for five years of service, and seventeen days for ten years of service to the organization. [10] Organizations vary greatly in how vacation time is accrued. Some organizations give one hour for a certain number of days worked, while others require a waiting period before earning any paid time off (PTO). In addition, some organizations allow their employees to carry over unused vacation time from one year to the next, while other employees must use their vacation every year or risk losing it. Employment Standards legislation identifies the minimum number of weeks holiday and minimum vacation pay employees are entitled to; many employers choose to go beyond these minimums.
- Paid Time Off (PTO): One option is to provide a set number of days off, which can be used for vacation time, holidays, and/or sick leave.
To promote longevity, some organizations offer paid (or for example, 60 percent of salary paid) sabbaticals. For example, after five years of employment, the employee may take a paid sabbatical for one month.
A Final Note on Compensation and Benefits Strategy
When creating your compensation plan, of course the ability to recruit and retain should be an important factor. But also, consideration of your workforce needs is crucial to any successful compensation plan. The first step in development of a plan is to ask the employees what they care about. Some employees would rather receive more pay with fewer benefits or better benefits with fewer days off. Surveying the employees allows you, as the HR professional, to better understand the needs of your specific workforce. Once you have developed your plan, understand that it may change to best meet the needs of your business as it changes over time.
Once the plan is developed, communicating the plan with your employees is also essential. Inform your employees via an HR blog, e-mails, and traditional methods such as face to face. Your employees might not always be aware of the benefits cost to the company, so making sure they know is your responsibility. For example, if you pay for 80 percent of the medical insurance premiums, let your employees know. This type of communication can go a long way to allowing the employees to see their value to you within the organization.
Key Takeaways
- Before beginning work on a pay system, some general questions need to be answered. Questions such as what is a fair wage from the employee’s perspective and how much can be paid but still retain financial health are important starting points.
- After some pay questions are answered, development of a pay philosophy must be developed. For example, an organization may decide to pay lower salaries but offer more benefits.
- Once these tasks are done, the HR manager can then build a pay system that works for the size and industry of the organization.
- Besides salary, one of the biggest expenses for compensation is medical benefits. These can include health benefits, vision, dental, and disability benefits.
- Canada Pension Plan, Worker’s Compensation premiums, and Unemployment Insurance premiums are required by law.
- Profit sharing is a benefit in which employees receive a percentage of profit the organization earns. Stock ownership plans are plans in which employees can purchase stock or are granted stock and become an owner in the organization.
- Team rewards are also a popular way to motivate employees. These can be in the form of compensation if a group or the company meets certain target goals.
- Paid time off, or PTO, can come in the form of holidays, vacation time, and sick leave. Usually, employees earn more days as they stay with the company.
- Communication with employees is key to a successful benefits strategy.
Exercises
1: Of the benefits we discussed, which ones are required by law? Which are not?
2: Describe the considerations when developing medical & dental extended benefit packages. Which do you think would be the most important to you as the HR manager?
3: Visit websites of three companies you might be interested in working for. Review the incentives they offer and be prepared to discuss your findings in class.
[1] WorldatWork, “Spot Bonus Survey,” July 2000, accessed July 23, 2011, http://www.worldatwork.org/waw/research/html/spotbonus-home.html.
[2] Nick Bunkley, “GM Workers to Get $189 Million in Profit Sharing,” New York Times, February 14, 2011, accessed February 21, 2011,http://www.nytimes.com/2011/02/15/business/15auto.html?_r=2&ref=business.
[3] “100 Best Companies to Work For,” Fortune, accessed July 21, 2011,http://money.cnn.com/magazines/fortune/bestcompanies/2010/snapshots/51.html.
[4] Gay, Lesbian, Bisexual, and Transgender Employees at Microsoft (GLEAM), Microsoft website, accessed July 21, 2011,http://www.microsoft.com/about/diversity/en/us/programs/ergen/gleam.aspx.
[5] Bureau of Labor Statistics, “Employee Benefits Survey,” 2010, accessed July 23, 2011, http://www.bls.gov/ncs/ebs/benefits/2010/ownership/private/table01a.htm.
[6] Towers Watson, “2009 Health Care Cost Survey Reveals High-Performing Companies Gain Health Dividend,”
[7] US Bureau of Labor Statistics, “Employee Benefits in the United States: March 2010,” news release, July 27, 2010, accessed September 12, 2011,http://www.bls.gov/ncs/ebs/sp/ebnr0016.txt.
[8] Rebecca Leung, “France: Less Work, More Time Off,” CBS News, February 11, 2009, accessed July 23, 2011,http://www.cbsnews.com/stories/2005/06/27/60II/main704571.shtml.
[9] HRM Guide, “Sick Day Entitlement Survey,” accessed February 21, 2011,http://www.hrmguide.com/health/sick-entitlement.htm.
[10] Jessica Yang, “Paid Time Off from Work Survey,” Salary.com, accessed September 15, 2011, http://www.salary.com/Articles/ArticleDetail.asp?part=par088.
Chapter Summary
- A COMPENSATION PACKAGE is an important part of the overall strategic HRM plan, since much of the company budget is for employee compensation.A compensation package can include salary, bonuses, health-care plans, and a variety of other types of compensation.
- The goals of compensation are first to attract people to work for your organization. Second, they can be used to retain people who are already working in the organization.
- Compensation is also used to motivate employees to work at their peak performance and improve morale of the organization.
- Employees who are fairly compensated tend to provide better customer service, which can result in organizational growth and development.
- Several types of pay systems can be implemented. A PAY GRADE SYSTEM sets up specific pay levels for particular jobs, while a GOING RATE SYSTEM looks at the pay throughout the industry for a certain job title. MANAGEMENT FIT gives maximum flexibility for managers to pay what they think someone should earn.
- HR managers can also develop pay systems based on skills and competency and utilize a broadbanding approach, which is similar to pay grades. Another option might include variable pay.
- There are several motivational theories in regard to pay. First, the EQUITY THEORY says that people will evaluate their own satisfaction with their compensation by comparing it to others’ compensation. The EXPECTANCY THEORY says people will put in only as much work as they expect to receive in rewards. Finally, the REINFORCEMENT THEORY says that if high performance is followed by a reward, high performance is likely to happen in the future.
- Other pay considerations include the size of the organization, whether the company is global, and the level of communication and employee involvement in compensation. HR managers should always be aware of what others are paying in the industry by performing market surveys.
- There are several laws pertaining to pay.
- Besides salary, one of the biggest expenses for compensation is medical benefits. These can include health benefits, vision, dental, and disability benefits.
- PROFIT SHARING is a benefit in which employees receive a percentage of profit the organization earns. STOCK OWNERSHIP PLANS are plans in which employees can purchase stock or are granted stock and become an owner in the organization.
- Team rewards are also a popular way to motivate employees. These can be in the form of compensation if a group or the company meets certain target goals.
- Canada Pension Plan, Worker’s Compensation premiums, and Unemployment Insurance premiums are required by law.
- Paid time off, or PTO, can come in the form of holidays, vacation time, and sick leave. Usually, employees earn more days as they stay with the company.
- Communication with employees is key to a successful benefits strategy. This includes communication before implementing the plan as well as communication about the plan.
