1

PHRi Functional Area 04

Compensation, Benefits, and
Work Experience
Professional in Human Resources – International (PHRi)

International Human Resource Certification Institute

IHRCI ®| WWW.IHRCI.ORG
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Professional in Human Resources – International (PHRi) Workbook

Module Four: Compensation, Benefits, and Work Experience

2018 Edition

Copyright © 2018 by International Human Resource Certification Institute

All rights reserved. No part of this book shall be reproduced, stored in a retrieval
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taken in the preparation of this book, the publisher and author assume no
responsibility for errors or omissions. Neither is any liability assumed for damages
resulting from the use of the information contained herein.

International Human Resource Certification Institute (IHRCI)

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Kowloon, Hong Kong

www.ihrci.org
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Introduction
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This workbook is not a textbook. These materials include workbooks and practice exams are
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Table of Content
Introduction ................................................................................................................................ 3
Table of Content ......................................................................................................................... 4
Part One: Total Rewards ............................................................................................................. 8
1. Compensation Design..................................................................................................... 8
1.1. Total Rewards ...................................................................................................... 9
1.2. Administration and Optimization ...................................................................... 10
1.3. Strategic Reward................................................................................................ 11
1.4. Individual Differentiation .................................................................................. 12
1.5. Market Conformity (Competitiveness) .............................................................. 13
1.6. Internal Consistency (Equity)............................................................................. 14
2. Total Reward Approach ................................................................................................ 15
2.1. Fixed Pay ............................................................................................................ 16
2.2. Variable Pay ....................................................................................................... 17
2.3. Benefits .............................................................................................................. 18
2.4. Work-Life Balance .............................................................................................. 20
2.5. Other Elements of Total Rewards ...................................................................... 20
3. Compensation Administration ..................................................................................... 21
4. Job Evaluation ............................................................................................................... 23
4.1. Objectives of Job Evaluation ............................................................................. 23
4.2. Aspects of Job Evaluation .................................................................................. 24
4.3. Job Evaluation Methods .................................................................................... 24
5. Remuneration Surveys ................................................................................................. 28
5.1. Purposes of Remuneration Surveys .................................................................. 28
5.2. Market Select .................................................................................................... 29
5.3. Data Collect ....................................................................................................... 29
5.4. Data Analysis ..................................................................................................... 31
6. Pay Structure ................................................................................................................ 32
6.1. Terms and Definitions........................................................................................ 32
6.2. Global Salary Grades ......................................................................................... 35
6.3. Global Pay Structure .......................................................................................... 35
7. Strategic Rewards ......................................................................................................... 37
8. Individual Differentiation ............................................................................................. 39
8.1. Entitlement Orientation .................................................................................... 39
8.2. Performance Orientation .................................................................................. 40
9. Market conformity........................................................................................................ 41
10. Internal Consistency ................................................................................................... 41
10.1. Red-Circled Employees .................................................................................... 42
10.2. Green-Circled Employees ................................................................................ 43
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10.3. Pay Compression ............................................................................................. 44

10.4. Pay Increases ................................................................................................... 44
11. Job vs. Person Based Pay ............................................................................................ 46
11.1. Paying for the job ............................................................................................ 47
11.2. Paying the person ............................................................................................ 49
12. Compensation Communications ................................................................................ 50
12.1. Goal of Compensation Communication .......................................................... 50
12.2. Timing of Compensation Communication....................................................... 51
12.3. Information of Compensation Communication .............................................. 51
12.4. Total Reward Statement .................................................................................. 52
Part Two: Incentive Programs .................................................................................................. 53
1. Incentive Compensation............................................................................................... 53
1.1. Principle of Incentive Plan ................................................................................. 53
1.2. Line of sight ....................................................................................................... 54
1.3. Individual Incentives .......................................................................................... 54
1.4. Group Incentives ............................................................................................... 55
2. Individual Performance Pay Plans ................................................................................ 56
2.1. Merit Pay ........................................................................................................... 56
2.2. Piecework .......................................................................................................... 57
2.3. Sales compensation ........................................................................................... 58
2.4. Cash Award ........................................................................................................ 59
2.5. Recognition Programs ....................................................................................... 59
3. Group Performance Pay Plans ...................................................................................... 61
3.1. Gainsharing........................................................................................................ 61
3.2. Profit Sharing ..................................................................................................... 62
3.3. Risk-Sharing Plans .............................................................................................. 63
3.4. Employee Stock Ownership Plans (ESOPs) ........................................................ 63
3.5. Performance-Sharing Plan ................................................................................. 63
Part Three: Payroll and Benefits ............................................................................................... 65
1. Employee Benefits ........................................................................................................ 65
1.1. Objectives of Benefits........................................................................................ 65
1.2. Benefits for Workforce Recruitment and Retention ......................................... 65
1.3. Global Employee Benefits ................................................................................. 65
2. Benefits Design ............................................................................................................. 66
2.1. Statutory Benefits.............................................................................................. 67
2.2. Industry Standards ............................................................................................ 67
2.3. Additional Benefits ............................................................................................ 67
2.4. Flexible Benefits ................................................................................................ 67
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2.5. Part-Time Employee Benefits ............................................................................ 68

3. Flexible Employee Benefits........................................................................................... 68
3.1. Flexible Spending Accounts ............................................................................... 69
3.2. Transportation Plans.......................................................................................... 69
3.3. Cafeteria Plans ................................................................................................... 69
4. Benefits Administration ................................................................................................ 69
4.1. Benefits and HR Technology .............................................................................. 70
4.2. Benefits and HR Outsourcing ............................................................................ 70
4.3. Benefits and HR Metrics .................................................................................... 70
4.4. Benefits and Cost Control .................................................................................. 71
4.5. Benefits and Communication ............................................................................ 71
5. Type of Benefits ............................................................................................................ 71
5.1. Legally required payments ................................................................................ 72
5.2. Retirement and Savings Plan Payments ............................................................ 73
5.3. Life Insurance and Death Benefits ..................................................................... 74
5.4. Health care and medical-related benefit payments.......................................... 74
5.5. Paid Rest Periods, Meal Break, Coffee breaks ................................................... 75
5.6. Pay for Time Not Worked .................................................................................. 75
5.7. Miscellaneous Benefits...................................................................................... 76
6. Payroll Administration .................................................................................................. 76
6.1. Element of Payroll ............................................................................................. 77
6.2. Payroll Process ................................................................................................... 78
6.3. Payroll Audit ...................................................................................................... 79
6.4. Payroll System.................................................................................................... 80
6.5. Payroll Outsourcing ........................................................................................... 81
Part Four: Employee Value Proposition.................................................................................... 83
1. Employee Value Proposition ........................................................................................ 83
1.1. Tactical ............................................................................................................... 83
1.2. Integrated .......................................................................................................... 83
1.3. Communicating and Delivering ......................................................................... 83
1.4. Segmenting and Differentiating ........................................................................ 84
2. Employer Branding ....................................................................................................... 84
2.1. Definition of Employer Branding ....................................................................... 84
2.2. Branding Techniques ......................................................................................... 84
2.3. Employee Value Proposition (EVP) is the Foundation of Employer Branding ... 85
2.4. Employer Brand Framework .............................................................................. 85
2.5. Manage the Employer Brand for the Long Term ............................................... 86
3. Employee Engagement ................................................................................................. 87
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3.1. Brand ................................................................................................................. 88

3.2. Leadership ......................................................................................................... 88
3.3. Performance ...................................................................................................... 89
3.4. The Basics .......................................................................................................... 89
3.5. The Work ........................................................................................................... 89
3.6. Company Practices ............................................................................................ 89
4. Employee Retention ..................................................................................................... 90
4.1. Retention Matrix ............................................................................................... 91
4.2. Employee Surveys.............................................................................................. 95
4.3. Exit Interviews ................................................................................................... 96
4.4. First-Year Turnover Evaluations ......................................................................... 96
4.5. Retention Evaluation and Follow-Up ................................................................. 97
4.6. Job Embeddedness ............................................................................................ 97
Reference.................................................................................................................................. 99
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Part One: Total Rewards

1. Compensation Design
Compensation refers to all forms of financial returns and tangible services and benefits
employees receive as part of an employment relationship. Also, compensation refers to a
form of monetary payment provided to a person who has suffered damage, harm, or injury.
Many HR authors use the term Remuneration rather than Compensation. This is because
Remuneration is used to connote something broad, like a package, essentially implying that
it is not only a salary, but many other benefits that are included in this “package.” In
general, Remuneration is referred to as the payment made to an employee for his/her
services or work. Typically, this is the payment of a salary or wage. However, Remuneration
is much broader and encompasses not only the periodic payment given to an employee
but also other payments and non-monetary benefits. It is the whole package offered to an
employee during his/her term of employment with the employer. Monetary benefits
include salary, overtime pay, vacation pay, bonuses and performance-related payments.
Non-monetary payments refer to benefits such as the provision of a company vehicle,
medical and/or hospital insurance, food and shelter, pension or retirement schemes, family
support schemes, child care, subscriptions and any other benefits.
Remuneration is an important factor affecting how and why people choose to work at one
organization over others. Employers must be reasonably competitive with several types of
compensation in order to hire, keep, and reward performance of individuals in the
organization. There are several important concepts about compensation designing as
follows:

WorldatWork (2015). The WorldatWork Handbook of Compensation, Benefits and Total

Rewards: A Comprehensive Guide for HR Professionals. Hoboken, New Jersey: Wiley.
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1.1. Total Rewards

Total Reward relate to all aspects of the employment offering, including the
remuneration package (base pay, variable pay and benefits) as well as the intangible
aspects of the psychological contract such as career development, employment
security and working environment. It is a key component of any Employer Brand
through which an organization establishes its competitive position in the labor market
and hence determines its ability to attract, recruit, retain and motivate employees of
the required caliber.
Formerly referred to as simply compensation and benefits, total rewards takes on a
more creative and broad definition of the ways employees receive compensation,
benefits, perks and other valuable options. WorldatWork defines this new term: "Total
rewards include everything the employee perceives to be of value resulting from the
employment relationship." According to Aon Hewitt, there are four factors that can
help employers think about the value total rewards deliver for employees, rather than
an ever-growing list of programs that are given equal importance. This new model is
intended to serve as a catalyst to stimulate new thinking around where to focus
energy, effort and expense in total rewards.
1.1.1. Access
Access refers to those rewards to which the organization provides access only—the
rewards themselves are paid for by the employee or (in some cases) perhaps a third
party. These could include things like group legal insurance, critical illness insurance
and discount programs.
1.1.2. Basic
Basic rewards are those “table stakes” reward elements that the organization feels it
must provide to be in the game, things like health and welfare and retirement benefits.
1.1.3. Contingent rewards
Contingent rewards are those elements of the package that are delivered based on
some level of performance or behavior by the employee. Wellness incentives are an
example of these types of rewards.
1.1.4. Differentiators
Differentiators are the one, two or—at most—three reward elements that are going to
set your company apart, the elements for which you want to be famous.
Thinking about benefits within this total rewards framework provides focus to how you
design, deliver and communicate. With this framework, the emphasis shifts from
providing access to rewards as well as basic rewards to using rewards to drive behavior
(contingent rewards) and those rewards that are going to set you apart
(differentiators). In the end, these are the rewards that will create the greatest return
on your investment.
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1.2. Administration and Optimization

In addition to overseeing the total reward framework, HR professionals must assure
administrative efficiency and costs optimization for designing total rewards. Optimizing
your investment in total rewards begins with a core set of guiding principles and
continues with understanding what employees value most. The following texts
describe key steps in the development of a total rewards strategy.
1.2.1. Define your differentiator
For years, communication efforts have centered on benefits, due in large part to open
enrollment and legal requirements. With this primary focus, employers miss the
opportunity to truly differentiate the employment experience. In addition to helping
inform your overall total rewards strategy and programs, identifying what it is you want
to be famous for can guide your key communication messages. Your differentiator
should support your business and what it is that motivates your employees, and can
fall into any one of the four quadrants described earlier. Keep in mind, many leading
companies are shifting more of their total rewards in the areas of career opportunities,
learning and development, and coaching. They are doing so, in part, because those
programs are harder for competitors to replicate.
1.2.2. Learn what motivates your employees
Knowing what motivates employees can help you develop a comprehensive, yet
targeted, communication strategy. One approach that is gaining traction within HR,
total rewards and benefits is segmentation—the process of breaking down large
populations into similar groups of employees to understand what is important to them
and how they might behave in certain circumstances. The more data you can gather
and leverage (demographics, attitudes, behaviors and preferences), the more
successful and targeted your communication strategy will be.
1.2.3. Develop a total rewards brand
Consumer marketers have always known the power of a strong brand (i.e., a clear
voice, compelling message, and consistent visual identity). Employers are starting to
get the picture, too. An effective total rewards brand tells a compelling story—what’s
expected of employees and what they can expect in return when it comes to
maximizing their total rewards. An effective total rewards brand articulates the value of
not only the collection of programs you offer but things like culture and work
experience. And, most importantly from a talent perspective, an effective total rewards
brand inspires action by making it clear to employees what it takes to meet both
business and personal needs. Once a total rewards brand is established, you’re able to
communicate consistently, using the same language, tone and style each time you
reach to employees. Repeating the message on a regular basis so that it becomes
familiar and recognizable is critical.
1.2.4. Personalize the experience
When it comes to total rewards, it’s all personal. Employees want to know how they’re
rewarded, how they’re protected and what they need to do to be successful. And as
outlined earlier in this article, employees generally think in terms of total rewards vs.
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benefits. So the best way to address those needs is to get personal. That’s one of the
reasons personalized statements—both print and online—remain one of the most
popular and effective communication tools. (According to the Aon Hewitt database of
total rewards statement customers, nearly 90% of employees who received a total
rewards statement say that the statement provides value.) And in today’s world, we
have the ability to provide employees with even greater access to real-time
information on total rewards through total rewards statements and portals.
1.2.5. Reach people through multiple communication channels
When it comes to communication, one size definitely doesn’t fit all. Employers that
deliver communication through multiple vehicles are more successful at reaching their
people and thereby creating greater perceived value. Using a variety of channels—
social media, direct mail, electronic solutions—signals that total rewards messages are
important and require attention/action.
1.2.6. Project cost and risk profile of rewards
In addition to achieving alignment and delivering employee value, successful reward
plans strike a balance between effectiveness and cost. With health care costs
continuing to increase, optimizing reward programs may be critical to success. HR must
use operating income growth as a metric in determining funding for short term
incentive plans.
1.3. Strategic Reward
Compensation decisions must be viewed strategically. Because so many organizational
funds are spent on compensation-related activities, it is critical for top management
and HR executives to view the “strategic” fit of compensation with the strategies and
objectives of the organization. The changes in the global marketplace for products and
services have led to organizational changes in business philosophies, strategies, and
objectives. Increasingly, organizations are recognizing that compensation philosophies
must change also. For example, if a firm wishes to create an innovative,
entrepreneurial culture, it may offer bonuses and stock equity programs so that
employees can participate in the growth and success of the company, but set its base
pay and benefits at relatively modest levels. However, for a large, stable organization,
highly structured pay and benefit programs may be more common.
Strategic reward management involves the formulation and implementation of an
equitable reward system that is congruent with the organization’s strategic objectives.
A strategic reward system is a type of human resource management tool that is used to
reward hardworking employees in an organization. It operates on two main principles;
the best-fit perspective and the best practice advocates claim. The objectives of a
strategic reward system are; attract and retain employees, motivate performance,
promote skill development, encourage corporate culture and determine pay costs.
Rewards can be either intrinsic or extrinsic. However, it is important when designing,
implementing and using a reward strategy, that it meets both individual and
organizational needs.
A total reward management process consists of four building blocks: fixed pay, variable
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pay, employee benefits and non-financial rewards such as work-life balance. With
enormous change in the labor markets and employment contracts, reward systems
today have also evolved. Contemporary reward strategies include employability pay,
person-based pay, market-determined pay and team-based rewards. Reward
management is a vital part of the total strategic human resource management process
as it supports the achievement of strategic objectives through the communication of
desired behaviors to employees. It also elicits a clear link between individual
performance and organizational performance and thereby acts as a catalyst for positive
organizational cultural change.
1.4. Individual Differentiation
Differentiation of rewards is supported where there are differences in the scope of the
position within an organizational context, and/or due to superior individual or team
contributions. For example, a reward program for an organization might look very
different from a compensation program for the manufacturing group or the sales team,
with varying incentives based on cash compensation and non-cash compensation
options. The goal is to attract, develop, and retain a high performing staff, as well as to
differentiate the highest performers so you can properly reward them. To achieve this
type of compensation structure, follow these four basic steps.
1.4.1. Step 1: Segment the Workforce
Every organization has critical skill sets. To find the value of various employees and
roles, first determine how people contribute to the well being of the organization, then
tie their value to a meaningful compensation plan. Identify critical roles within your
organization and critical skills that impact its success. Based on this understanding you
can segment your rewards programs to properly compensate those roles and skill sets
that are most important to the company. Once compensation has been awarded,
survey employees to learn about what they like and dislike, and whether there are
other types of compensation they would value more. This information provides
valuable insights for setting compensation budgets in the future, and provides
employees an opportunity to have their preferences heard.
1.4.2. Step 2: Create Flexible Compensation and Incentive Plans
As you design your incentive plan, establish clear links between incentives and
corporate goals, divisional goals, departmental goals, and individual goals. Each
employee should know how their actions impact the company. Executives and senior
directors should be incented based on their impact on their respective regions and
divisions. Line-of-business professionals often share team-based goals. They should be
incented based on how they support critical objectives and by how their individual
achievements influence results. Variable compensation plans are most effective if they
are structured to pay out over time, based on performance. Don’t give away all the
money up front. Spend wisely and reward people as they make valuable contributions.
As the labor market improves many companies will see increased turnover among their
staffs. To retain top employees, consider offering them three-year compensation plans
tied to agreed-upon performance metrics.
1.4.3. Step 3: Enforce Equitable Policies with Complete Transparency
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Compensation policies must be fair and equitable to everyone, not just to the high-
performing segment of the workforce. There can’t be any perception of favoritism—
not just in the cash compensation plans, but also in non-cash based rewards such as
the projects to which they are assigned, opportunities for training, etc.
Even the best planned compensation strategies will fail if employees think they are
being treated unfairly. Fostering an environment of fairness requires transparency: you
must be able to convey the total rewards philosophy to each employee. HCM systems
include employee portals and online compensation statements that paint a complete
picture of each employee’s pay, benefits, and incentives.
It’s also important to facilitate extensive communication between management and
staff as well as total transparency into performance and goals. It helps to have good
development plans and performance plans and highly engaged managers who can
facilitate goal setting and career planning. HR can support these efforts: first by
acquiring the right e-HR solutions to summarize and communicate total compensation
plans, second by instituting top-down policies governing effective communication with
employees.
1.4.4. Step 4: Use Technology to Simplify Administration
Modern IT applications enable managers to allocate budgets for incentives, manage
the salary review process, and generate compensation statements. They typically
incorporate business intelligence tools that let authorized users examine salary trends,
market developments, salary structures, and distribution scenarios.
Utilizing these platforms can streamline market analysis, program design, and
administration of total rewards programs. These platforms also simplify key activities
for the compensation team such as defining and editing business rules, verifying
employee eligibility, and creating a performance-driven culture with transparency into
compensation policies and practices. Additionally, total rewards professionals will be
freed up and empowered to add strategic value to the business by consulting with
managers, rather than being mired in the tactics of the process.
1.5. Market Conformity (Competitiveness)
In order for a business to operate effectively, the company needs to develop a
compensation strategy that achieves the two goals of rewarding considered fair to
employees, while providing a financial return on the investment for the employer. Pay
equity has two approaches. The first is externally driven by market forces. The second
is an internal focus, driven by the employer’s valuation of the job.
Using market pricing to establish wages and salaries is called market conformity or
competitiveness. Achieving external competitiveness in the area of compensation
means balancing the need to keep operating costs (including labor costs) low with the
need to attract and retain quality workers. External competitiveness is how a
company's rates of pay compare to those of its competitors.
Market based pay systems benefit from being inherently empirical, built from research,
through surveys, reporting what similar jobs are paid in the organizations that one
competes with in the labor market. Committing to a market base pay compensation
14

structure means that employees will be paid at a competitive salary when compared
with rates offered to people in similar positions in peer organizations. The labor
market, ruled by supply and demand, drives this approach.
Establishing the pay level balances a company's profit requirements with competition
for competent employees. Factors determining pay level include:
1.5.1. Competition in the labor market: the supply and demand for employees with
various qualifications.
1.5.2. Product market conditions: the degree of demand for specific products and the
level of industry competition.
1.5.3. Organizational characteristics: industry, management philosophy, size, and
technology.
Weighing all these considerations, firms can choose to pay more than the industry
average, and therefore favor attracting and retaining quality employees, or pay less
than their competitors' average hoping to attract and retain employees through non-
compensation means such as recognition events, achievement celebrations, and
working in a pleasant environment. A competitive pay level—one that balances all
considerations—can help contain labor costs, enlarge the pool of qualified applicants,
increase quality and experience, reduce voluntary turnover, discourage unionization,
and abate pay-related work stoppages. Once a company has determined its pay level
relative to its competitors, compensation managers must determine the best
compensation package for each occupation.
1.6. Internal Consistency (Equity)
External equity is one side of the coin. There is also the employer’s perception of
fairness called internal equity. Where external equity is a measure of market
competitiveness forming its basis on job functions and duties, internal equity is a
measure of internal worth with a basis in job autonomy and responsibility. If you have
multiple incumbents in the same job title who are paid differently, the differences in
pay are an expression of internal equity.
Arriving at fair compensation is not always easy. Aside from the fact that each position
has a unique value to an organization and not all jobs are created equal, employers
also face the challenge of recognizing and rewarding exemplary performance in a given
role. There are a variety of definitions for internal equity.
“Internal equity is a situation that results when people feel that performance fairly
determines the pay for each individual with a certain job or that relative difficulty
results in appropriate differences in pay rates between jobs.”
This and other definitions of internal equity have one fact in common: in order to
achieve internal equity, it’s not enough that compensation be fair according to the
employer, compensation must be seen as fair by employees. Employees will have their
own ideas about how their jobs should be valued relative to other roles in the
company—and they may not agree with the company’s perspective.
 15

One way to achieve a sense of internal equity is by following a consistent set of

principles when designing and applying compensation structures and by avoiding ad
hoc negotiations. If you’re concerned about internal equity in your organization or you
hear rumblings of discontent on the topic, you may choose to conduct an internal
equity study to help determine whether concerns are justified.
The number of levels and the degree of pay differentials are based on three general
criteria: the value of a job and a job's responsibilities, the skills and knowledge needed,
and job performance and productivity. Employers can use these criteria to modify
employee behavior by indicating what kinds of responsibilities, performance,
productivity, skills, and knowledge employees need to move into a different level and
receive a higher pay rate. More specifically, six primary but interrelated factors can
shape a company's pay structure:
1.6.1. Social Customs
Beginning in the thirteenth century, employees began demanding a "just" wage. This
idea evolved into the current notion of a federally mandated minimum wage. Hence,
economic forces do not determine wages alone.
1.6.2. Economic Conditions
Demand for labor influences employee wages. Employers pay wages based on the
relative contributions employees make to production goals. In addition, supply and
demand for knowledge and skills helps determine wages.
1.6.3. Company Factors
Pay structures depend on the kind of technology a company has and on whether a
company uses pay as an incentive to motivate employees to improve job performance
and to accept more responsibilities.
1.6.4. Job Requirements
Some jobs may require greater skills, knowledge, or experience than others and hence
fetch a higher pay rate.
1.6.5. Employee Knowledge and Skills
Likewise, employees bring different levels of skills and knowledge to companies and
hence they are qualified to work at different levels of a company hierarchy and receive
different rates of pay as a result.
1.6.6. Employee Acceptance
Employees expect fair pay rates and determine if they receive fair wages by comparing
their wages with their coworkers' and supervisors' rates of pay. If employees consider
their pay rates unfair, they may seek employment elsewhere, put forth little effort in
their jobs, or file lawsuits.
2. Total Reward Approach
Throughout the history, employers have been challenged with attracting, motivating and
16

retaining employees. During the past decade, the Compensation topic has continued
mature. Increasingly, it has become clear that the battle for talent involves much more
than highly effective, strategically designed compensation and benefits programs.

• Base Pay • Bonus or Incentives

• Types of Base Pay • Commissions
• Profit-Sharing Plans
• Performance Sharing
• Plans

Variable
Fixed Pay
Pay

Work-Life
Benefits
Balance
• Healthcare •Caring for Dependants
• Welfare •Supporting Health and
• Retirement and Investment Wellness
Plans •Creating a Workplace
• Other Benefits Flexibility
•Financial Support

Source: Burguillos, B. & López, M. (2013). How to develop a Global Total Compensation
Model. HR Strategy: Gamification & Engagement.

The most successful companies have realized that they must take a total rewards
approach, emphasizing attraction, motivation and retention. It is undoubtedly crucial to
design, develop and implement a Total Compensation plan successfully. We should
consider this as the previous step before to develop the whole Total Rewards Model,
including concepts as “Performance & Recognition” and “Development & Career
Opportunities”.
2.1. Fixed Pay
Fixed pay, also known as base pay, is nondiscretionary compensation that does not vary
according to performance or results achieved. It’s usually determined by the
organization’s philosophy and pay structure.
2.1.1. Base Pay
Fixed or base pay is the compensation paid to an employee for performing specific job:

 The definition of base pay can vary by country.

 Base pay levels need to take into account variations in equivalent monthly salaries
vary by country.
 17

 The bottom line to fixed pay practices need to be based on a competitive strategy
for each country.
2.1.2. Types of Base pay
Once pay structures are built, the organization must determine how employees will be
paid:

 Salary: paid on a weekly, biweekly or monthly basis rather than by the hour,
generally to higher level positions.

 Nonexempt / hourly rates: paid by the hour for a job being performed. An
individual’s annual pay is dependent on the number of hours worked during the
course of the year.

 Piece rate: payment is based on an individual’s rates production. A payment is

received for each piece or unit work produced.
2.2. Variable Pay
Incentive or Variable pay, also known as pay at risk, is compensation that is contingent
on discretion, performance or results achieved. Much of the innovation in
compensation is occurring in the variable pay element. Companies are making greater
use of variable pay programs by expanding them to a significantly broader portion of
the workforce that they have in the past. These schemes are adopted by many
corporations in order to improve the employee morale and increase the motivation to
work for the employees. Based on performance measures and metrics defined by the
human resources of the specific organization incentive plans are devised and the
specific mode of incentive is decided.
2.2.1. Bonus or Incentives
Bonuses or Incentives are delivered through plans that predetermine a performance
and reward schedule. The incentive can be paid in an accounting period (month,
quarter, year, multi-year) or upon an event (reaching an objective, completing a
project, etc). Organizations that seek to create a closer link between employee
compensation and the risks of doing business have increased the prevalence of
group/team incentives.
2.2.2. Commissions
Commission is a sum of money that is paid to an employee upon completion of a task,
usually selling a certain amount of goods or services. Commission may be paid as
percentage of the sale or as a flat dollar amount based on sales volume. Employers
often use sales commissions as incentives to increase worker productivity. A
commission may be paid in addition to a salary or instead of a salary. Commissions are
cash payments, based on predetermined performance and reward schedule. They are
typically based on sales or profit margin on those sales. Commissions are usually for
sales employees. Sales incentive plans matched to type of responsibilities: Customer
identification, customer service or customer persuasion.
2.2.3. Profit-Sharing Plans
18

Profit- Sharing is a form of variable pay provided to all employees based on the profits
of the company. Companies usually have predetermined goals and formulas for
determining the amount that will be allocated to employees. Profit- Sharing is typically
implemented to achieve employee participation and identification with the
organization’s success.
2.2.4. Performance-Sharing Plans
A variable pay plan bases rewards on the performance of a combination of quantitative
and/or qualitative measures. The objective increase employee identification with the
organization’s success and increase employee understanding of what is important to
the organization and communicate the basis upon which success is measure.
2.3. Benefits
Benefits are a core element of the Total Rewards Model. Benefits include Health and
Welfare plans, Retirement plans and programs providing pay for time not worked. Over
time, employee benefits have evolved from basic fringe benefits of insurance coverage
and a few perquisites to wide a range of benefits designed to strike a balance between
an employee’s personal and professional life.
2.3.1. Healthcare
Healthcare systems are influenced by the beliefs, values, culture and perceptions in
different regions regarding the role of government in providing health care to its
citizens. The employers commonly supplement the government health programs with
health care plans influenced by corporate objectives, competitive practices and the
limitations of government programs. Limitations government-sponsored programs may
include restricted access, limits on services/facilities, payments, reimbursement and
gaps in coverage.
2.3.2. Welfare
The factors that influence health and retirement benefits may also affect other benefits
such as life insurance, disability and time off. Depending on the type of benefit,
statutory requirements, coordination with government programs, collective bargaining
agreements and other influences may shape or define the final program, limiting
employer flexibility in plan design. In addition, offer wellness programs to employees
are very useful to increase the satisfaction and healthy life.
2.3.3. Retirement and Investment Plans
Qualified retirement plans include both the traditional defined benefit pension plans
and defined contribution plans:
Defined benefit plan is based on a formula that considers pay and service (i.e. one
percent of compensation for each year of continuing service). Provide better benefits
to employees with long service.
Defined contribution plan is characterized by employee and employer contributions
made to individual participant accounts.
 19

Hybrid plans; combine elements of defined benefits and defined contribution plans.

Relative Advantages of Different Pension Alternative

Defined Benefit Plan Defined Contribution Plan

1. Provides an explicit benefit which is easily 1. Unknown benefit level is difficult to

communicated communicate
2. Company absorbs risk associated with 2. employees assume these risks
changes in inflation and interest rates
which affect cost 3. More favorable to short-term
employees
3. More favorable to long service employees
4. Employer cost known up front
4. employer cost unknown

2.3.4. Other benefits

 Housing Allowance

 Transportation Allowance

 Meal Allowance

 Phone Allowance

 Training Allowance
2.3.5. Flexible benefits
Flexible benefits are the approach to benefits in an increasing number of American
organizations. In essence, employees are typically given choices, up to a certain dollar
limit, among a series of options for their benefits, including such things as pension
contributions, health insurance options, dental insurance, life insurance, etc. MNEs are
beginning to examine flex benefits for their global operations.
Issues such as tax treatment of benefits, private versus state health care, employee
expectations and culture, non-standardized social benefits from country to country,
and varying company structures will need to be addressed in order to design flexible
benefit packages that might be used throughout an MNE. Nevertheless, such an
approach may help simplify worldwide complete compensation systems for
multinational firms.
2.3.6. Voluntary Benefits
The cost of providing employee benefits is expensive. Controlling costs is high on the
employee-benefits agenda at most companies. But many employers are also looking to
enhance their benefits programs to advance basic business objectives such as
attracting and retaining good employees. One increasingly popular approach is to
20

supplement existing employer-paid benefits with so-called voluntary benefits -- those

for which employees pay at least half, or more typically all, of the costs. Group-rate
supplemental life insurance is an old standby in this domain, but employers today also
are giving their employees access to additional voluntary benefits such as auto and
homeowner's insurance, long-term care insurance, dental insurance, retiree dental
insurance and legal services. These programs are attractive to employees because they
typically can get institutional pricing when they buy these products through their
employer, and, in the case of insurance policies, group underwriting rules that provide
some level of guaranteed issuance. Plus, they can pay for it through the convenience of
payroll deductions, which employees like a lot. Beyond offering employees access to
potentially cheaper group rates and convenient enrollment procedures, giving them
access to voluntary benefits can help them plug important gaps in their financial plans,
too.
2.4. Work-Life Balance
Work-Life Balance (WLB) is an umbrella term used to describe a variety of benefit-
related initiatives to help employees effectively manage work, family, and personal life
without extreme stress or negative impact. Many organizations report that balancing
work and family has overtaken other benefit and compensation items as a key factor in
employee satisfaction surveys. WLB is composed of offerings in the Total rewards
package that address the unique individual needs of the employee. These offerings are
important to the employee but may be less tangible than compensation and benefits.
Categories which support work – life could be:
2.4.1. Caring for depends
2.4.2. Supporting health and wellness
2.4.3. Creating a workplace flexibility
2.4.4. Flexible Work Hours
2.4.5. Financial support programs
The intent of work/life programs and services is to support the well-being of
employees and help them achieve a balance between their jobs, families, and personal
lives. Some organizations couch work/life programs in terms of diversity and corporate
social responsibility (CSR) initiatives. Others feature WLB as part of the organization's
brand. There are many compelling reasons for WLB. However, as with the success of
other organizational and global HR strategies, commitment and communication can
make or break success. Having work/life programs means little if employees are
unaware of them or the culture does not support the initiatives.
2.5. Other Elements of Total Rewards
There are five elements of total rewards, each of which includes programs, practices,
elements and dimensions that collectively define an organization's strategy to attract,
motivate and retain employees. These elements are compensation, benefit, work-life,
performance & recognition, and “development & career opportunities”.
After we have our Global Total Compensation model (including compensation, benefit,
 21

and work-life as discussed at previous text) successfully implemented in our company,

it´s time to think about “Performance & Recognition” and “Development & Career
Opportunities” thus completing the corporative Total Rewards Model is required to get
business goals.
2.5.1. Performance & Recognition
Performance: The alignment and assessment of organizational, team and individual
efforts towards the achievement of business goals.
Recognition: Acknowledges or gives special attention to employee efforts or positive
performance. It meets an intrinsic psychological need for appreciation and can support
business strategy by reinforcing certain behaviors that contribute to organizational
success. Awards can be cash or non-cash (e.g., verbal recognition, trophies, certificates,
plaques, dinners, tickets, etc.).
2.5.2. Development & Career Opportunities
Development: A set of learning experiences designed to enhance employees' applied
skills and competencies; development engages employees to perform better and
leaders to advance their organizations' people strategies.
Career Opportunities: A plan for an employee to advance their own career goals and
may include advancement into a more responsible position in an organization. The
organization supports career opportunities internally so that talented employees are
deployed in positions that enable them to deliver their greatest value to their
organization.
Development and career opportunities can be in the form of learning opportunities,
coaching/mentoring opportunities, and advancement opportunities.
The elements represent the "tool kit" from which an organization chooses to offer and
align a value for both the organization and the employee. The elements are not mutually
exclusive. Total rewards strategy involves the art of combining the five key elements into
tailored packages designed to achieve optimal engagement. An effective total rewards
strategy results in satisfied, engaged and productive employees, who create desired
business performance and results.
3. Compensation Administration
A general principle of compensation administration encompasses the creation and
management of a pay system based on four basic, interrelated policy decisions: internal
consistency, external competitiveness, employee contributions, and administration of the
compensation program. Compensation professionals work with these policy decisions
according to individual corporations' needs, keeping in mind the ultimate objectives of
compensation administration—efficiency, equity, and compliance. Companies develop
their individual pay policies by placing varying degrees of emphasis on these four policy
decisions.
Once pay policies have been determined, the actual development of a base pay system
begins. Because most organizations use task-based systems focusing on work done in
specific jobs, which is the emphasis of this discussion. If skill-based or team pay systems
22

are used, then many of the activities discussed here must be modified.
As the below figure shows, the development of a wage and salary system assumes that
accurate job descriptions and job specifications are available. The job descriptions then are
used in two activities: job evaluation and pay surveys. These activities are designed to
ensure that the pay system is both internally equitable and externally competitive. The
data compiled in these two activities are used to design pay structures, including pay
grades and minimum-to-maximum pay ranges. After the pay structures have been
developed, individual jobs must be placed in the appropriate pay grades and employees’
pay adjusted based on length of service and performance. Finally, the pay system must be
monitored and updated.

Job Analysis
(Job Descriptions, Job Specifications)

Job
Pay Surveys
Evaluation

Pay
Pay Policies
Structures

Individual Performance
Pay Appraisal

Implementation,
Communication,
Monitoring

Source: Burguillos, B. & López, M. (2013). How to develop a Global Total Compensation
Model. HR Strategy: Gamification & Engagement.

The administrative policy refers to the tasks of compensation managers in designing and
implementing a pay program. Taking into consideration the three policies, compensation
managers must choose the components that they will include in a company's
compensation program—that is, which kinds of base pay, wage and salary add-ons,
incentives, and benefits they will offer employees with different jobs and skill levels.
Administration also involves determining whether the pay program will attract and retain
needed employees successfully, whether employees consider the pay program fair, how
competitors pay their employees and if competitors are more or less productive.
Companies adopt different approaches to compensation administration responsibilities.
Some rely on a centralized approach where the design and administration of compensation
programs are performed by a single company department. Others opt for a decentralized
approach where multiple company departments have these responsibilities. The drawback
to the centralized approach is that a compensation program may suit general corporate
needs, but not individual department needs. Creating compensation task forces with
 23

members drawn from various departments helps avoid this problem. Likewise, the
decentralized approach also can lead to problems. This approach may make it difficult to
transfer employees from one department to another and may bring about a lack of
internal consistency.
Consequently, compensation administrators frequently adopt general guidelines that all
departmental compensation policies must follow, but allow departments to develop their
own policies, such as those for incentives, as long as they adhere to the general guidelines.
A compensation program must" be flexible enough to reflect the different needs of the
individual and the organization; joint investments in ongoing training; the ebb and flow of
an employee's contributions without creating expectations of permanence, and each
employee's changing needs over time."
4. Job Evaluation
Employees receive remuneration for the services specified in their contract of
employment. The legislator classes as remuneration any financial means and benefits
provided by the employer which can be understood as being a consideration for the
services performed by the employee. It includes wages (manual workers) and salaries
(white-collar workers).
Some people use the terms wages and salary interchangeably. Wages is best associated
with employee compensation based on the number of hours worked multiplied by an
hourly rate of pay. Base wage tends to reflect the value of work or skills and generally
ignores differences attributable to individual employees. Salary refers to pay for those
workers who are exempt from the U.S. labor regulations, and hence do not receive
overtime pay. In contract, non-exempts calculated at an hourly rate referred to as a wage.
Generally, salary is best associated with employee compensation quoted on an annual
basis.
Wages or salary is generally provided by organizations following structured methods.
These methods are more than identifying the wage incentive plans for employees. Wages
or salary should be based on identifying the characteristics of various job activities and its
value and importance to the organization.
Organizations consider job evaluation methods that are structured methods of
determining wages or salary for employees and play a significant role especially when
planning for new business ventures. Thus, we can say that global job valuation can
determine the value and price of a job in order to attract and retain employees in a
competitive global environment.
4.1. Objectives of Job Evaluation
Job evaluation techniques are required to develop a suitable compensation /
remuneration plan based on the above mentioned factors. Job evaluation is a process
of determining the relative worth of a job within an organization and accordingly aims
at:
4.1.1. Reducing inequalities in salary structure by bringing about external and internal
consistency in salary further motivating employees within an organization.
24

4.1.2. Enabling structured approach to division of labor or specialization by defining

specific jobs and salary levels.
4.1.3. Helping in selecting employees by defining jobs and responsibilities.
4.1.4. Developing harmonious relationship between employer and employees to avoid
any conflicts on salaries.
4.1.5. Creating standardization by determining salary differentials for different jobs
further helping to bring about uniformity into salary structure.
4.1.6. Generating relevance and relative value to new jobs.
4.2. Aspects of Job Evaluation
The most important aspects of job evaluation concern ensuring that the methodology
is understood by both managers and employees and that evaluation and qualification
standards are determined through a process that involves employee participation:
4.2.1. A measure of job content: content has innate value outside of external market.
4.2.2. A measure of relative value: relevant groups can consensus on relative value.
4.2.3. Link with external market: job worth cannot be specified without external market
information.
4.2.4. Measure device: honing instruments will provide objective measures.
4.2.5. Negotiation: put face of rationality to a social/political process.
4.3. Job Evaluation Methods
Generally, job evaluations methods are of two types, analytical and non-analytical,
where in analytical schemes are designed on the basis of the requirements and
elements of a job and non-analytical schemes are designed on the basis of jobs as a
whole. Analytical and non-analytical methods are further divided into different sub-
types which will be explained in the following sections.

 Non-Analytical Schemes: These schemes involve assigning wages in terms of

whole jobs and then compared in terms of rank or order. This implies that jobs are
compared with one another and then decided whether it should be valued more,
less or the same. There will be only two kinds of non-analytical schemes studied
during this course – 1.Ranking Method and 2.Classification Method.

 Non-Analytical Schemes: These schemes involve assigning wages in terms of

whole jobs and then compared in terms of rank or order. This implies that jobs are
compared with one another and then decided whether it should be valued more,
less or the same. Non-analytical schemes, for example, include Ranking Method
and Classification Method.

 Analytical Schemes: These schemes are designed on the basis of the requirements
and elements of the jobs. Grades are also generated under these schemes but
these grades are developed on the basis of certain elements and factors of a job
 25

and not the whole job as seen in non-analytical methods. Analytical schemes, for
example, include Factor Comparison Method and Point Method.

Job Evaluation Methods

Non-Analytical Methods Analytical Methods

Classification Factor
Ranking Method Point Method
Method Comparison
Quick and inexpensive Benchmark job Point+Ranking Compensation factors
Job guide chart
Market Pricing?

Methods designed on the Methods designed on the

basis of the jobs as a basis of the requirements
whole and elements of the jobs

Types of Job Evaluation Methods

Armstrong, M., Cummins, A., Hastings, S., & Wood, (2003). The Job Evaluation
Handbook: A Guide to Achieving Equal Pay. Kogan Page Business Books.

4.3.1. Ranking Method:

Ranking is the process of comparing jobs with one another and arranging them in order
of their importance, their difficulty, or their value to the organization. Accordingly, the
first step is to create benchmark jobs like producers, maintenance, administrators, etc.
For example, benchmark jobs in a firm can be categorized as accounting, purchase
department, operations and administration.
The second step would be to list down the jobs that are perceived to be of the highest
and lowest value; selecting a job mid-way between the two and finally choosing others
at lower or higher intermediate points. For example, the firm’s most important job is
that of an accountant and the least is that of the office boy. The job/s mid-way
between the two could of a purchase assistant / machine-operator. The intermediate
jobs could be the job of an accounts clerk below and above the accountant job and the
purchase assistant respectively and typist job below and above the machine operator
and the office boy respectively.
The third and the last step are to divide the ranked jobs into grades. An initial estimate
should be identified depending upon the number of grades or levels that may be
required. Grade boundaries may be drawn between groups of jobs with common
features with the aim of being able to separate the benchmark jobs in terms of
content, activity and levels of jobs. For example, if the accountant in the accounting
department is the highest position in the firm in the accounting department, then the
26

head of purchase in the purchase department under whom the purchase assistant
works could also be considered as the highest grade despite of different job
descriptions and activities. Correspondingly, the accountant and the head of purchase
could more or less come under the same wage bracket. Please refer to the slides for
this method’s advantages and limitations.
4.3.2. Classification Method
Job Classification (or grading) is a simple, widely used method in which you categorize
jobs into groups. The groups are called classes or benchmark jobs if they contain
similar jobs or grades if they contain jobs that are similar in difficulty but otherwise
different.
Classification method is a revised version of the ranking method that considers one
whole job of an organization and divides the job into different grades and levels.
Accordingly, grades/levels are defined in terms of certain factors such as the key tasks
carried out, skill, competence, experience, initiative and responsibility. The number of
grades is usually limited between 4 and 8 and between each grades there are
differences in demands made by any job in its respective grade.
Like ranking method, classification method is simple and easily understood but cannot
be considered for jobs that are divided more than 8 grades. Further grade definitions
tend to be generalized and they may not help in evaluating border-line cases especially
at more senior levels. It often fails to deal with the problem of evaluating and grading
jobs in dissimilar occupational or job families where demands made on job holders are
widely different. For example, technical and administrative jobs may be graded at the
same levels but the demands from each job category are different. Grade definitions
also tend to be inflexible and unresponsive to technological and organizational changes
that affect roles and job content.
4.3.3. Factor Comparison Method:
Factor Comparison is a quantitative technique, which is a refinement of the ranking
method. It entails deciding which jobs have more of the chosen compensable factors.
Factor comparison method as the name suggests compares factors of a job on whose
basis the grades and levels are identified. First step is to identify all key jobs in a
business unit followed by analyzing them into more than 4 factors that describe the
requirements of a job and are also known as “critical” or “compensation” factors. The
compensation factors can be different for different key jobs and activities across firms
and businesses. For example, in our class 5 critical factors were identified – Mental
Requirement; Physical Requirements; Skill requirements; Working conditions and;
Responsibility. These factors are requirements in a manufacturing unit that need
mental and physical work, feasible working conditions, skills and responsibility.
Additional characteristics of this manufacturing unit could include that the tools
manufacturing unit produces tools like saw, hammers, sickle, etc. The relative
importance of each of these critical factors will be different for different types of
employees and the jobs they perform. For example, the jobs in the manufacturing unit
example were identified to be – Tool maker; Craft worker; Process Operator and
Maintenance assistant. The employees with relevant jobs are ranked in accordance to
the compensation factors between 1 and 4 wherein 1 indicates most important and 4
 27

indicating least important. Each rank will be different for different factors for each job
as seen in the example discussed in class. Following assigning ranks, assign benchmark
wages to each of the factor.
Finally, total wage for each key job is calculated by adding wages assigned across each
factor. These wages for key jobs act as benchmark or threshold wages in accordance to
which newer jobs and their wages can be compared depending upon the critical
factors. The newer jobs are non-benchmark jobs whose wages will be more or less the
same as the benchmark jobs depending upon the future employees knowledge, skill
etc. across each compensation factor.
Among all advantages and disadvantages the striking disadvantage of factor
comparison method is the presence of subjective judgment in deciding wages across
critical factors as seen in the example above. The basis of deciding wages across each
critical factor is subjective and could be held discriminatory.
4.3.4. Point Methods
The point method is a more quantitative technique, involves identifying several
compensable factors, each having several degrees numerically scaled, as well as the
degree to which each of these factors is present in the job.
Point method is believed to be more objective and analytical than factor comparison
and all other methods. The first step in the point-method is similar to that of factor
comparison method that involves selecting key jobs. However, the point-method
considers key jobs into job clusters and the specific jobs within the job clusters for
evaluation. For example, ‘Accounting’ is a job cluster and the jobs under this category
could be of an accountant, accounting assistant, data-entry, book-keeping and filing.
The point-method’s most important characteristic is to list out and define specific
compensation factors for each job within the job cluster.
The number of compensation factors used in point- method can be more than 8
depending upon the size of the organization, jobs in different companies.
Computerized job Evaluations use structured questionnaires and statistical models.
They can simplify job analysis, help keep job descriptions up to date, increase
evaluation objectivity, reduce the time spent in committee meetings, and ease the
burden of system maintenance.
Evaluating jobs on the basis of their external market values (market-based evaluation)
is not a true job evaluation system, but market rates can be used to develop a job-
worth hierarchy. Jobs are priced in the labor market(s) in which the organization wants
to be competitive.
Market pricing approach emphasizes external competitiveness and de-emphasizes
internal consistency. “Rank to market”, it involves first determining the competitive
rates for positions for which external market data are available and then blending the
remaining (non-benchmark) jobs into the pay hierarchy.
These prevailing rates are used to represent the relative "worth" of the jobs. Once a
hierarchy is developed around benchmark market rates, the remaining jobs are
28

typically placed into the hierarchy based on whole-job comparisons to benchmark jobs.
5. Remuneration Surveys
As discussed earlier, Job evaluation which is considered to determine the relative worth of
a job within an organization focuses on internal equity of compensation. Now we would
then talk about external competitiveness which can be analyzed by up-to date
Remuneration survey.
Remuneration surveys collect information on prevailing market compensation and benefit
practices, including base pay, other cash payments (statutory and market), variable
compensation (e.g., short- and long-term incentive plans), and time off. Remuneration
surveys allow organizations to recognize and relate their remuneration structures to global
and local trends. many organizations use various remuneration surveys to benchmark or
measure themselves against what the industry is paying employees with similar skill sets
and experience in that occupation. Most of the remuneration surveys have to be bought
from the company directly.

Org Labor Product

Factor Market Market

Market Benchmark
Select

Job Matching
Free hand approach Market Data
Regression Analysis Pay Line Collect
(Least-squares)

Number of incumbents (%) Statistical Data Aging

Mean, median, mode Analysis Analysis Cost of living
Percentiles and SD

Milkovich, G., Newman, J., & Gerhart, B. (2013). Compensation, 11th edition. New York
City, NY: McGraw-Hill Education.

5.1. Purposes of Remuneration Surveys

5.1.1. Adjust the pay level in response to changing rates paid by competitors.
5.1.2. Set the mix of pay forms relative to that paid by competitors.
5.1.3. Establish or price a pay structure.
 29

5.1.4. Analyze pay-related problems.

5.1.5. Estimate the labor costs of product/service market competitors
5.2. Market Select
To determine the prevailing rate for a job, companies can "benchmark" jobs against
compensation surveys that are detailed and specific to the companies' industries and
regions. A good compensation survey uses standard, proven methods of data gathering
and statistical analysis to determine how much companies pay for a specific job in a
specific industry. Match your job descriptions to the descriptions in the salary survey.
Only match those which strongly resemble the survey description. Not all positions in
your organization will match descriptions in the survey. Relevant labor market includes
employers who compete:
5.2.1. For same occupations or skills.
5.2.2. For employees in same geographic area.
5.2.3. With same products and services
5.3. Data Collect
Once an organization decides that it needs a remuneration survey, it must decide how
the survey should be designed and conducted. The organization has two choices: It
may develop and conduct an internal survey, or it may look to an external source. In
the global environment, the use of external third-party data prevails.
There are many sources for global and country-specific compensation and benefits
data. Typical sources include:
5.3.1. Government sources (e.g., ministries of labor or government statistical offices.
5.3.2. International organizations (e.g., the International Labor Organization).
5.3.3. Private firms (e.g., consulting organizations around the world that provide
current global and local information for a fee).
5.3.4. Membership-based business organizations (e.g., employer federations and local
chambers of commerce).
5.3.5. Professional, trade, and industrial associations.
Here are some considerations to weigh for a company who is deciding whether to
purchase a compensation survey.

 The background of the survey research firm and cosponsors, if any. Look for
reputable firms that follow proven methods to gather and analyze compensation
data.

 The scope of the survey. Look for studies that cover industries, jobs, and regions
that are most applicable to your purposes; and that provide data on enough jobs
to be cost-effective.
30

 The survey methodology. Review the summary of the methodology to make sure
it's consistent with standards set forth by reputable industry associations. Be
especially sure the research organization is surveying human resource
professionals or other people knowledgeable about compensation information
within a company, rather than individuals.

 The number of participants in the survey. A good survey should cover a

representative number of companies for its target population. A survey doesn't
have to cover the entire industry or region to be robust; even a few dozen
responding employers in some industries can provide enough data for a valid
survey.

 The names of participants. Look for your competitors and peers. For many jobs,
you may be competing for candidates with companies in different industries but
the same geographic area. Some firms reveal a list of participants, or at least
those well known within the industry. The surveying company may disclose big-
name participants to draw more interest from smaller companies. A list of major
employers can also add credibility to the survey. An important exception to note is
that if a compensation analyst or compensation consulting firm is using multiple
surveys to produce their own derivative market numbers, they will aggregate the
data by combining the surveys, placing differing weight on different sources and
sometimes even making a qualitative adjustment. When the data has been
aggregated in this manner, it is not customary to report numbers or names of
participants. The usefulness and relevance of a salary survey depends largely on
the survey participants.

 The number of incumbents covered by the survey; and the sample size for each
salary. Make sure the participants are a good sample of the recruiting market.
Generally, eight to ten participating companies is a good sample for positions
below the management level. The sample size should increase the more senior
the positions being surveyed, both to get a good representation and to allow for
more job matches, since each company is organized differently. There could be
limited pay data in some industries, or the available data might not be
representative of the industry because of a low participation rate in the survey.

 The relevance of the job descriptions to the positions being benchmarked. Look
for a good match between the survey and your company. Be sure to compare job
descriptions, not just job titles.

 The effective date of the survey data. The date a survey is published is always
later than the effective date of the data within the survey. If necessary, age the
data from the effective date to the current month.
As with any form of research, it is important to use multiple data sources to narrow in
on the "true" answer. Relying on a single source can be misleading if that source
doesn't perfectly reflect the market in question. World at Work suggests that
compensation analysts should use multiple data sources wherever possible; consulting
firms and academics agree. The exceptions come when there is only one data source,
or when there is a spot-on data source, such as a custom survey, that truly describes a
 31

precise market.
5.4. Data Analysis
5.4.1. Effective Date
For those surveys conducted on a regular basis, such as annual surveys, the effective
date will be until the next survey is released in the following year. Otherwise, knowing
the effective date of the survey can prevent companies from using outdated salary
figures and causing error in pay budget forecasts.
If the survey is not current, the person using it should age the salaries to the current
date. If a survey was conducted in September, the salaries are likely to be as of
September or even August. If you are using the survey in December to benchmark for a
new position in the company, you will have to age the number. A simple way to do this
is to take the annual rate at which salaries are moving for this job and prorate it, salary
increases overall this year are around 3.5% but this may vary by job title.
A similar approach is used in setting pay levels across a company. Sometimes these
figures are set at the beginning, middle, or end of the company's payroll year by aging
the appropriate compensation data to those dates. When salary data is aged,
movement in market rates is used to adjust outdated data.
5.4.2. Job Description
If a job on a survey is similar but not identical to one in the organization, the data can
be weighted or leveled for a better match. Therefore conduct job analysis or review job
descriptions is important for job matching.
When consulting a compensation survey, match the job descriptions rather than the
job titles, even if the survey uses generic or widely used job titles. For example, an
associate could be an entry-level position at one consulting firm, or it could be the title
for someone with an MBA at another. Companies are structured differently, and
different companies use different names for the same jobs, so job descriptions are the
best way to match positions. Beware of surveys that use only job titles, as it is unlikely
the data will be a reasonable representation of the jobs you're interested in.
A survey job description should list the primary job function in one or two sentences,
followed by key responsibilities. While the descriptions should be generic and not
specific to any one company, they should contain enough information for participants
to match appropriately to ensure the data is accurate. It is also important to match the
organizational level of the positions be surveyed. A position that is at the group level at
one company may be at the subgroup or the sector level at another.
Job titles are broken down differently in different surveys. Some surveys break them
down by levels within the organizations, i.e., senior management, middle
management, and entry level. Positions may also be broken down by job families or the
types of responsibilities, i.e., business development, marketing, product management,
and sales.
5.4.3. Geographic area
32

Some salary surveys do not provide data for a specific geographic area since wage rates
will vary by location, and organization should factor for geography any national salary
survey data for the local or regional recruiting area to approximate local wage rates.
5.4.4. Compensation data.
There are many things to consider when analyzing the compensation components of a
salary survey. Because companies have different pay structures, compensation data is
collected in ranges as well as actual pay. Salary surveys can provide employers more
information on the marketplace and how to set competitive pay without overpaying or
underpaying employees. Surveys should ask for the minimum, midpoint, and maximum
for the surveyed positions, in addition to the actual base salary paid.
Usually, the prevailing practice for any one job is to pay a range of incomes. As a result,
although the median pay for a job is likely to be a definable number, the range is just as
important. Companies pay employees differently for various reasons. It could be the
company's pay philosophy; or it could be the geographic location or the industry
practice; or it could be the incumbent's length of service or proficiency in the job.
Whatever the reason, it is unlikely that two companies will pay an employee doing the
same job exactly the same amount.
When reading the base pay figures, it's important to check how the numbers are
calculated. The surveying parties can dictate to the participants how the numbers
should be reported. Salaries can be on an annual, monthly, or hourly basis. For
example, if the incumbent is a contract employee, hourly salaries are more relevant
than an annual figure. The survey may request pay data for individual incumbents or
averages for all incumbents matching a specific job description, depending on the
types of surveys and their objectives.
6. Pay Structure
When a company has planned to expand into new countries, it is necessary to establish a
pay (salary) structure. With all the different economic situation, cultures and exchange
rates, it is difficult to come up with one structure that works everywhere. In the following,
we will introduce more details with regard to pay structure. There are several terms and
definitions to acknowledge first:
6.1. Terms and Definitions
6.1.1. Policy Line
A job structure orders jobs on the basis of internal organizational factors. The pay
structure, on the other hand, is anchored by the organization’s external competitive
position, reflected n its pay policy line.
The pay level that a company sets its pay at compared to the market pay line, typically
the midpoint of the pay structure is set to judge the going market rate. In building pay
structure scientifically, the line is a statistically computed least-squares-regression line.
6.1.2. Pay Grades
Pay grades are used to group jobs that have approximately the same relative internal or
 33

external worth; in other words, all jobs within a particular grade are paid the same rate
or within the same pay range. Grades enhance an organization's ability to move people
among jobs with no change in pay.
6.1.3. Pay Range
Pay range typically means high to low or minimum to maximum pay for a certain job
grade. The range midpoints, minimums, and maximums reflect career paths,
promotions, and other management systems and philosophy within the organization.
The differential must be large enough to induce employees to seek and/or accept the
promotion or to undertake the necessary training required.
Range spread subtracts the minimum amount from the range maximum and then
divides that figure by the minimum. In general, lower-level jobs typically have a narrow
range between mil1imumand maximum salaries, while the salary ranges for higher-
level jobs will be wider. People in entry-level jobs have more promotion possibilities
and tend to stay at the entry level for shorter periods of time, while people in higher-
level jobs tend to stay in their range for a longer period of time.
Range overlap in salary ranges that will allow career development and pay increases
without promotion at each level and the percentage of increase the organization will
offer an employee for a promotion.
Overlap=(max rate of lower grade – min rate of higher grade)/(max rate of higher
grade-min rate of higher grade)
6.1.4. Compa-ratios (CP)
CP is a salary expressed as a percentage of or indexed to the salary range
midpoint/market rate (salary/midpoint or market rate = CP). The CP may be used as an
indicator of how an individual is doing against plan.
6.1.5. Broadbanding
Broadbanding, which uses fewer pay grades having broader ranges than traditional
compensation systems, is increasingly being used. Broadbanding, called fat grades,
means collapsing pay grades and ranges into just a few wide levels or a band, which
includes one minimum and one maximum range, while midpoint often not used. The
purposes of using broad banding as follow:

 Provide flexibility to define job responsibilities more broadly.

 Foster cross-functional growth and development.

 Ease mergers and acquisitions.

The most important difference between grades and broad banding is where the
controls are located. There are several reasons why it is beneficial to reduce the
number of pay grades and broaden pay ranges. First and foremost, broadbanding is
more consistent with the flattening of organizational levels and the growing use of jobs
that are multidimensional. With fewer bands and broader ranges, employees can shift
responsibilities as market conditions and organizational needs change. Traditional
34

questions from employees about when a promotion to a new grade occurs, and what
pay adjustments will be made for temporarily performing some new job
responsibilities, are unnecessary.
Another advantage of broadbanding is that employee career development can be
enhanced when the artificial barriers of numerous pay grades are removed. With
broadbanding, many of the control mechanisms traditionally enforced by HR
departments also are removed, and authority for more compensation decisions is
decentralized to the operating managers. By allowing employees to move into other
job areas and broaden their knowledge, skills, and abilities without having to deal with
a large number of constraints imposed by a compensation program, the organization
encourages employees to move between departments, divisions, and locations. In
firms that have adopted broadbanding, employees are encouraged to move across
business units and apply for openings in areas of the company other than where they
have been working. This cross-functional development is beneficial because it creates
more employees who have greater flexibility and broader sets of capabilities.
However, broadbanding is not appropriate for every organization. Many organizations
still operate in a relatively structured manner, and the flexibility associated with
broadbanding is not consistent with the traditional hierarchical culture in which
executives and managers have been operating.
Another problem with broadbanding is that many employees have
become ”conditioned” to the idea that a promotion is accompanied by a pay raise and
movement to a new pay grade. As a result of removing this grade progression, the
organization may be seen as having fewer upward promotion opportunities.
Furthermore, a number of individuals do not want to move across the organization into
other areas.

Pay Level

Broadband
Policy Line

Max 2

Max
Spread
Overlap Max-Min 2
Pay Range

Max-Min Mid Max 2-Min 2

Min 2
Min

Min Grade Level

Grade 1 Grade 2 Grade 3 Grade 4

Pay Structure
Heaps, W. (2011). Global Salary Grades or Global Salary Structure? Retrieved from
 35

internationalhrforum.com.

6.2. Global Salary Grades

Global Salary Grades refers to a standardized method of classifying positions across a
global enterprise. Alternative titles would be global bands or global job evaluation.
Employers often adopt global salary grades to enable internal comparisons and
standardize certain elements of compensation and benefits, such as short- and long-
term incentives. For example, global salary grades helps answer the question “is the
Brand Manager position in Greece equivalent to the Associate Brand Manager in
France or the Marketing Manager in Kenya?” Or, all staff in band C or higher are
eligible for equity compensation awards.
Salary Structure is the term used to refer to the salary ranges associated with salary
grades. A Global Salary Structure, by it’s very name, would imply a single structure
for all locations globally. Sometimes you may also see this referenced as an
international salary range. Some companies use a global salary structure to manage a
cadre of international assignees (usually based on the headquarters market).
International organizations such as the World Bank and the United Nations, and many
international NGOs, use international salary structures in managing their international
(expatriate) staff as well. But it would be very unusual to have a global salary structure
applicable to all staff in an organization.
If you are managing a global enterprise, global grades can be very useful in several
respects. In addition to the examples above allowing comparison of equivalent
positions across different markets with varying titles, and standardization of executive
compensation programs, global grades allow the organization to establish leading
talent management processes. The global grades will help establish competencies
and career tracks, and the related training and development that is required to train
future leaders. Global grades also help companies manage succession planning more
easily, by providing a common language to describe the challenges and complexities of
an individual position.
6.3. Global Pay Structure
Salary structures are a very useful tool for all organizations. They help ensure
consistency and avoid discrimination, control costs, and together with a strong
performance management process, allow managers to differentiate between different
positions and varying levels of performance amongst the team. Each country is a
different market, however, and therefore, you need to build your structure separately
for each one. Market data plays a key role here, since the structure must be anchored
to the market in which you are competing for talent.
In the end, if you design a global grading system with local pay structures, you’ll get it
right. The grades will give you global consistency while the structures will be tailored
to the local market, guided by your global compensation philosophy, which provides
standards for each country to meet.
A salary structure is commonly used by employers to set out the range of pay, from
36

minimum to maximum, associated with each salary grade or band. By associating each
position with a grade or band, employers can use a salary structure to help manage
compensation in an optimal way.
Here are ten steps to develop a salary structure for your organization, with some
special considerations for international developing markets:
6.3.1. Establish your compensation philosophy
Each employer needs a policy which outlines their desired market position. What
percentile of the market is your target? Which comparators are appropriate? Is the
target the same for all grades? A well-articulated compensation policy provides
valuable guidance for the development of a pay structure. In large organizations, there
is often a corporate policy which forms the basis for local policies.
6.3.2. Gather market data
Identify surveys with your desired comparators (as specified in your company policy).
Most employers prefer at least two survey sources. In international markets this can be
challenging, especially in developing countries and smaller markets. Consider sector-
specific surveys as well as multi-sector options – certain jobs are found across many
employers, not just your sector. In smaller international markets, leading employers
often provide a better proxy for the most competitive market than do sector surveys
with many less sophisticated employers. Don’t overlook international organizations;
they pay very competitively and are often well-established in the smallest of countries.
6.3.3. Identify benchmark jobs
Benchmark jobs are those that are representative of roles found across many
organizations – standard roles such as Manager, Accountant, Payroll Administrator,
Secretary, Clerk and Driver. Benchmark jobs are easy to understand and match to, and
will appear in multiple surveys, enabling the use of multiple sources. For professional
roles specific to your sector, sector surveys could be a good source. In other cases, and
with multi-sector survey sources, look for those that utilize well-developed career
ladders, enabling easy cross-occupational job matching. As an example, such an
approach would examine Analyst positions across different functional areas (e.g.,
finance, HR, procurement, marketing, etc.).
6.3.4. Measure your market position
There are several ways to do this. If you have a lot of benchmark jobs, tabulate the
average of all of the roles in the same internal level or grade. Weighted averages
incorporating number of incumbents associated with each survey data point is a
common approach. Select the market reference from the survey most appropriate
under your policy. In developing countries market data is more volatile. A good
approach is to use minimum and maximum values to “bookend” the data in these
markets. This helps eliminate outliers and capture more realistic market survey values.
6.3.5. Calculate the compa-ratio
Calculate the compa-ratio. This is the ratio of your data to the market — 100 means
fully comparable, while a ratio under 100 indicates a below market position, and over
 37

100, above market. There are different approaches to summarizing the data — by
position, by grade, etc. Whatever approach you use, the compa-ratio analysis will
illustrate which parts of the organization are competitive against the market and which
ones require some attention!
6.3.6. Check your budget
This is a critical step. You can calculate the average difference between your current
scale and the market. This indicates about how much of an increase would be required
to make your scales fully comparable to the market. Your internal budget constraints,
though, will dictate how close to this ideal you can achieve. In addition to internal
budgets, consider the average market movement in your surveys, and the general
inflation rates (never use inflation to determine how much more to pay staff – this is
determined by cost of labor, not cost of living).
6.3.7. Start allocating
This is the start of an exercise which will repeat many times, until you get the desired
result. Build a model of your organization, ideally with the number of incumbents in
each grade. Using your overall percentage of market and budget number, start
increasing your scale (use Mid points, or the Mins and Maxs). See how close you can
get to fully comparable to the market, and how much it will cost. Does it jive? If not,
tweak the data a bit. You can adjust the percentage each grade is increased, as well as
examine the spans (range from min to max) and inter-grade differentials, in order to
gain better market alignment. Obviously, the incumbent count of each grade will
impact the overall costing model.
6.3.8. Final adjustments
Once you have built your new scale and matched it to the market as closely as possible,
and within your budget, give it a once over. Does it make sense? Are the increase
amounts distributed in a pattern which will cause unrest amongst your staff? Strive to
achieve a scale which will reflect your comp policy and enhance internal cohesion in
the organization. This step is the art of compensation, not the science.
6.3.9. Management approval
Review your proposed scale with management, presenting your rationale, budget and
overall market comparisons. Discuss concerns you may have uncovered about specific
positions or grades, and educate your management about the process used. Outline
your implementation plans.
6.3.10. Communicate
Develop appropriate communications for managers and staff. Let them know all of the
work that went in to the exercise, and how the organization compares to the market.
Be careful here — you need to obviously put on a positive spin — that’s why statistics
are so flexible!
7. Strategic Rewards
The design process is started by identifying desired outcomes and goals for your
38

organization. This is often referred to as developing your compensation philosophy. Your

philosophy is formed by considering a number of factors. The balance of direct and indirect
rewards, the complexity and responsibility of a role and the candidate or employee filling
it, as well as your focus on internal versus external equity are just few factors explored in
this section. It is the ability to achieve results that is critical to organizational success.
Compensation can be defined as all of the rewards earned by employees in return for their
labor. This includes:

 Direct financial compensation consisting of pay received in the form of wages,

salaries, bonuses and commissions provided at regular and consistent intervals.

 Indirect financial compensation including all financial rewards that are not included in
direct compensation and can be understood to form part of the social contract
between the employer and employee such as benefits, leaves, retirement plans,
education, and employee services.

 Non-financial compensation referring to topics such as career development and

advancement opportunities, opportunities for recognition, as well as work
environment and conditions

FINANCIAL NON-FINANCIAL

DIRECT INDIRECT THE WORK

JOB/POSITION ENVIRONMENT
Equitable Wages Insurance Plans:
Life, Supplementary
and Salaries Interesting Duties Fair and Consistent
Health, Dental, Vision, and Responsibilities Practices and
Disability Coverage… Policies
Market
Challenges
Adjustments or Social Security Competent
Cost of Living Benefits: Retirement Authority Supervision
Increases plans, Employment
insurance, Workers Autonomy Fun and Effective
Merit Increases or Compensation, Co-workers
Educational services, Opportunity for
Performance Recognition Flexible Scheduling
Bonuses Employee services
Feeling of Alternative Working
Fair Commissions Paid Absences: Achievement Arrangements
Vacations, Holidays,
Sick Leave, Advancement Modified
Educational Leave. Opportunity Retirement
Jury Duty,
Compassionate Leave

Burguillos, B. & López, M. (2013). How to develop a Global Total Compensation Model.
HR Strategy: Gamification & Engagement.
It is critical that organizations align their compensation practices with their organizational
cultures, especially if efforts are made to change the cultures because of competitive
pressures. For instance, a telecommunications firm faced major changes in the industry
after government restrictions on pricing were removed and cable television firms were
allowed to provide telephone service. The firm could not continue to offer the wages it
had paid when government agencies allowed the pricing of services to obtain full cost
 39

recovery and a set level of profits. When changing organizational culture, organizations
must change their compensation systems if they are to avoid sending mixed signals to
employees.
Another strategic design consideration for compensation systems is to balance the costs of
attracting and retaining employees with the competitive pressures in its industry.
Considering these pressures is particularly important when the organization faces a very
tight labor market for workers with specific skills. The cost pressures of industry
competition with organizations in lower-wage countries such as China or Mexico must also
be addressed, while maintaining competitive pricing for the firm’s products and services.
Some organizations have specifically stated policies about where they wish to be
positioned in the labor market. Most employers position themselves in the second quartile
(P50), in the middle of the market, based on pay survey data of other employers’
compensation plans. Choosing this level attempts to balance employer cost pressures and
the need to attract and retain employees by mid-level compensation plans.
An employer using a first-quartile (P25) approach is choosing to pay below market
compensation. This may be done for several reasons. One is because of a shortage of funds
and the inability to pay more and still meet strategic objectives. Also, if there is an
abundance of workers, particularly those with lower skills, then a below-market approach
can be used to attract sufficient workers at a lesser cost. The downside of this strategy is
that higher turnover of workers is more likely. If the labor market supply tightens, then
difficulty in attracting and retaining workers will probably result.
A third-quartile (P75) approach is an aggressive, above-market emphasis. This strategy may
be chosen to ensure that sufficient workers with the required capabilities are attracted and
retained. It also may allow the organization to be more selective when hiring workers.
However, because it is a higher-cost approach, it is crucial that those paid above-market
wages be more productive.
In determining effective rewards, however, the uniqueness of each employee must also be
considered. People have different needs or reasons for working. The most appropriate
compensation will meet these individual needs. To a large degree, adequate or fair
compensation is in the mind of the employee.
8. Individual Differentiation
There are two basic compensation philosophies, which should be seen as opposite ends of
a continuum. At one end of the continuum in the below figure is the entitlement
philosophy; at the other end, the performance-oriented philosophy:
8.1. Entitlement Orientation
The entitlement philosophy can be seen in many organizations that traditionally have
given automatic increases to their employees every year. Further, most of those
employees receive the same or nearly the same percentage increase each year.
Employees and managers who subscribe to the entitlement philosophy believe that
individuals who have worked another year are entitled to a raise in base pay, and that
all incentives and benefit programs should continue and be increased, regardless of
changing industry or economic conditions. Commonly, in organizations following an
40

entitlement philosophy, pay increases are referred to as cost-of-living raises, whether

or not they are tied specifically to economic indicators. Following an entitlement
philosophy ultimately means that as employees continue their employment lives,
employer costs increase, regardless of employee performance or other organizational
competitive pressures. Market comparisons tend to be made within an industry, rather
than more broadly considering compensation in firms of all types. Bonuses in many
entitlement-oriented organizations are determined very paternalistically and often do
not reflect operating results. Instead, the CEO or owner acts as Santa Claus at the end
of the year, passing out bonus checks that generally do not vary from year to year.
Therefore employees “expect” to receive the bonuses as another form of entitlement.

Entitlement Performance

• Senior – based pay • No raises for length of service

• Across - the – board raises • No raises for longer-service
• Pay scales raised annually poor performers
• Industry comparisons of • Market adjusted pay
compensation only structures
• “Santa Claus” bonuses • Broader industry comparison
• Bonus tied to performance
results

Berger, L. & Berger, D. (2015). The Compensation Handbook: A State-of-the-Art Guide to

Compensation Strategy and Design (6th Edition). Columbus, OH: McGraw-Hill Education.

8.2. Performance Orientation

Where a performance-oriented philosophy is followed, no one is guaranteed
compensation just for adding another year to organizational service. Instead, pay and
incentives are based on performance differences among employees. Employees who
perform well get larger compensation increases; those who do not perform
satisfactorily receive little or no increase in compensation. Thus, employees who
perform satisfactorily should keep up or advance in relation to a broad view of the
labor market for their jobs, whereas poor or marginal performers should fall behind.
Bonuses are paid based on individual, group, and/or organizational performance
results. Few organizations are totally performance-oriented in all facets of their
compensation practices. However, breaking the entitlement mode is increasingly
occurring in the organizational restructuring common throughout many industries. A
study of public-sector HR managers found that there is a desire and need to shift
toward more performance-oriented compensation practices in many public-sector
organizations. How fast that occurs, given the historical traditions and the strength of
public-sector unions, remains to be seen.
 41

9. Market conformity
An organization may choose to match the market and pay approximately the same wages
and offer a benefits package similar to that of the competition.
Some organizations strive to lead the market and recruit and retain the most desirable
talent from the labor pool by offering higher salaries and/or better benefits. When using
salary survey data, leading the market typically equates to the 75th percentile of the
market.
Other organizations deliberately, out of economic necessity or to control labor costs, lag
the market and establish their pay rates or benefits levels below those offered by other
employers. Reduced labor rates may enable the organization to offset other higher costs
such as purchasing, distribution, or sales expenses. When using salary survey data, lagging
the market typically equates to the 25th percentile of the market.
P75
Pay Level

Benchmarking: lead, match, or lag? Actual Data

Policy Line (P50)

P25

Max Pay
Compa-Ratio =
Pay
Mid
Mid

Min Grade Level

Grade 1 Grade 2 Grade 3 Grade 4

Berger, L. & Berger, D. (2015). The Compensation Handbook: A State-of-the-Art Guide to

Compensation Strategy and Design (6th Edition). Columbus, OH: McGraw-Hill Education.

10. Internal Consistency

Once managers have determined pay ranges, they can set the specific pay for individuals.
Setting a range for each pay grade gives flexibility by allowing individuals to progress
within a grade instead of having to be moved to a new grade each time they receive a
raise. A pay range also allows managers to reward the better-performing employees while
maintaining the integrity of the pay system.
Regardless of how well constructed a pay structure is, there usually are a few individuals
whose pay is lower than the minimum or higher than the maximum. These situations
occur most frequently when firms that have had an informal pay system develop a new,
more formalized one. Red circles green circles refers to salary of employees either above
or below the salary range associated with the job which the employee is the job
42

incumbent. If the overall staff compensation is well managed, both green-circle and red-
circle rates would be fairly uncommon within the organization.
10.1. Red-Circled Employees
A red-circled job is shown on the graph in the below figure. A red-circled employee is
an incumbent who is paid above the range set for the job. For example, assume that
an employee’s current pay is $10.92 per hour but the pay range for that grade is
between $6.94 and $10.06. The person would be red circled, and attempts would be
made over a period of time to bring the employee’s rate into grade. Typically, the
red-circled job is filled by a longer service employee who has declined promotions or
has been viewed as unpromotable due to insufficient education or other capabilities.
Yet the individual may have continued to receive large pay increases.
Several approaches can be used to bring a red-circled person’s pay into line. Although
the fastest way would be to cut the employee’s pay, that approach is not
recommended and is seldom used. Instead, the employee’s pay may be frozen until
the pay range can be adjusted upward to get the employee’s pay rate back into the
grade. The employee can also be transferred to a job with a higher grade or given
more responsibilities. This method will result in greater job evaluation worth, thus
justifying the job’s being upgraded. Another approach is to give the employee a small
lump-sum payment but not adjust the pay rate when others are given raises. There
are some solutions for red circled employees:
10.1.1. Regular increase. In this approach a red-circle employee receives the same
increase as if he or she were not at or above the maximum.
10.1.2. No increase. No merit-based or seniority pay raise beyond the maximum is
allowed with this approach. The “no increase” strategy ensures that the
company pays only what the job is worth and makes the most sense in the
context of a wage/salary structure. This approach may result in the loss of
valued personnel, but such turnover can be minimized if the institution
provides employees with the encouragement, training, and development
opportunities necessary to qualify for higher positions.
10.1.3. Freeze salaries until cost of living adjustments to a revised salary range
catches up with the employee. This may take years or may never be possible
because employees are too far above the new pay range.
10.1.4. Limited or minimal increase. Under this policy, only less-than-regular
increases are permitted for red-circle personnel.
10.1.5. Lump-sum bonus. With this approach eligible employees receive a cash
payment “up front” when a rate change is due.
10.1.6. Allow employees to train for and transfer into higher paying jobs.
10.1.7. No established policy. Red-circle situations are handled on a case-by-case
basis, with no set approach. Some red-circle employees receive regular
increases; others are given limited pay raises or none at all.
 43

10.2. Green-Circled Employees

An individual whose pay is below the range is a green-circled employee. Promotion is
a major cause of this situation. Assume someone receives a promotion that
significantly increases his or her responsibilities and pay grade. Typical promotion
adjustments are 8% to 15%, but such an adjustment may still leave the individual
below the minimum of the new pay range. Because the promotion represents such a
significant increase in responsibilities, the employer may not work to increase the
person’s pay to the minimum until all facets of the new job are being fully
performed. Generally, it is recommended that the green-circled individual receive pay
increases to get to the pay grade minimum fairly rapidly. More frequent increases can
be given if the increase to minimum would be large.
In the situation where green-circled employees are members of a protected group,
such as union members, when salary ranges had been agreed in the collective
agreement, the green circle status could look like discrimination and subject the
organization to litigation, especially if other employees in the same job are all paid in
the range. There are some solutions for green circled employees:

Pay Level

Policy Line

Red Circle

Max Green Circle

Mid Pay compression?

Min Grade Level

Grade 1 Grade 2 Grade 3 Grade 4

Berger, L. & Berger, D. (2015). The Compensation Handbook: A State-of-the-Art Guide

to Compensation Strategy and Design (6th Edition). Columbus, OH: McGraw-Hill
Education.

10.2.1. Immediate increase. With this approach immediately raise the employee’s pay
to match the adjusted range in accordance with that individual’s seniority and
performance. This would be the preferred method for an organization whose
budget is large enough to allow such immediate action.
10.2.2. Gradual Increase. With this approach gradually raise the individual’s wages to
the appropriate level, starting first with an adjustment to bring the employee’s
44

pay to the minimum of the range. This would most likely be the preferred
method for an organization whose budget is small.
10.3. Pay Compression
One major problem many employers face is pay compression, which occurs when the
range of pay differences among individuals with different levels of experience and
performance becomes small. Pay compression occurs for a number of reasons, but
the major one involves the situation in which labor market pay levels increase more
rapidly than an employee’s pay adjustments. Such situations have become prevalent
in many occupational areas, particularly those in the information technology field.
Occasionally, in response to competitive market shortages of particular job skills,
managers may have to deviate from the priced grades to hire people with scarce
skills. For example, suppose the worth of a specialized information systems analyst’s
job is evaluated at $38,000 to $48,000 annual salary in a company, but qualified
individuals are in short supply and other employers are paying $60,000. The firm
must pay the higher rate. But suppose several analysts who have been with the firm
for several years started at $38,000 and have received 6% increases each year. These
current employees may still be making less than salaries paid to attract and retain
new analysts from outside with lesser experience. One solution to pay compression is
to have employees follow a step progression based on length of service, assuming
performance is satisfactory or better.
10.4. Pay Increases
Once pay ranges have been developed and individuals’ placements within the ranges
identified, managers must look at adjustment to individual pay. Decisions about pay
increases often are critical ones in the relationships among employees, their
managers, and the organization. Individuals have expectations about their pay and
about how much increase is “fair,” especially in comparison with the increases
received by other employees. There are several ways to determine pay increases:
10.4.1. Pay for Performance Systems
Many employers profess to have a pay system based on performance. But relying on
performance-appraisal information for making pay adjustments assumes that the
appraisals are done well, and this is not always the case, especially for employees
whose work cannot be measured easily. Consequently, some system for integrating
appraisals and pay changes must be developed and applied equally. Often, this
integration is done through the use of a pay adjustment matrix, or salary guide chart.
Pay adjustment matrices base adjustments in part on a person’s compa-ratio, which
is the pay level divided by the midpoint of the pay range.
In many organizations, pay-for-performance systems are becoming a popular way to
change the way pay increases are distributed. In a truly performance oriented
system, no pay raises are given except for increases in performance. Giving pay
increases to people because they have 10 to 15 years’ experience, even though they
are mediocre employees, defeats the approach. Further, unless the performance-
based portion of a pay increase is fairly significant, employees may feel it is not worth
 45

the extra effort. Giving an outstanding industrial designer making $40,000 a year the
“standard raise” of 4% plus 1% for merit means only $400 for merit versus $1,600 for
“hanging around another year.”
10.4.2. Seniority
Seniority, or time spent in the organization or on a particular job, can be used as the
basis for pay increases. Many employers have policies requiring that persons be
employed for a certain length of time before they are eligible for pay increases. Pay
adjustments based on seniority often are set as automatic steps once a person has
been employed the required length of time, although performance must be at least
satisfactory in many nonunion systems. A closely related approach uses a maturity
curve, which depicts the relationship between experience and pay rates. Pay rises as
an employee’s experience increases, which is especially useful for professionals and
skilled craft employees. Unlike a true seniority system, in which a pay raise occurs
automatically once someone has put in the required time, a system using maturity
curves is built on the assumption that as experience increases, proficiency and
performance also increase, so pay raises are appropriate. If proficiency does not
increase, theoretically pay adjustments are reduced, although that seldom happens
in practice. Once a person plateaus in proficiency, then the pay progression is limited
to following the overall movement of the pay structure.
10.4.3. Cost-Of-Living Adjustment (COLA)
A common pay-raise practice is the use of a standard raise or cost-of-living
adjustment (COLA). Giving all employees a standard percentage increase enables
them to maintain the same real wages in a period of economic inflation. Often, these
adjustments are tied to changes in the Consumer Price Index (CPI) or some other
general economic measure. However, numerous studies have revealed that the CPI
overstates the actual cost of living. Unfortunately, some employers give across-the-
board raises and call them merit raises, which they are not. If all employees get a pay
increase, it is legitimately viewed as a cost-of-living adjustment having little to do
with merit or good performance. For this reason, employers should reserve the term
merit for any amount above the standard raise, and they should state clearly which
amount is for performance and which is the “automatic” COLA adjustment.
10.4.4. Lump-Sum Increase (LSI)
Most employees who receive pay increases, either for merit or seniority, first have
their base pay adjusted or then receive an increase in the amount of their regular
monthly or weekly paycheck. For example, an employee who makes $12.00 per hour
and then receives a 3% increase will move to $12.36 per hour. In contrast, a lump-
sum increase (LSI) is a one-time payment of all or part of a yearly pay increase. The
pure LSI approach does not increase the base pay. Therefore, in this example the
person’s base pay remains at $12.00 per hour. If an LSI of 3% is granted, then the
person received $748.80 (computed as 36¢ per hour * 2080 working hours in the
year.) However, the base rate remains at $12.00 per hour. It is that base rate upon
which overtime is figured, and keeping the base rate static slows down the
progression of the base wages. It also allows for the amount of the “lump” to be
varied, without having to continually raise the base rate. Some organizations place a
46

limit on how much of a merit increase can be taken as a lump-sum payment. Other
organizations split the lump sum into two checks, each representing one-half of the
year’s pay raise.
As with any plan, there are advantages and disadvantages. The major advantage of
an LSI plan is that it heightens employees’ awareness of what their performance
“merited.” A lump-sum check also gives employees some flexibility in their spending
patterns so that they can buy big-ticket items without having to take out a loan. In
addition, the firm can slow down the increase of base pay, so that the compounding
effect of succeeding raises is reduced. Unionized employers have negotiated LSI plans
as a way to hold down base wages, which also holds down the rates paid for
overtime work. Pension costs and some other benefits, often tied to base wages, can
be reduced as well.
One disadvantage of LSI plans is administrative tracking, including a system to handle
income tax and Social Security deductions from the lump-sum check. Also, workers
who take a lump-sum payment may become discouraged because their base pay has
not changed. Unions generally resist LSI programs because of this and because of the
impact on pensions and benefits. To some extent, this problem can be reduced if the
pay increase is split to include some in the base pay and the rest in the lump-sum
payment.
11. Job vs. Person Based Pay
Pay scales have traditionally been defined by the qualifications, experience and
knowledge required to perform job duties at a certain level. In other words, pay is
centered on the job, not the person. Skill-based pay, also referred to as knowledge-based
pay, is person-focused. Workers are compensated for each new skill that allows them to
perform new tasks on the job. As workers gain each additional skill, their pay rate goes
up. Some companies believe that learning a certain sets of skills leads to higher
productivity and, therefore, embrace the idea of skill-based pay.
The underlying objectives of any compensation system are to attract, motivate and retain
good staff. But which compensation system is most likely to achieve that goal? The
answer, not surprisingly, is that it depends.
There is no “magic bullet” — only a choice about what's right for your particular practice.
There are literally hundreds of variations to choose from, but they are all derived from
just a few theoretical models, which can be categorized as either base pay or
performance pay. Most practices use some combination of the two categories to leverage
the strengths of each. This article will examine two models of base pay — paying for the
job and paying the person — as well as models that involve extra pay for performance —
merit pay and practice-effectiveness pay.
 47

Job-Based Person-Based

Employee focus Seek promotions to earn more pay Seek skills/competencies

Procedures Job analysis Skill/competence analysis

Job evaluation Certification

Advantages Clear expectations Continuous learning

Sense of progress Flexibility
Pay based on value of work performed Reduced work force
Lateral movement
Limitations Potential bureaucracy Potential bureaucracy
Potential inflexibility Requires cost controls

Berger, L. & Berger, D. (2015). The Compensation Handbook: A State-of-the-Art Guide to

Compensation Strategy and Design (6th Edition). Columbus, OH: McGraw-Hill Education.

Although no single model is right for everyone, the practice-effectiveness model does
offer a number of advantages. Because this formula combines base salaries with variable
bonus payments that depend on the performance of the practice, it helps control
operating costs; rewards the right behaviors and builds unity; works with a variety of
payment structures; encourages self-management and innovation; and breaks down
bureaucracy. But before we analyze it, let's look at its rivals.
11.1. Paying for the job
Paying for the job is the “traditional” model that most people know. Each position is
slotted into a grade level and weighted based on the education and experience the
job requires and the number of staff who report directly to the person in the
position. Pay raises are scheduled as an employee's tenure with the practice
increases. The traditional model is designed to serve as a cost-control tool and to
establish each job's relative worth in a practice.
The traditional model has a number of advantages:

 It facilitates centralized control. It gives an organization criteria with which to

evaluate whether individual physicians or managers are paying their staff too
much. It also makes budgeting relatively easy and makes salary expenditures
predictable.

 It's a useful tool for evaluating internal pay equity. Because compensation for all
jobs in the practice is based on one system, you can easily compare what staff
across the practice are earning.

 It facilitates market testing of your pay scale's competitiveness. It allows a job in

one practice to be scored using measures that are comparable with those used
in other practices. With some of the widely used systems, extensive survey data
are available to help practices set their pay levels based on what similar
practices are paying.
48

 It has the appearance of objectivity. Although quantification doesn't ensure

fairness, it does make a pay system consistent. Staff members may not be
completely satisfied with their compensation, but at least they won't see the
pay system as arbitrary.
In short, the traditional pay model can be appropriate if your practice needs high
levels of internal equity and centralized control of compensation. But the traditional
model has several disadvantages:

 It can inflate the pay system's operating costs. After implementing a traditional
base-pay system, a practice may need to hire a consulting firm to provide
ongoing compensation audits and survey data. In addition, the traditional model
is a high producer of records and administrative overhead because it requires
that each job be evaluated (with supporting documentation) and that the pay
grades be revised annually.

 It encourages point grabbing and inefficiency. Staff members become quite

sophisticated in how to get their jobs scored highly in compensation reviews.
The traditional model rewards people for creating overhead and higher costs
because overseeing larger budgets and more subordinates leads to higher pay.

 It compromises honesty in job descriptions. People quickly realize that the way
to beat the system is to create flamboyant and overly inclusive job descriptions.
Over time, the practice can end up paying everyone excessively.

 It rewards the wrong behavior. Giving a person more money simply for taking on
new responsibilities rewards job changes rather than outstanding performance
or development of needed skills.

 It doesn't accurately reward the performance of talented staff. Because

compensation is determined by an employee's level and the job's rating, the
model limits your flexibility to reward people based on their individual
performance. For example, no matter how well a first-year billing clerk performs,
he or she will earn less than someone who has been doing an average job for
the last four years. This can hurt the motivation of your best performers and
encourage them to look for jobs elsewhere.

 It reinforces a vertical career orientation. More responsibilities, especially

supervisory and managerial, lead to more money. This drives your best technical
and clinical staff into roles where they may not be as effective, and it does little
to encourage the development of technical and clinical skills. This is especially
counterproductive in practices that are implementing total quality management
(TQM), continuous quality improvement (CQI) or other team approaches to
improving problem solving, operational efficiency and clinical outcomes.

 It reinforces hierarchy and bureaucracy. By assigning value to jobs in terms of

their hierarchical position and level of control, the traditional model fosters
unnecessary and undesirable pecking orders and power relationships.
In short, the traditional model offers consistency and the perception of fairness in a
 49

practice's compensation system. But be careful: Once implemented, it can become a

dominant part of a practice's culture and have unintended, counterproductive
results.
11.2. Paying the person
The alternative to job-based pay is to compensate staff according to the value of their
skills in the market. The most common approach is competency-based pay. This
model is designed to motivate staff to develop the competencies — knowledge and
skills for performing specific work — that the practice needs to accomplish its
objectives. This model is most appropriate for practices that need high levels of intra-
group teamwork, intergroup collaboration and adaptability to change.
Advantages of the competency-based model include these:

 It can lead to a broader perspective for staff. When this model is combined with
a participatory management style, it encourages and rewards cross-training,
learning and the assignment of responsibilities based on the skills that staff
possess (rather than their “positions”). In turn, staff learn more about how the
practice works, resulting in a big-picture understanding of what improvements
are needed. This broader perspective allows staff members to be more
innovative in making the practice more efficient.

 It reinforces a culture of improvement. The model delivers a tangible reward to

staff for growing, learning and developing new areas of competency. It is
compatible with TQM, CQI and similar approaches to improvement.

 It facilitates self-management and enables leaner staffing. Because the model

rewards staff members for developing new skills, it prepares them to be more
productive, take on greater responsibility and work more collaboratively with
other staff. It also reduces the need for physician oversight. Maximizing the
staff's potential can lead to leaner, flatter staffing configurations — and
substantial overhead savings.

 It improves staff retention. Because they can develop skills continuously, staff
members have more control over their pay. They are unlikely to find comparable
jobs elsewhere because most organizations still use the traditional model.

 It builds acceptance for change. This model helps staff become more accepting
of change because in it change represents the potential for professional growth
— and better pay. As staff learn to accept change, the practice becomes better
able to react to staff turnover, expansions, mergers or changes in the health care
environment.
There are several disadvantages of the competency-based model as well:

 It produces high pay rates. As staff become more valuable to the practice and
their tenure increases, individual salaries will increase. This doesn't necessarily
mean that total payroll costs will rise. In fact, they can be lower than those
generated in a traditional model, if the practice can use its fewer, but more
competent, staff more effectively.
50

 It requires a large investment in training. Because peers train each other,

productivity will decline initially. Physicians must be committed to staff training
as the means of competency acquisition, and they must be patient early in the
implementation process, giving the model a chance to produce the expected
results.

 Market comparisons can be more difficult. Since most survey data relate to the
traditional pay model, staff-salary comparisons may not be straightforward. You
can overcome this challenge by examining data about what others pay for
certain competency mixes rather than direct job-by-job comparisons.

 Individuals can “top out.” Practices generally establish an income ceiling for staff
who master all competencies, but employees in the traditional model can also
reach this kind of limit. In a competency-based model, this is less of an issue
since staff have higher pay scales than traditional models offer.

 Administrative involvement can increase. Keeping track of each person's

competency assessments, competency mix and pay rate requires time and
effort. A computerized record-keeping system can help you deal with this. A
competency-based pay model requires practices to commit to ongoing staff
training and to developing an administrative infrastructure that will support the
system. It may also require some mental effort to step outside the box of
traditional thinking.
12. Compensation Communications
Managing a company’s compensation program is a balancing act, with your company’s
needs on one hand and your employees’ needs on the other. Your company needs to offer
a budget-passing yet competitive salary and benefits package because it translates into
better individual, team, and company performance. Your employees want to earn what
they’re worth and feel valued for their time and talents. You need to create a win-win, and
engaging employees in the compensation conversation is a step in the right direction.
If HR stop and think about it, it’s really all about managing employee expectations: if they
believe they are being compensated fairly and can look forward to future rewards, they
are likely to remain loyal employees; if they perceive their compensation as “less than,”
they will seek greener pastures. And the lynchpin to managing expectations with respect
to compensation is – you guessed it – effective communications.
12.1. Goal of Compensation Communication
For your employees (present and future) to see their compensation package as the
tremendous offering that it truly is, they need to understand it. This starts with
grasping your company’s compensation philosophy, your base pay system, and the
role your culture plays in promoting and supporting career growth. If your
compensation communications don’t connect the dots between their pay,
performance, and career development, maybe now is the time to evaluate your
communications plan.
 51

12.2. Timing of Compensation Communication

If you’re simply informing employees of their pay when they complete new hire
documentation and sign-off on their annual reviews, challenge your HR team and
management to make it a regular topic of group or individual discussion. Motivate
employees at different points throughout the year. Monthly or quarterly in general
terms (promoting a bonus program or employee awards luncheon) and two or three
times during face-to-face meetings (formal and semi-formal employee reviews). And
take the opportunity to reassure employees during periods of change, such as
expansion, downsizing or restructuring, and remind them of your company’s goals and
how their work contributes to it.
12.3. Information of Compensation Communication
Be as clear, straightforward, and explicit about your compensation up to the level of
transparency your company is comfortable with. Remember, you’re “selling” this
information to employees to help them see the value in all you offer, helping to
manage their expectations, and encouraging them to buy-in to your programs. You’ll
want to include details about:

 How base pay is calculated — pay grade and pay range structures, relative to
experience and education levels

 Explanation on any pay changes — increases/decreases and how they’re

connected to the job market, performance, and cost of living trends; criteria for
raises and bonuses (especially in a pay-for-performance system), timing for
awards and payments

 Learning and career development opportunities — next steps, performance

markers, criteria for advancement

 How benefits such as health insurance, stock options, or tuition reimbursements

factor into their total compensation

 Relevant source material such as market data to back-up pay adjustments

And, don’t forget to promote your “feel-good” programs or extras that are not
necessarily reflected in paychecks. These might include an employee of the week
program, free lunch Fridays for top performers, gold star award ceremonies, etc.
Information about compensation should always come from HR or management.
Ideally, messages will get shared and reinforced by both. In fact, you may want to
develop a separate communications plan and training program for managers to help
them understand your company’s compensation programs and encourage their buy-in
so they can effectively talk to employees about them.
All forms of media can support employee understanding and acceptance of the total
compensation package, so conform to your employees’ preferences. Outside of one-
on-one employee review meetings, you can share personalized compensation-related
information with employees through total rewards statements or pay raise letters
mailed to their homes. More general, guideline-specific information can be given in
52

educational meetings held by benefits company representatives, through e-mail

newsletters, or on the company intranet.
12.4. Total Reward Statement
Communicating the value of your total rewards program is critical for engaging and
motivating employees. If employees are not aware of the full value of their total
rewards package, then your organization's return on investment is significantly lower
than it should be.
A Total reward statement provides employees with a personalized document that
communicates the overall value of their financial rewards such as base pay, incentives
and employee benefits. Total reward statements can also be used to reinforce the
communication of less tangible benefits such as work/life programs, learning and
development and flexible work arrangements.
Organizations who strive to be the best in their field, with an emphasis on attracting
and retaining top talent with a total rewards package that distinguishes them from
other organizations. Employees who are educated and informed about their rewards
package and have the tools to assist them with their own financial planning.
 53

Part Two: Incentive Programs

1. Incentive Compensation
Internationalization or increased global reach is creating pressure for greater consistency
in compensation strategies. One might expect just the opposite given the need to be
sensitive to culture and local market differences between countries and regions.
However, the convergence toward consistency is primarily at the philosophical or core
levels. Performance incentive programs are rapidly being deployed in many parts of the
world. There is increasing evidence that the strategies to deliver pay are becoming more
uniform from one country to the next.
Incentive pay is paying for performance beyond normal expectations, which is designed to
motivate employees to perform at higher levels. Traditionally, all incentive plans are pay-
for-performance plans. They all tie employees’ pay to the employees’ performance.
Variable pay is more specific: It is usually an incentive plan that ties a group or team’s pay
to some measure of the firm’s overall profitability. Please refer to the below figure:

Individual performance

• Merit pay
Line of sight
• Piecework
• Sales compensation
• Cash awards Individual
• Recognition programs
incentives

Group performance Group

• Gain-Sharing incentives
• The Scanlon plan
• The Rucker Plan
• Improshare plan
• Profit-sharing
• Deferred profit-sharing
• Risk-sharing plans
• Employee stock ownership plans (ESOP)
• Performance-sharing plans

Incentive Plan
Source: Milkovich, G.T. & Newman, J. (2013). Compensation. (11th Edition). New York
(USA): McGraw-Hill/Irwin.

1.1. Principle of Incentive Plan

1.1.1. The plan must be in concert with other organizational programs.
1.1.2. The plan must be in the line of sight-employees must be able to influence the
54

attainment of the goal and see the direct results of their efforts.
1.1.3. The plan must have a sunset clause-all identified time period and have a
defined end.
1.1.4. The plan must incorporate short- and long-term perspectives. An overlapping
perspective may make it difficult for a key performer to leave the organization
without significant loss of money (sometimes called the golden handcuffs
approach).
1.2. Line of sight
Line of sight is a favorite phrase of compensation professionals and an important
concept in designing incentive plans (assuming you expect them to actually impact
performance). But where did it come from and what does it mean? Line of sight is
an expression that has its origins in the military. In this context, it means "distance
to target".
When we use the phrase in relation to employee motivation and rewards, it is
defined as an employee's perceived ability to affect a particular performance metric.
Why does this matter? Because the whole point of most incentive plans is to focus
employee attention and effort on making some type of improvement happen -- more
revenues, greater profits, more satisfied customers, etc. If you choose a measure of
improvement and base incentive awards on it, but the typical employee doesn't
believe that there is anything he/she can do to influence that measure, what
outcome can you expect?
So how do you shorten line of sight and engage employees in making a difference?
It usually has less to do with finding that one magical measure and more to do with
communication and education. You say that your organization needs to generate
more profit, but most employees don't understand how the business makes money?
When your employees show up each day knowing exactly what they need to do in
their particular niche of the organization to drive profits up, then you can hang that
carrot in front of them and expect things to happen.
1.3. Individual Incentives
Incentive plans are used to encourage a particular behavior or performance standard
for staffers through the use of monetary or other rewards. Individual plans may
encourage top performers to excel, but they also have the potential disadvantage of
intimidating and discouraging lower-performing staffers.
1.3.1. Encouraging Maximum Effort
If you’ve got a superstar performer for whom the sky is the limit, an individual
incentive plan can encourage her to reach her maximum potential. This can be
especially effective in the sales arena when a monetary incentive increases
incrementally based on the individual’s performance. The staffer knows her income is
dependent on her performance and that the more revenue she generates, the larger
her paycheck will be. As a business owner, you get the advantage of only paying out
bonuses when staffers excel.
 55

1.3.2. Motivating Other Staffers

Individual incentive plans can create a sense of healthy competition within an
organization, as employees push themselves to excel to keep pace with or surpass
top-performing colleagues. There's no blame game with individualized incentive
plans. Employees succeed or fail based on their own merit, with staffers
understanding that they are in control of their own earning potential.
1.3.3. Lack of Teamwork
An environment where it's every man for himself diminishes the propensity for
teamwork and collaboration. Staffers may not want to support one another in
incentive-related endeavors, for fear the colleague will get a leg up or get credit for
another individual's work. This can create an uncomfortable or even high-stress work
environment that leads to infighting and potentially low morale. The problem can
become exacerbated if the incentive plan is accompanied by a feeling that leads or
support are not fairly distributed among all staffers.
1.3.4. High Turnover Potential
Individual incentive plans often are utilized in commission-based learning structures.
In other words, if you don't perform, your earnings are significantly diminished. An
inability to generate a regular paycheck can discourage staffers and result in high
turnover as employees leave to seek other jobs with more stable compensation
structures. Turnover can be bad for business, as you incur the costs of advertising,
recruiting, screening and retraining new hires.
1.4. Group Incentives
Employee incentive plans can help encourage staffers to work toward particular
objectives. Knowing they will be rewarded for above-and-beyond efforts -- such as
reaching earning goals -- can motivate staffers to push their limits. To be effective,
group incentive plans should be clearly defined, easily measured and achievable.
Plans should also take into consideration the personalities, skill sets and interpersonal
communication skills of each member of the team that will be participating.
1.4.1. Group Incentive Pros
Creating a group incentive plan can help foster relationships between staff members,
encouraging them to find ways to work together in a collective environment in order
to achieve group goals. The approach can build a stronger team, encourage
brainstorming and create a vested sense of project ownership across the board.
Staffers know they each must pull their own weight in order for the team to be
successful, which can prevent slacking or underperformance. Encouragement and
even some degree of positive peer pressure can help ensure everyone's strengths are
utilized toward achieving stated objectives.
1.4.2. Group Incentive Cons
If team members perform at vastly different levels, creating a group incentive can set
the stage for drama in the workplace, particularly if some staff members feel
compelled to work harder than others to carry the workload. This can lead to
56

resentment, infighting and even a hostile work environment. Low-performing

employees may feel pressure from both the boss and their colleagues to perform at
levels above their comfort zone, whereas high performers may feel they're doing all
the work for the same amount of reward as their less-motivated colleagues.
1.4.3. Making it Work
To make a group incentive plan work without creating tension or infighting, clearly
outlined objectives and individual work parameters should be set within the group. If
all individuals understand the specific roles they are expected to play in the group’s
performance, you’re less likely to create an environment in which 10 percent of the
group does 90 percent of the work. Request both individual and group progress
reports during the duration of incentive projects and troubleshoot potential
underperformance issues before they get out of hand.
1.4.4. Other Considerations
Consider creating a hybrid approach to incentive plans that includes an overarching
group incentive as well as individual bonuses for exceptional performance by
individual staffers. This will help ensure that your top performers will give it their all,
resulting in high-level group performance, while simultaneously rewarding stellar
individual work. This can help encourage friendly competition and increase
productivity and motivation without creating resentment.
2. Individual Performance Pay Plans
Pay for performance is typically a financial incentive employees receive for meeting a
certain performance objective or target. Companies use this type of system to motivate
employees to achieve results that increase profits or improve service. Examples of
incentives might include bonuses for perfect attendance, meeting a certain service quality
target, and achieving a specific sales growth target. Incentive payments are usually added
on to an employee's regular salary or hourly pay, but may comprise the majority of
earnings in certain professions.
Compensation for sales representatives usually falls under the pay for performance
concept. Commissions earned are directly related to the amount of sales volume that a
representative is able to achieve. While not all sales positions pay the same way, some pay
structures in this profession are primarily based on sales results. In addition, there may be
additional bonuses for achieving a certain level of sales volume within a specified period.
The main idea behind this payment concept is to create a direct link between an
employee's job performance and the amount of pay he earns. In short, the more he
produces, the more financial reward he reaps. In addition to cash bonuses and
commissions, there are other types of pay for performance incentives that companies use,
such as extra vacation or personal time off.
Individual Incentive Plans are established standard against which employee performance
is compared to determine magnitude of incentive pay.
2.1. Merit Pay
A merit pay system links increases in base pay to how highly employees are rated on a
 57

subjective performance evaluation. However, just a small pay increase ranges will
hinder performance. Merit pay involves giving employees a permanent pay raise
based on past performance. Often the company’s performance appraisal system is
used to determine performance levels and the employees are awarded a raise, such
as a 2% increase in pay. One potential problem with merit pay is that employees
come to expect pay increases. In companies that give annual merit raises without a
different raise for increases in cost of living, merit pay ends up serving as a cost-of-
living adjustment and creates a sense of entitlement on the part of employees, with
even low performers expecting them. Thus, making merit pay more effective
depends on making it truly dependent on performance and designing a relatively
objective appraisal system.
To motivate employees effectively, the size of the merit increase must be significant
enough to make a noticeable difference to employees. Generally speaking, any merit
increase of 2% or less is regarded as being inconsequential. Some studies show that a
merit increase of less than 7% is unlikely to have ANY IMPACT on employee
performance…yikes! One alternative more and more companies are turning to in
today’s tight economic times is the use of lump sum payments in lieu of a merit
increase to base pay. As a result, the employee receives the pay increase in one
payment, hopefully motivating him/her, and the company continues to pay the same
base salary, while controlling salary budget costs in the long-run.
Ultimately, to be successful, the merit pay program must ensure that awards provided
to the best performers will be substantially greater than increases awarded to
average, or below-average performers. Furthermore, especially in today’s economic
climate, it is advisable to NOT reward below-average performers at all. A well-
designed system will give the employee a personal stake in seeing that their efforts
result in increased productivity and success for the organization as a whole.
2.2. Piecework
Piecework is the oldest and still most popular individual incentive plan. Here the
worker is paid a sum (called a piece rate) for each unit he or she produces. In per-
piece pay structures, payment is based on the number of “pieces” of work that a
worker completes. The worker is paid a monetary rate of a certain number of cents
or dollars for each piece of work. What constitutes a “piece” worthy of the set rate is
defined in advance. The hourly wage of a worker engaged in piece work will vary
based on how skilled she is in completing the work and how time-consuming each
piece of work is.
Piece work, particularly when done from home, may have no set time frame for
completion, but some jobs may have hourly or daily quotas. Piece work has been
used in manufacturing goods but can also be used in jobs with non-tangible work
outputs, such as data entry.
The concept of piece work has been around a long time--long before Internet, online
jobs and data entry. It has been used in garment factories and other manufacturing
jobs to pay workers based on production since the time of the Industrial Revolution.
In today’s economy, it is still used that way, especially in developing nations.
However, piece work is also used in fields such as data entry, translation, writing,
58

editing and call centers. In these lines of work, the “pieces” may be clearly defined
and incorporated in the rate, such as per-minute talk time, per call, per word, per
page or on a project basis.
However, it is very important to note that only employees are protected by minimum
wage laws, not independent contractors, and per-piece pay structures are very often
used as pay rates for freelancers, or independent contractors.
2.3. Sales compensation
Both bonus and commission plans are common sales incentive compensation
approaches to attract, motivate and retain salespeople, but how should firms decide
which is the most suitable? Several aspects of a firm’s selling process and
environment influence the plan structure – bonus, commission or mixed – that is
appropriate.
2.3.1. Bonus Plans
With a bonus plan, each salesperson is typically given a quota for a territory, and
incentive payments are tied to performance relative to defined quota gates, targets
or thresholds. For example, the salesperson might receive a first bonus payment at
90% of quota, a second payment at 100% attainment, and a third at 110%. Bonus
plans typically include a sizeable salary component, so that if salespeople do not sell
enough to earn the bonus, they can still earn a decent living.
Because most bonus plans have a large salary component, such plans are often
attractive to salespeople with a longer-term focus who want to stay with a firm and
build a career. They also attract salespeople who in addition to selling, are interested
in problem solving, consulting and servicing customers.
2.3.2. Commission Plans
Commission plans pay continuously for every sale. A commission rate is multiplied by
a performance measure, such as sales or gross profits, to determine payout.
Sometimes the commission rate varies by product or customer. Often, the rate varies
depending upon the level of performance attained by the salesperson. For example, a
salesperson might earn 3% on sales up to a territory goal and 5% on sales beyond the
goal. Many commission plans include a salary component, but usually the variable
component is larger than it is in a bonus plan. With most commission plans, a
salesperson relies on commission earnings, in addition to salary, as an important part
of income.
Commission plans that pay mostly variable pay with little or no salary tend to attract
result-oriented salespeople who believe they can sell anything to anyone. Such plans
also encourage poor performers to leave the firm, as they will not make enough
money to earn a decent living. However, sometimes such plans generate little firm
loyalty from salespeople. A salesperson paid mostly on commission is likely to jump
ship if a competitor makes a better offer, and may take many of the firm’s customers.
By adapting the sales incentive compensation plan to the selling process and
environment, firms can establish an incentive compensation design that will drive
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sales by attracting, motivating and retaining salespeople consistent with the desired
salesforce culture.
2.4. Cash Award
A performance-based cash award (commonly known as a rating-based award)
recognizes an employee's performance over an entire rating period. The award must
be based on a rating of record of "fully successful" or equivalent or higher. Agencies
must design their performance-based cash award programs to reflect meaningful
distinctions based on levels of performance to ensure employees with higher ratings
of record receive larger cash awards.
Employees within the same awards pool should receive awards reflecting meaningful
distinctions based on the employee's individual rating of record. (For agencies
electing not to use awards pools, this would correspond to the organizational level
that controls an awards budget and has authority for approving awards.) However
this may not hold true when comparing employee awards across award
pools/organizations.
For example, an employee in a given awards pool rated "Outstanding" should receive
a larger award than employees rated at lower levels within the same awards pool.
However, if you compare those awards to the ones given in other awards
pools/organizations within the agency, it is possible for an employee with a rating of
"Outstanding" in one awards pool to get a lower award amount than an employee
rated at a lower level in a different awards pool.
Agencies have the flexibility to design their awards programs to meet the needs of
their agency and to reflect their agency cultures provided they ensure the amounts of
the performance-based awards reflect meaningful distinctions in performance.
Agencies may calculate performance-based awards as a lump-sum dollar amount, a
percentage of base pay, or some other method such as assigning shares to rating
levels to ensure meaningful distinctions.
2.4.1. Percentage of Base Pay
Agencies can design their awards programs so employees with higher ratings of
record receive larger cash awards, as a percentage of base pay, than those with lower
ratings. When computing a performance-based cash award as a percentage of base
pay, locality pay is included because this is one of the purposes for which it is
considered to be base pay.
2.4.2. Lump-Sum Dollar Amount
Agencies can design their awards programs so employees with higher ratings of
record receive larger cash awards, as a lump-sum dollar amount, than those with
lower ratings.
2.5. Recognition Programs
An employee does something above and beyond and receives a gift card or a lunch
with the boss; a team achieves a goal and is rewarded with a party. These rewards,
however, can backfire; they tell the employee that he or she is worth n dollars to the
60

organization for some level of effort. In my opinion this approach misses the point of
recognition: people are motivated by more than money. People crave positive
feedback, recognition they put in extra effort, acknowledgement of leaders and
peers, the glow that comes with knowing an achievement has been seen,
appreciated and celebrated. I love this place. But I’m also realistic as I look at ways
leaders can recruit and truly nurture current and future talent.
Financial reward is a great thing, don’t get me wrong, but it’s not the equivalent of
recognition. Let’s not kid ourselves. It’s a short term solution. Neither is constant
praise for average work. Recognition is a key tool in employee retention programs for
a reason: people need more than constructive feedback and positive affirmation.
They need recognition of extra effort. They need to “feel” it. This will never go away
as a basic human need.
An effective approach to employee recognition encompasses these key points:
2.5.1. In the moment
Catch people doing exemplary work and acknowledge their efforts. Don’t be knee-
jerk – showing up for work on time does not count in most cases. Be specific,
descriptive and measured.
2.5.2. In context
Recognition is most effective when it’s given in the context of a larger goal or
business-results-focused activity. Random affirmations are much less meaningful
than those tied to a business goal. An employee who lands a big contract by putting
in the extra effort needs to know you noticed, and understand the employee’s effort
to ensure business success. This is matter.
2.5.3. Appropriate in volume/scale
Think back to the mom in the market. Was the praise she doled out appropriate in
scale and volume? Not really. Here again randomness is not your ally. Recognition
should match effort and results, or it loses meaning. This is where the complexity
lives.
2.5.4. Authentic, not automatic
You have to mean it when you give employees recognition. This is my chief worry
about automated recognition systems – they remove the human touch so important
to effective recognition. Can we find a smart balance? Can we make social HR
Technology software work?
2.5.5. Tied to the employee’s perception of value
People know when they’re valued, and they should have a good idea of their value to
the organization. Monetary rewards can skew this notion of value, linking it to cash
when it should be linked to appreciation of extra effort and smarts. Money is
appropriate much of the time, but it’s not the only – or even the most effective –
motivator. Treat employees as valued team members, not as numbers. Most of the
time it’s the best way to really recognize a valued player.
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3. Group Performance Pay Plans

A group-based incentive pay plan financially compensates employees for the goals they
meet as a collective group, rather than as individuals. Employers who use this method find
the approach brings a sense of urgency to the group effort and results in greater
performance and goal reaching than when individuals work on their own. It also results in
a greater sense of camaraderie among coworkers.
Group performance incentives reward group members for meeting or exceeding
performance standards, often in all egalitarian manners. (Each person receives the same
percentage of payer flat dollar award.) However, this system can result in perceptions by
high performers that they are not being recognized for their performance. In addition, it
can allow marginal performers to share equally in the award.
3.1. Gainsharing
In gain sharing, gain means savings. An employee or team shares in the amount saved
by a business as a result of a suggestion he made. Gain sharing is based on the idea
that the people doing the work know what is needed to improve the product, service
or process. Historical data is compared with actual costs generated by an
implemented suggestion. If there is a cost savings, those who made the suggestion
receive a percentage of the gain.
Gainsharing offers industry the opportunity to improve plant performance and boost
productivity while reducing costs attributed to poor quality (e.g., waste, spoilage,
rejects, and customer returns). Gainsharing is not an individual, piecework system. It
is a group incentive, pay-for-performance wage system—a group bonus in which the
entire factory workforce shares as a result of improving productivity above a certain
level and decreasing rejects and rework. Moreover, while productivity gain is the
object, the output must be a good product; rejects and customer returns are
deducted from the output totals. Over a five-year period, the productivity gains
should be close to 100 percent and the costs of rejects and rework greatly reduced.
A successful gainsharing program relies on two factors—formula and training. A sound
formula based on a careful examination of the company's past performance is the
level from which gain is measured and payout is made. There is no one-size-fits-all
gainsharing plan; each program is custom made to fit an individual company's needs.
Not only are productivity and quality factored into the formula, but other costs such
as the cost of worker's compensation or the reduction in order-to-shipment lead
times can also be added. And in order for the program to work, all levels of the
workforce must be educated about their respective roles in gainsharing through
proper training methods.
3.1.1. Scanlon plan
The Scanlon plan is a model for business organization. This type of organizational
structure is a gain sharing program, and seeks to involve employees more directly in
the processes of corporate decision-making in order to benefit from suggestions and
contributions from employees. Employees are rewarded for their input and assistance
through profit sharing plans, which disperse some portion of the economic benefits
62

generated by a more engaged workforce to the members of that workforce. These

plans work best in environments where employees have relatively stable, long-term
attachments to a single corporation.
3.1.2. Rucker Plans
Rucker Plans also use a committee system; the savings gain is based on value added,
the increased value of goods at each stage of production, and calculated by
comparing labor costs with sales minus the cost of goods sold. These plans are used
in manufacturing where costs are relatively stable over time and where the business
wants to reduce other costs in addition to labor, such as the cost of energy and
production waste materials.
3.1.3. Improshare Plans
An Improved Productivity Through Sharing (Improshare) Plan involves developing
standards for product or service-delivery time based on historical data. These
standards form the operational baseline against which suggested improvements are
compared. Savings are an indication of the amount of change in the relationship of
labor (inputs) to outputs -- the final product or service. Because the plan is based on
performance standards, changes in sales volumes, technology and equipment have
minimal impact on the plan.
3.2. Profit Sharing
Profit sharing is an example of a variable pay plan. In profit sharing, company
leadership designates a percentage of annual profits as a pool of money to share with
employees, or a portion of employees such as executives. The pool of money
generated is then divided across covered employees using a formula for distribution.
Profit sharing, when distributed as a percentage of annual pay - a common practice -
results in less money shared with employees in lower paying jobs and higher amounts
shared with highly compensated employees. This reflects the belief that more highly
compensated employees are responsible for managing the company, making
decisions, taking more risk, and providing leadership to the other employees.
Profit sharing payments are generally made only if the company has been profitable
for the time period specified, or when an employment contract requires the
compensation. Profit sharing usually occurs annually after the final results for the
annual company profitability have been calculated.
3.2.1. Pros of Profit Sharing
The positive impact of profit sharing is that it sends the message that all of the
employees are working together on the same team. The employees have the same
goals and are rewarded equivalently to reinforce this shared service to customers and
lack of competition with each other.
3.2.2. Cons of Profit Sharing
The weakness of profit sharing plans is that individual employees cannot see and
know the impact of their own work and actions on the profitability of the company.
 63

Consequently, while employees enjoy receiving the profit sharing money, it gradually
becomes more of an entitlement than a motivational factor. With profit sharing,
employees receive the profit sharing money regardless of their own performance or
contribution.
3.2.3. Deferred Profit Sharing Plan (DPSP)
A deferred profit sharing plan is a type of retirement plan in which the contributions
of the employer to the plan vary based on the profitability of the business. In most
plan structures, the contributions and any interest earned are not subject to taxes
until the funds are withdrawn. One of the chief benefits for the employee is that no
annual contributions that the employer makes into the profit sharing plan are not
subject to taxes until the funds are withdrawn. Depending on governmental
regulations that apply, it may be possible to roll the proceeds from the plan into a
different retirement or investment account at some point and have the withdrawals
taxed at a lower rate. Typically, the account receiving the funds from the DPSP must
be part of a registered pension plan, which means the governmental revenue agency
involved must recognize and approve of that receiving plan in order to qualify for the
tax breaks.
3.3. Risk-Sharing Plans
Risk variable pay plans (sometimes called risk-sharing plans) are plans that put some
portion of the employee’s weekly, monthly, or yearly pay at risk. If employees meet or
exceed their goals, they earn back not only the portion of their pay that was at risk,
but also an incentive. If they fail to meet their goals, they forego some of the pay they
would normally have earned.
Shared-risk plan design allows sponsors to change employee contributions, benefits,
or some combination of the two, when the plan's financial condition is affected by
market downturns, longevity changes or inflation.
3.4. Employee Stock Ownership Plans (ESOPs)
ESOP is a way in which employees of a company can own a share of the company they
work for. There are different ways in which employees can receive stocks and shares
of their company. Employees can receive them as a bonus, buy them directly from the
company, or receive them through an ESOP.
In a non-leveraged ESOP, the employer contributes stock or cash or provides
employee discounts to buy stock. The stock is then allocated to accounts of the
employees. Non-leveraged ESOPs are intended to provide employees with an
ownership stake in the company at a relatively low cost to the company and to help
create a market for the employer's stock.
In a leveraged ESOP, the employer borrows money from a financial institution or the
plan sponsor to finance the compal1y stock rather than contribute the cash or stock
directly. The employer establishes a trust, called an employee stock-ownership trust.
3.5. Performance-Sharing Plan
Performance-sharing plans use predetermined criteria and standards to measure
64

results and, based on that, they create a fund available for incentive awards. The
criteria can be factors other than profits, such as quality and customer satisfaction. A
Performance Share Plan allows employees to earn actual stock in their company. The
company establishes specific financial objectives which, once achieved, will trigger
the awarding of stock grants to employees.
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Part Three: Payroll and Benefits

1. Employee Benefits
A benefit is an indirect reward given to an employee or group of employees for
organizational membership. Benefits often include retirement plans, vacations with pay,
health insurance, educational assistance, and many more programs. In many countries,
citizens and employers are taxed to pay for government-provided benefits, such as health
care and retirement programs. Benefits are costly for many employers in developed
countries, averaging from 30% to 40% of payroll expenses. In highly unionized
manufacturing and utility industries, they may be over 70% of payroll.
1.1. Objectives of Benefits
Benefits should not be viewed entirely as cost factors because they can positively
affect HR efforts. Given the intense competition for competent workers, companies
should consider investing in benefits packages that are attractive for those
employees. Researchers suggest that benefits do not always meet the needs of both
employers and workers, so more efforts are needed to successfully position benefits
as a driver of employee relations. A major advantage of benefits is that they generally
are not taxed as income to employees. For this reason, benefits represent a
somewhat more valuable reward to employees than an equivalent cash payment.
1.2. Benefits for Workforce Recruitment and Retention
Organizations can choose to compete for or retain employees by providing different
levels of base compensation, variable pay, and benefits. The benefits approach
chosen to be part of total rewards depends on many factors, such as workforce
competition, organizational life cycle, and corporate strategic approach. What
benefits are offered, the competitive level of benefits, and how those benefits are
viewed by individuals all affect employee attraction and retention efforts of
employers.
Many baby boomers who are approaching retirement age are concerned about
retirement benefits and health care, while the younger generation of workers is more
interested in flexible and portable benefits. However, all generations have concerns
about the nature of and changes in health insurance. Having benefits plans that
appeal to the different groups is vital to attracting and retaining all different types of
employees.
1.3. Global Employee Benefits
Benefits vary from country to country. In many countries, retirement, health, and
other benefits are provided as part of government services. Employers are taxed
heavily to pay into government funds that cover the benefits. Retirement and pension
systems are provided by the government in many countries. Also, Health care
benefits also differ significantly worldwide. Many countries have national health
services. Some global firms require employees to use the medical services available
from host countries, whereas other global employers provide special coverage that
allows expatriates to receive health care from private providers. Arranging quality
66

private coverage becomes an especially important issue for global employees located
in various underdeveloped countries where the availability and quality of medical
facilities and treatment vary widely.
2. Benefits Design
An effective employee benefit program will accomplish a few targeted goals. First, it will
provide financial protection for employees and their families in the event of illness,
disability, death, or unemployment. Second, it will promote positive employee morale and
support the productivity of the company as a whole. Finally, it should act as a recruitment
tool that will attract and keep quality talent, without costing your firm more than it’s
worth. For many business owners, designing a benefit program that meets all of these
criteria is a difficult task indeed.
Benefits plans can provide flexibility and choices for employees, or they can be
standardized for all employees. Increasingly, employers are finding that providing
employees with some choices and flexibility allows individuals to tailor their benefits to
their own situations. However, the more choices available, the higher the administrative
demands placed on organizations.
A corporate strategies and compensation philosophy matter for developing employee
benefits because that is a strategic decision about how to position the business in the
marketplace. Whether it is documented or a matter of internal practice, your
compensation philosophy shapes how employees perceive your business with respect to
your competitors. What are your company’s values? What benefits budget do you have
available? Which types of employees do you want to attract and retain?
If you want to be the best company in your industry for innovative product design, you
must hire and retain the best product engineers. That means appropriately compensating
them to help reduce turnover. If your business is focused on providing the best customer
service in your industry, you must hire and retain the best customer service
representatives. The benefits offering for these two groups of employees may be very
different.

Flexible Develop benefits as

Benefits competitive advantage

Additional
Increase employee morale
Benefits
and retention rates

Industry
Standards Have significant difficulty
hiring or retaining talents

Statutory Begin with employees needs

Benefits and mandated items
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2.1. Statutory Benefits

Begin your employee benefit program by including the basic, federally mandated
employee benefits. These benefits include unemployment insurance, workers
compensation insurance, and social security. Businesses in the United States must
provide at least these three benefits to ensure employee protection in cases of
unemployment, injury, or disability.
2.2. Industry Standards
Consider what optional benefits are necessary to include. You will find that certain
optional benefits have become industry standards and you will have significant
difficulty hiring or retaining talented staff without these benefits. For example, health
insurance, life insurance, paid and sick leave programs, retirement plans, and flexible
compensation plans have all become staples of benefits plans in many industries.
2.3. Additional Benefits
Consider adding additional benefits to your program. Once your employee benefits
program includes the basics, you’ll want to evaluate benefits like tuition
reimbursement programs, flexible spending accounts, child care subsidies, retail
discount programs, telecommuting options, legal insurance, bonus plans, and fitness
or wellness programs. These programs will often provide an additional edge in
increasing employee morale and reducing your employee turnover rate.
2.4. Flexible Benefits
Evaluate what benefits are most important to your employees. You will need to
survey your employees or potential employees to find out what benefit types hold
the most value for them.
Looking for a way to customize your benefits plan to the needs of your individual
employees? A cafeteria plan is an employee benefits plan that allows your employees
to choose among a variety of options to create a benefits plan that best meets their
needs and those of their family. In a cafeteria plan, an employee receives a certain
number of dollars from the employer to "purchase" particular components of a
benefits plan.
Cafeteria plan options can include various levels of health insurance plans, other
insurance options, tax advantages as in a flexible spending account, and retirement
plan contributions.
The advantage of a cafeteria plan is that employees have benefits plan options. For
example, a young employee with no health problems might opt to spend cafeteria
plan dollars on a minimal health plan.
An employee with four family members might choose to spend the cafeteria plan
dollars on a health plan with more comprehensive coverage. The employee without a
family might choose to “spend” his or her benefits dollars for investments in a
retirement plan.
68

In a typical cafeteria plan, an employee might exceed the number of dollars allowed
by the employer with the benefits plan choices made. In these cases, the employee
pays a part of the premium for his or her chosen benefits, so the cost to employers is
lower.
2.5. Part-Time Employee Benefits
Another key design issue is whether or not to provide benefits coverage to part-time
employees. Many employers do not provide part-time employee benefits, except
some time-off leave benefits. In some companies, part-time employees who do
receive benefits usually do so in proportion to the percentage of full-time work they
provide. According to many cases, employees initially hired as part-timers often end
up transitioning into full-time positions; offering them benefits as part-timers can
help motivate them to stay with you until opportunities for full-time employment
arise.
If you decide to offer benefits to part-timers, the first step is to set a minimum
number of hours per week or month that must be worked in order to qualify. Twenty
hours a week is common in United States. Next, define the eligibility requirements for
part-time employees by determining a set number of months or hours they must be
on the job (such as three months or 250 hours) before they’re eligible for benefits.
It may be smart to start off with part-time benefits that are relatively easy and
inexpensive. Flextime and telecommuting are two good examples of low-cost benefits
that most employees value greatly. Be sure to consult with a labor attorney or your
state department of labor for more details on offering benefits to part-time
employees.
3. Flexible Employee Benefits
As part of both benefits design and administration, many employers offer employees
choices for benefits. A flexible benefits plan allows employees to select the benefits
they prefer from groups of benefits established by the employer. Sometimes called a
flex plan or cafeteria plan, these plans have a variety of “dishes,” or benefits, available
so that each employee can select an individual combination of benefits within some
overall limits.
As a result of the changing composition of the workforce, flexible benefits plans have
grown in popularity. Flexible benefits systems recognize that individual employee
situations differ because of age, family status, and lifestyle. For instance, dual-career
couples may not want the same benefits from two different employers. Under a flex
plan, one of them can forgo some benefits that are available in the partner’s plan and
take other benefits instead.
A problem with flexibility in benefits choice is that an inappropriate benefits package
may be chosen by an employee. A young construction worker may not choose a
disability benefit, but if that person is injured, the family may suffer financial hardship.
Part of this problem can be overcome by requiring employees to select a core set of
benefits (life, health, and disability insurance) and then offering options on other
benefits.
 69

Another problem can be adverse selection by employees, whereby only higher-risk

employees select and use certain benefits. For example, only employees with chronic
illnesses might choose health insurance. Because insurance plans are based on a group
rate, the employer may face higher rates if insufficient numbers of healthy employees
select an insurance option.
Because many flexible plans have become so complex, they require more
administrative time and information systems to track the different choices made by
employees. Despite the disadvantages, flex plans will likely continue to grow in
popularity.
3.1. Flexible Spending Accounts
Flexible spending accounts, often called reimbursement accounts, are conceptually
similar to a bank savings account. Employees deposit funds through the year and use
them for health care, dependent care and other qualified expenses. An employer may
also contribute to these accounts but is under no obligation to do so. The three basic
types of flexible spending accounts are premium-only, medical and dependent care.
Premium-only plans allow employees to deposit funds for medical and life insurance
premiums. Medical FSAs allow employees to set aside funds for health costs not
covered by health insurance, and dependent care FSAs allow savings for day care and
other expenses.
3.2. Transportation Plans
Transportation benefit plans allow employees to deposit funds to pay for commuting
expenses, parking expenses or both. Eligible commuting expenses include passes,
tokens and vouchers purchased for travel on buses, trains, ferries and other forms of
mass transit. Eligible parking expenses include parking at or near the workplace and
transit station park-and-ride lots. Ineligible commuting and parking expenses include
transportation by personal car, cab fares, traffic tickets, tolls and gas.
3.3. Cafeteria Plans
As discussed, cafeteria benefit plans give employees the choice of receiving a selection
of nontaxable benefits, cash or some other taxable benefit. Employers can offer only
some benefits through these plans, such as health and life insurance, disability and
dental coverage, pension plans, day care and elder care. The funding may come from
the employer, the employee or both. Employers may also provide spending credits,
which employees can use to select benefits from a range several options.
4. Benefits Administration
Benefits administration is the process of establishing, maintaining, and managing benefits
for the employees of an organization. Employee benefits typically include medical
insurance, pension plans, individual retirement accounts (IRAs), vacation time, sick time,
and maternity leave.
A good benefits administration program creates and maintains an enrolment profile for
every employee, keeping track of information such as the date hired, marital status,
number of dependents, total hours worked, and attendance records. The program offers
70

flexibility, taking into account special employee needs, part-time and temporary hires, and
changes in government regulations. The benefits administration program can function in
tandem with tax preparation software, ensuring that all allowable deductions are taken
and maintaining detailed records for reference in case of an audit.
4.1. Benefits and HR Technology
The spread of HR technology, particularly Internet-based systems, has significantly
changed the benefits administration time and activities for HR staff members.
Internet and computer-based systems are being used to communicate benefits
information, conduct employee benefits surveys, and facilitate benefits
administration. Recent research shows that these systems can decrease expenses,
increase positive communication, and effectively connect people across many
different HR functions, including benefits management.
4.2. Benefits and HR Outsourcing
Administering employee benefits can be quite complex. Understanding the
considerations involved in the process will assist you in deciding whether you should
handle your benefits administration on your own or outsource all or part of it.
However, administering even a few employee benefits can be complex and will be
time-consuming. Only you can make the decision as to whether you should handle
your employee benefit administration or hire someone else to take over the job.
In today's market, HR departments are able to find an able administrator for a fair
price, so that they can concentrate more of their time on what they know best.
Among those who provide administrative services for a fee are insurance companies,
consulting firms, banks, payroll service companies, and investment brokers.
One significant trend affecting HR is that outsourcing of benefits administration may
be necessary. A study indicated that they were outsourcing more benefits functions.
The most frequently outsourced item is Employee Assistance Plans (EAP).
Administrative activities related to retiree benefits, pension plans, and flexible
spending accounts also are often outsourced.
4.3. Benefits and HR Metrics
The significant costs associated with benefits require that analyses be conducted to
determine the payoffs for the benefits. With the wide range of benefits that are
offered, numerous HR metrics can be used.

 Benefits as a percentage of payroll (pattern over a multiyear period)

 Benefits expenditures per full-time-equivalent (FTE) employee

 Benefits costs by employee group (full-time vs. part-time, union vs. nonunion,
management, professional, technical, office, etc.)

 Benefits administration costs (including staff time multiplied by the staff pay and
benefits costs per hour)

 Health care benefits costs per participating employee

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Some common benefits that employers track using HR metrics are workers’
compensation, wellness programs, prescription drug costs, leave time, tuition aid,
and disability insurance. The overriding point is that both benefits expenditures
generally, and costs for individual benefits specifically, need to be measured and
evaluated as part of strategic benefits management.
4.4. Benefits and Cost Control
Because benefits expenditures have risen significantly in the past few years,
particularly for health care, employers are focusing more attention on measuring and
controlling benefits costs, even reducing or dropping benefits offered to employees.
The common means of benefits cost control is cost sharing, which refers to having
employees pay for more of their benefits costs. A lot of global companies use this
means. The next three means of health care cost control are using wellness programs,
adding employee health education efforts, and changing prescription drug programs.
Sometimes it is more cost effective for individuals to purchase benefits directly from
providers, and some companies also are negotiating contracts with providers to offer
benefits at reduced rates. Companies might also consider consolidating benefits
packages into more streamlined offerings so that costs can be minimized.
4.5. Benefits and Communication
Benefits communication and satisfaction of employees with their benefits are linked.
For instance, employees often do not fully understand their health benefits, a
situation that can cause individual dissatisfaction. Consequently, many employers
should consider developing special benefits communication systems to inform
employees about the monetary value of the benefits they provide. Employers can use
various means, including videos, CDs, emails, electronic alerts, newsletters, and
employee meetings. All these efforts are done to ensure that employees are
knowledgeable about their benefits. Some of the important information to be
communicated includes the value of the plans offered, why changes have to be made,
and the fundamental financial costs of the plans.
When planning benefits communication efforts, it is important to consider factors
such as the timing and frequency, the communication sources, and the specialized
content. Any significant changes to benefits should be communicated by the top
managers in the organization, and these communications should be supported by HR
professionals and other key managers who are well-informed to answer any
questions. HR professionals should also collect feedback about benefits programs.
Some employers give individual employees a “personal statement of benefits”, as
well as total reward statement, that translates benefits into dollar amounts.
Increasingly, firms are using the Internet to provide statements, and these statements
often are used as part of a total rewards education and communication effort.
5. Type of Benefits
A wide range of benefits are offered by employers. Some are mandated by laws and
government regulations, while others are offered voluntarily by employers as part of their
HR strategies.
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1 Legally required payments

2 Retirement and savings plan payments

3 Life insurance and death benefits

4 Health and medical-related benefit payments

5 Paid Rest Periods, Meal Break, Coffee breaks

6 Payments for time not worked (Leave and time-off)

7 Miscellaneous benefit payments

5.1. Legally required payments

There are two types of employee benefits must provide by law those the employer
must provide by law in many countries, and those the employer offers as an option to
compensate employees. Every employer may pay Social Security taxes at the same
rate paid by their employees in accordance with the local laws. Examples of required
benefits include workers’ compensation, unemployment compensation, and
severance pay, while optional benefits include health care insurance coverage and
retirement benefits. All required and optional benefits may have legal and tax
implications for the employer.
5.1.1. Worker Compensation
Workers’ compensation provides benefits to persons who are injured on the job. The
workers’ compensation system requires employers to give cash benefits, medical
care, and rehabilitation services to employees for injuries or illnesses occurring within
the scope of their employment. In exchange, employees give up the right to pursue
legal actions and awards.
5.1.2. Unemployment Compensation
Unemployment compensation is money paid to workers who have lost their jobs. It is
not paid to those who leave voluntarily. Unemployment compensation is provided by
states and is paid according to formulas, for a specified period of time to those
actively looking for work. To pay for this compensation, companies are required to
pay unemployment taxes, based on a percentage of money paid to employees and
the type of industry.
5.1.3. Severance Pay
Severance pay may be given to employees upon termination of employment.
However, companies are not required to provide severance pay. Severance pay is
usually based on length of employment. For example, it could be a week's pay for
every year or service or a flat amount based on six weeks pay, or any other amount
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determined by the employer. When provided, it is given as either a lump sum or paid
over a number of weeks. A severance package may also include health insurance
coverage for a certain period of time and other continuation of benefits coverage.
5.2. Retirement and Savings Plan Payments
A pension plan is a retirement program established and funded by the employer and
employees.
5.2.1. Defined-Benefit Pension Plans
A “traditional” pension plan, in which the employer makes the contributions and the
employee will get a defined amount each month upon retirement, is no longer the
norm in the private sector. Through a defined-benefit plan, employees are promised a
pension amount based on age and service. The employees’ contributions are based
on actuarial calculations on the benefits to be received by the employees after
retirement and the methods used to determine such benefits. A defined-benefit plan
gives employees greater assurance of benefits and greater predictability in the
amount of benefits that will be available for retirement. Defined-benefit plans are
often preferred by workers with longer service, as well as by small business owners. If
the funding in a defined-benefit plan is insufficient, the employer may have to make
up the shortfall.
5.2.2. Defined-Contribution Pension Plans
In a defined-contribution plan, the employer makes an annual payment to an
employee’s pension account. The key to this plan is the contribution rate; employee
retirement benefits depend on fixed contributions and employee earnings levels.
Profit-sharing plans, employee stock ownership plans (ESOPs), and the US 401(k)
plans are common defined-contribution plans. Because these plans hinge on the
investment returns on the previous contributions, the returns can vary according to
profitability or other factors. Therefore, employees’ retirement benefits are
somewhat less secure and predictable. But because of their structure, these plans are
sometimes preferred by younger, shorter-service employees.
5.2.3. Cash Balance Pension Plans
Some employers have changed traditional pension plans to hybrids based on ideas
from both defined-benefit and defined-contribution plans. One such plan is a cash
balance plan, in which retirement benefits are based on an accumulation of annual
company contributions, expressed as a percentage of pay, plus interest credited each
year. With these plans, retirement benefits accumulate at the same annual rate until
an employee retires. Because cash balance plans spread funding across a worker’s
entire career, these plans work better for mobile younger workers.
5.2.4. Early Retirement Plan
Many pension plans include provisions for early retirement to give workers voluntary
opportunities to leave their jobs. After spending 25 to 30 years working for the same
employer, individuals may wish to use their talents in other areas. Phased-in and part-
time retirements are alternatives being used by individuals and firms. Some
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employers use early retirement buyout programs to cut back their workforces and
reduce costs. Employers must take care to make these early retirement programs
truly voluntary.
5.3. Life Insurance and Death Benefits
Generally, life insurance death benefits that are paid out to a beneficiary in lump sum
are not included as income to the recipient of the life insurance payout. This tax-free
exclusion also covers death benefits payment made under endowment contracts,
worker's compensation insurance contracts, employer's group plans or accident and
health insurance contracts in many countries.
5.3.1. Life Insurance
Bought as a group policy, the employer pays all or some of the premiums. A typical
level of coverage is one and one-half or two times an employee’s annual salary.
5.3.2. Disability insurance
Both short-term and long-term disability insurance provide continuing income
protection for employees who become disabled and unable to work. Long-term
disability insurance is much more common because many employers cover short-term
disability situations through sick leave programs.
5.3.3. Long-term care insurance
Usually voluntary, these plans allow employees to purchase insurance to cover costs
for long-term health care in a nursing home, an assisted-living facility, or at home.
Though employees pay for the premiums, they may get cheaper rates through
employer sponsored group plans.
5.4. Health care and medical-related benefit payments
Employers provide a variety of health care and medical benefits, usually through
insurance coverage. For several decades, the costs of health care have escalated at
rates well above those of inflation and changes in workers’ earnings. In addition, the
costs of health care have increased by two percentage points over increases in the
Gross Domestic Product (GDP) across many developed nations for close to 50 years.
As a result of large increases such as these, many employers find that dealing with
health care benefits is time consuming and expensive.
Employers offering health care benefits are taking a number of approaches to
controlling their costs. The most prominent ones are changing copayments and
employee contributions, using managed care, switching to mini-medical plans or
consumer-driven health plans, and increasing health preventive and wellness efforts.
5.4.1. Changing Copayments and Employee Contributions
The copayment strategy requires employees to pay a portion of the cost of insurance
premiums, medical care, and prescription drugs. Requiring new or higher copayments
and employee contributions is the most prevalent cost-control strategy identified by
many employers surveyed.
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5.4.2. Using Managed Care

Managed care consists of approaches that monitor and reduce medical costs through
restrictions and market system alternatives. Managed care plans emphasize primary
and preventive care, the use of specific providers who will charge lower prices,
restrictions on certain kinds of treatment, and prices negotiated with hospitals and
physicians.
5.4.3. Mini-Medical Plans
Another type of plan that has grown in usage in the past few years is the mini-medical
plan. This type of plan provides limited health benefits coverage for employees.
Minimal coverage plans typically offer individuals scaled-down health care benefits,
and because coverage is limited, the plans are offered at a highly discounted rate.
Management can negotiate different coverage caps depending on the needs of
workers, and premium prices, which may or may not be paid completely by
employees, tend to rise as the caps increase.
5.5. Paid Rest Periods, Meal Break, Coffee breaks
5.5.1. Paid Rest Periods
“Hours of work” is the period of time during which an employee works for an
employer. It includes time off with pay instead of overtime pay provided by an
employer and taken by an employee.
5.5.2. Meal Break
In some countries, an employee is entitled to at least 30 minutes of rest (break) in
each shift longer than five consecutive hours of work. Most employees are entitled to
an eating period (meal break) during their shift. The length and timing of the eating
period is somewhat flexible, recognizing work demands. Meal breaks, whether paid
or unpaid, are generally not considered working time and are therefore not typically
counted toward the limits on hours of work, overtime pay or minimum wage.
5.5.3. Coffee Breaks
There is may be not requirement to give the employees coffee breaks or any other
kind of break other than eating periods. Time spent by an employee on a coffee break
or other non-eating period break during which he or she is required to remain at the
workplace is considered to be working time under the Employment Standards Act. If
the employee is free to leave the workplace during the coffee break or other type of
break, it is not considered to be working time.
5.6. Pay for Time Not Worked
Pay for time not worked also called supplemental pay benefits is one of the most
costly benefits because of the large amount of time off that many employees receive.
Common time off with pay periods include holidays, vacations, jury duty, funeral
leave, military duty, personal days sick leave, sabbatical leave, maternity leave and
unemployment insurance payments for laid off or terminated employees.
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A growing number of employers have made use of a paid-time-off (PTO) plan, which
combines all sick leaves, vacation time, and holidays into a total number of hours or
days that employees can take off with pay. Many of those employers have found PTO
plans to be more effective than other means of reducing absenteeism and in having
time off scheduled more efficiently. Other advantages cited by employers with PTO
plans are ease of administration and as an aid for recruiting and retention and for
increasing employee understanding and use of leave policies. Alternatively, PTO plans
might increase absenteeism rates in companies and can make workers think that
managers do not trust them to effectively manage their time off.
5.7. Miscellaneous Benefits
Employers offer a wide variety of miscellaneous benefits. Some of the benefits are
voluntary, meaning that employees can participate in them and pay for the costs
themselves, often at group discount rates. Various types of voluntary insurance
programs are the most common offered. Others are unique to employers and are
provided at little or no cost to employees.
Some benefits and services are social and recreational in nature, such as tennis
courts, bowling leagues, picnics, parties, employer-sponsored athletic teams,
organizationally owned recreational lodges, and other sponsored activities and
interest groups. As interest in employee wellness has increased, more firms are
providing recreational facilities and activities. The idea behind social and recreational
programs is to promote employee happiness and team spirit.
Employees may appreciate this type of benefit, but managers should not necessarily
expect increased job productivity or job satisfaction as a result. Further, employers
should retain control of all events associated with their organizations because of
possible legal responsibility.
6. Payroll Administration
Payroll administration is defined as any of the tasks necessary to organize the
compensation of employees for the hours that have been worked. This may include
keeping totals for hours worked by employees, rates of pay and managing payments to
employees. Businesses that use a commission system often benefit from having a
dedicated payroll administrator in order to better manage payroll services for employees.
For a small business owner, payroll administrative work is often performed by the
business owner initially as there may be few employees. Software may be used to
facilitate ease of payment and tracking of payroll concerns or payroll may be managed on
paper. Often, software used for payroll purposes can make issuing paychecks easier as
well as helping business owners to keep track of payments made. This can also help with
direct deposit payments for employees or managing company accounts used for funding
payments.
When payroll must be organized for only a few employees it may be easy to keep track of
payments but as employee numbers grow it is important that enough time is devoted to
payroll upkeep. This can help to prevent errors in both accounting and payroll to ensure
that employees receive the appropriate amount of compensation per pay period. Payroll
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administrators are also responsible for making sure that payments are delivered on time
to employees.
Another aspect to managing payroll is ensuring that payroll taxes have been properly
deducted from the employee's income. This process can sometimes become
overwhelming, prompting the small business owner to hire a payroll specialist who is
experienced in managing payroll matters. This can help to prevent problems such as direct
deposit issues, tax exemptions or problems with deducting taxes. Errors in deductions for
taxes can cause serious complications for small business owners. Manage payroll as
efficiently and effectively as possible is vitally important.
Payroll administration also includes making sure that company payroll policies adhere to
employment laws. This can apply to overtime that has been worked, holiday pay or other
payroll changes. As businesses grow and employ more workers, it becomes increasingly
important to have someone who is capable of processing payroll.
6.1. Element of Payroll
6.1.1. Hourly Pay
The first step in payroll processing is to calculate the wages to pay each employee.
The most frequent pay cycles are weekly, biweekly, semi-monthly and monthly.
Hourly employees are usually paid weekly or biweekly. Most companies will have
hourly employees complete a time sheet to be turned in at the end of each week.
The payroll professional must ensure the employee and her manager/supervisor
signs the time sheet; if not, it is invalid. Typically, regular, personal/sick or vacation
hours are recorded on the time sheet and are paid at regular pay. Overtime pay
should be listed on the time sheet as well to be paid at time and a half.
6.1.2. Salaried Pay
Salaried employees are usually paid biweekly, semi-monthly or monthly. They are not
required to complete a time sheet for they are paid the same amount of hours each
pay date. The only time a salaried employee's hours will change is if she had a salary
change or is to be paid on a prorated basis (this could be due to termination or other
unpaid days). Typically, the payroll professional does not need to make any changes
to a salaried employees pay, as the system automatically pays the amount due.
6.1.3. Benefits
Employees may opt to participate in the company's health insurance. These amounts
are usually deducted from the have to be changed unless the employee is making a
change to his deductions. In this case, he should notify the payroll professional in
writing of the change. If the changes are submitted timely, they are made effective
on the next payroll.
6.1.4. Taxes
The employee and the employer may be both required to pay payroll taxes. Some
companies use payroll software that will compute these taxes, automatically
deducting the amounts from the employees' paychecks. The payroll professional is
also responsible for depositing taxes to the government, for filing quarterly and
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annual taxes, and for issuing yearly income withholds to employees.

6.1.5. Payroll Adjustments
Once the hours to be paid are entered in the system, the payroll professional must
double-check the information. She can run reports from the system and use them to
check for errors. Any errors detected before the payroll closes can be corrected and
reflected on the current payroll. Once the payroll is closed, changes or adjustments
can be manually done (e.g. a manual check) or adjusted on the next payroll.
6.2. Payroll Process
Payroll involves performing many tasks to ensure accurate and timely paychecks and
payroll tax and record-keeping compliance. These duties cannot be rushed, and they
should be performed with painstaking detail. Otherwise, erroneous paychecks and
improper payroll tax and record-keeping procedures can result.
6.2.1. Process the payroll ahead of time.
Devise a payroll-processing schedule that allows you ample time to process the
payroll and to correct detected errors before employees receive their paychecks. For
example, perform payroll processing two or three days before the actual pay date.
6.2.2. Make changes to the employees’ payroll record
Make changes to the employees’ payroll record, if applicable. This includes: address
changes; payroll deduction changes, such as state income tax form changes; and
voluntary deduction changes, such as retirement and health benefits. Furthermore,
enter new hire information for employees hired in the current pay period.
6.2.3. Compute timekeeping data
Compute timekeeping data from time cards or time sheets and enter the hours to be
paid into the system, such as regular, overtime and vacation hours. If you use a
computerized timekeeping system, you can import the time into the payroll software.
All you have to do is ensure the time is transported correctly and make the necessary
edits.
6.2.4. Pay other types of income
Pay other types of income, such as bonuses, commissions and retroactive pay due to
a pay raise. Perform other adjustments, such as additional pay or wage deduction
due underpayment or overpayment from a prior pay period. Prorate the salaried
employees’ pay if she terminates but does not work the entire pay period, and enter
stop dates in the payroll software to stop future payments.
Furthermore, prorate the salaried new employees’ pay if they are hired after the
current pay period begins. For instance, if she starts working on the fourth day of the
biweekly pay period, pay her for seven working days instead of 10.
6.2.5. Verify the payroll reports
Print reports that allow you to verify the payroll before you print paychecks and
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generate the direct deposit file. Make adjustments, if necessary.

6.1.6. Print paychecks/pay stubs
Print paychecks/pay stubs. Generate the direct deposit file and forward to the bank.
Contact the bank and ensure it is appropriately received, and verify the amount
received.
6.2.7. Filing the payroll records
Print payroll registers showing employees’ gross-to-net wages for the current payroll.
File in a confidential storage area. Keep these records for a minimum of three years.
Keep timekeeping records and those upon which wage computations are based for a
minimum of two years.
6.2.8. Forward the payroll reports
Print and distribute reports needed by related departments, such as human
resources and finance, for benefits administration and reconciliation purposes. If a
separate department or company handles payroll taxes, forward the necessary tax
records for each pay period to the appropriate individual.
6.3. Payroll Audit
Employers should audit payroll processing as part of regular business operations. A
small business usually has the advantage of fewer employees making a thorough
audit possible rather than sampling data for further review. A good time frame for
scheduling a payroll audit is at the end of each quarter of business.

1 3 5
2 4 6
Review Review
Verify Active
Hours Paid Payroll Tax
Employees
Compare Payroll Submissions Bank
Verify Pay Reports to
General Ledger Reconciliation
Rate
Review

6.3.1. Verify Active Employees

For each person that received a paycheck during the quarter, verify that the person
was employed during the time period for which the check was issued. Although it is
more difficult to commit payroll fraud on a smaller business, one method of financial
theft is by cutting checks to terminated employees and then altering the checks for
cashing or colluding with the terminated employee to cash the checks and provide a
kick back.
6.3.2. Verify Pay Rate
Verify the pay rate entered into the payroll processing system for each employee.
Payroll rates should always be in writing, approved by an owner or manager, and filed
with other employee paperwork.
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6.3.3. Review Hours Paid

Compare the hours paid to employees for each pay period to the time clock reports
or other tracking device used to record employee hours worked. Pay special attention
to overtime hours as the cost of overtime can add up quickly and push a small
business over budget in salaries and wages expense. If you offer paid time off, such as
paid holidays, sick time and vacation days, review each entry of paid time off to
ensure the employee who received paid time off pay was eligible for the pay.
6.3.4. Compare Payroll Reports to General Ledger
Compare the totals, such as gross payroll expense, taxes withheld and net check
amount, to the general ledger to ensure each payroll processing is correctly recorded
on the general ledger. If you have multiple salaries and wages accounts, such as
manager payroll, administrative payroll and sales payroll, ensure that each category
of payroll reflects the correct expense for the employees in those specified positions.
6.3.5. Review Payroll Tax Submissions
Business payroll taxes include Social Security taxes, Medicare/Medicaid taxes, state
unemployment taxes and federal unemployment taxes, as well as the remission of
federal withholdings for the employee. The total amount of payroll processed
determines how often you remit payroll taxes to the respective taxing authorities, but
most payroll remissions will occur at least quarterly with the exception of federal
unemployment taxes, which can occur once a year if the business has low payroll
amounts.
Compare the payroll totals on the tax remittance reports with reports generated by
the payroll system to ensure proper reporting of all payroll amounts. Perform manual
calculations of all computer-generated totals to ensure proper calculation of amounts
due. Verify that electronic or check remissions equal the exact amount recorded on
tax remittance reports.
6.3.6. Bank Reconciliation Review
Review the bank reconciliation for the payroll account to ensure that all checks
cleared for the issued amount and make a note of any stale-dated payroll checks to
research. Make sure you receive the hard copy of all payroll checks from your bank,
even if you have to pay an additional fee for the service. Review each payroll check to
ensure the check does not appear altered in any way.
6.4. Payroll System
A payroll system is software which organizes all the tasks of employee payment and
the filing of employee taxes. These tasks can include keeping tracking of hours,
calculating wages, withholding taxes and deductions, printing and delivering checks
and paying employment taxes to the government.
Payroll software often requires very little input from the employer. The employer
needs to input employee wage information and hours—then the software calculates
the information including withholdings automatically. Most payroll software is
automatically updated every time a tax law changes and will remind employers when
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to file various tax forms.

Choosing a payroll system that best fits your business is essential. It may be difficult
to decide which system to choose, but there are some factors to keep in mind when
deciding. First, analyze the size of your business and how much of your budget you
are willing to spend on payroll processing.
While it is possible for smaller businesses to handle payroll duties in-house through a
manual process, a lot of time can be wasted attempting to calculate everything
correctly. Payroll system software can eliminate errors in the payroll process and
eliminate excessive effort involved in put calculating employee hours, wages and tax
withholdings. Payroll software is easy to use often times very affordable for small
businesses.
Employers or HR departments can purchase an affordable system accessible on their
local computer or via a cloud service. Purchasing software eliminates the expense of
hiring an in-house accountant for payroll processing. Lastly, small business owners
can maintain more control of the payroll process by using software. Using payroll
software allows the business to compile reports at whatever pace they desire.
When choosing a payroll system, you’ll want to look for security. Is the software
password protected? Having a password protected software ensures there is no
tampering of information. Next, is the software compatible and flexible? It is
important to have payroll software that functions well with your other business
systems and will grow with your business.
Another factor to consider is systems credibility. Make sure the software is made by a
well-known brand. Lastly, you’ll want a payroll system which will allow the employer
to still have control and the option of viewing reports and historical information.
Once you choose your payroll system it is up to you how much control you want over
it.
6.5. Payroll Outsourcing
Payroll outsourcing is a business practice that involves contracting with a business
service to handle all functions related to a company payroll. Using an outsourcing
service makes it possible to manage the payroll process without the need to maintain
a large payroll department. Payroll service providers manage such diverse functions
as the calculation of wages and salary, withholding of taxes, the distribution of
withheld funds to the proper government agencies, and the direct deposit of net pay
into the bank accounts of employees.
There are many reasons why a company may choose to go with a payroll outsourcing
option. The most common is to save time and money on the handling of financial
tasks associated with a payroll. By contracting with an outside vendor, it is possible to
restrict the payroll team to one or two individuals within the company. Often, these
two designated individuals are authorized to supply basic data to the payroll service,
which then handles the rest of the details. As a result, there is no need for anyone to
spend a majority of the workweek calculating hourly wages, taxes, and dealing with
various types of withholding issues.
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Since most payroll outsourcing services offer the option of cutting checks or direct
deposit, it is possible for each employee to choose which format he or she prefers.
When checks are selected, they are usually sent by courier to the client, who then
distributes them to the employees. In situations where the direct deposit option is
selected, employees often find their money is credited to their account the evening
before their actual pay date, or early on the standard pay date.
Another benefit to using a payroll outsourcing service is that the employer does not
have to keep up with changes in regulations that impact the calculation of taxes.
Since the outsourcing service constantly updates their information to comply with
current laws, the employer never has to worry about incurring late charges and other
penalties, due to an improper calculation of the taxes due. This benefit alone can
save a large corporation a significant amount of money over the course of a year.
Payroll outsourcing also prevents an employer from having to deal with technology
woes. Since the payroll is processed off-site, there is never a need to upgrade payroll
software or spend time and money on program or hardware glitches or any of the
system issues that can occur and slow down the payroll process. As a result,
employees are consistently paid on time and remain happy.
While payroll outsourcing does mean incurring another business expense on a
regular basis, even small businesses often find that using this type of service saves
time and money each month. Most outsourcing vendors will offer several different
payroll plans that are likely to be ideal for businesses of different sizes. In terms of
convenience, keeping the payroll records up to date, and keeping the withholding
accurate, going with a payroll outsourcing service just makes sense.
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Part Four: Employee Value Proposition

1. Employee Value Proposition
The employee value proposition (EVP) is the deliberate construct of the organization to
provide a compelling set of value that will attract the desired future workforce and, at the
same time, keep the desired current workforce in the organization. The EVP will offer
messages that address the rewards, the opportunity, the culture, the organization, the
work, and the people you will be working with. Inside of these categories the EVP might as
the full array of elements an organization delivers to employees in return for the
contribution those employees make to the organization. It’s everything that matters to
employees about their work and their organizations, the things they brag about at the
neighborhood barbeque.
EVP encompasses the factors that some organizations categorize as total rewards: various
forms of pay and benefits, plus such other programmatic elements as learning and
development, flexible work arrangements and wellness programs. The value proposition
also includes a range of intangible factors that don’t show up in the pay check or on the
benefits statement but nonetheless carry high value. Research suggested that
organizations fall into one of four stages on a value proposition evolutionary scale.
1.1. Tactical
First-stage organizations have made little progress in defining the coherent set of
factors that make up the value proposition to employees and candidates. Nature
abhors an EVP vacuum, however, so no organization can truly be without a value
proposition, any more than it can be without a strategy or a set of organizational
values.
All of these exist, even if not formally recognized or clearly explained. Stage 1
companies certainly provide rewards and have cultures, but employees are on their
own to understand and interpret these. In our global research, about one-third of
organizations fall into this category.
1.2. Integrated
Organizations at the next evolutionary step have established a formal EVP and have
made strides to integrate their strategies for talent and rewards management. These
enterprises have typically established stated objectives for each reward and talent
management program.
They’ve made key connections among those programs (for example, creating clear
linkages among competencies, hiring processes, learning programs, career paths and
compensation bands). They represent about one-fourth of our global data set.
1.3. Communicating and Delivering
Companies at the third evolutionary step have accomplished the advances we see
with Stage 2 companies. Third-stage organizations (a little less than one-fourth of our
data set) have also gone further by cogently communicating the EVP to employees and
delivering consistently on their EVP promises.
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In effect, they have established an internal brand, sometimes expressed through clever
graphics and messages, and communicated it to employees and candidates.
1.4. Segmenting and Differentiating
On the foundation of an EVP solidly defined, communicated and delivered, Stage 4
organizations have differentiated their EVPs from those of their talent market
competitors. We usually find that these companies have also made significant progress
in customizing the EVP for critical workforce segments. They are also more likely than
their less-advanced brethren to measure the effectiveness of their rewards programs.
These enterprises represent less than 20 percent of the companies we’ve studied.
They are more than twice times as likely as Stage 1 companies to report financial
performance substantially above their peer group.
These four stages not only represent increased sophistication, but also incremental value
associated with the employee value proposition.
Stage 4 organizations believe their value propositions, reflected in their brand promises,
give them a competitive advantage in the employment market. They view their employee
brands as strong and, in some important way, uniquely attractive.
This advantage comes from the way they respect the order of the phrase employee value
proposition: they start by understanding the employee, then defining and delivering
rewards that have true value, and then conveying a clear and compelling why-you-should-
care proposition to the target audiences.
2. Employer Branding
One of the greatest challenges facing companies right now is their ability to exploit
synergies and efficiencies in their talent acquisition and retention programs. When
considered with the fact we are about to enter an era of unparalleled talent scarcity
around the world, employer branding is set to become one of the most critical roles inside
global companies. Then, what is the “Employer Branding”?
2.1. Definition of Employer Branding
It is the process of positioning an organization as an "employer of choice" in the
workforce market. An employer brand creates an image that makes people want to
work for and stay working for the organization. An organizational value proposition of
employees is the foundation of employer branding.
2.2. Branding Techniques
Employer branding uses the same marketing, communications, and performance
technology used to market products and services to create an image of what it is like to
work at the company. Firms typically use the following techniques, collectively or in a
selective manner:
2.2.1. The corporate Web site
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2.2.2. Media ads (e.g., print, television, radio)

2.2.3. Collateral materials (e.g., brochures)
2.2.4. Marketing campaigns
2.2.5. Representation of the company at job fairs, campuses, etc.
2.2.6. Community events, sponsorships, and CSR, etc.
2.2.7. Continuous recruiting to keep visible in the labor market.
2.3. Employee Value Proposition (EVP) is the Foundation of Employer Branding
An EVP answers the question, why would a talented person want to work for the
organization? The EVP must be aligned with the organizational strategic plan, vision,
mission, and values and create an image that attracts and retains people. Further, it
must provide an accurate picture of employment for employees and candidates. Any
inconsistencies in the work environment can erode the credibility of a branding
strategy.
An EVP should promote the tangible and intangible benefits that people derive from
working there. Many people are attracted to work for international NGOs or other
nonprofits because they want to make a difference.
To create a global Employee Value Proposition can build on the principles of corporate
brand to further differentiate the company in an increasingly competitive talent
marketplace. This included identifying:
2.3.1. Any different approaches needed to attract and retain different talent segments
and what those differences should be.
2.3.2. Priority areas for change in order to maintain and improve engagement of key
talent.
2.3.3. The messages to use to attract different talent groups in different countries.
2.4. Employer Brand Framework
An employer brand framework defines the employment experience from a stakeholder
perspective. The Framework considers the role of stakeholders including employees,
prospective candidates, customers, investors, and society in employer branding.
86
Employer Brand Excellence Framework
Stakeholders Prospective
Employees

Corporate Brand Employer Value Proposition

EBSP Employer and Employee Platform

•Recruitment and induction
•Compensation and benefits
EBEP •Career development
•Employee research
•Reward and recognition
•Communication systems
•Work environment
EVP
Employer Brand Strategic Platform
•Mission, vision, values
•CSR
•Leadership
•Corporate reputation and culture
•People management policies and practice
•Performance management
•Innovation

Market
Forces Costumers

Employer Brand Excellence Framework

Source: Minchington, B. (2011). Employer Branding Without Borders – A Pathway to
Corporate Success. Retrieved from ere.net.

Adapting the employer brand strategy to external environments should begin with a
focus on the employee experience. Not all employees are the same and while
companies like to use a “one-size-fits-all” engagement strategy, the reality is that most
employees want to have their own needs met before they consider those of their team
members or the organization as a whole. The employer brand strategy has to be build
from the ground up.
2.5. Manage the Employer Brand for the Long Term
If there is one variable that causes more employer brand strategies to fail or to not
even get started, it is the lack of relevant measures to determine the return on
investment of the employer brand strategy over the long term. Most metrics used are
short-term measures such as recruitment advertising costs or job-board spends.
Metrics need to be more strategic and should include measures such as quality of hire,
retention rate, and employee engagement which will provide deeper insights into the
level of value creation from your employer brand strategy.
At the onset of your employer brand strategy, metrics based on desired outcomes
should be established. There is no one-size-fits-all measurement tool for your
employer brand program. The key is developing a set of metrics that is based on your
own unique challenges and business objectives. Senior managers should develop a
dashboard of metrics that is relevant to their organization’s strategy rather than
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implementing a “me-too” ROI measurement tool.

The key differentiator of companies that successfully adopt the employer brand
concept in the future will be those that appoint dedicated employer brand resources
and staffing, develop a clear strategy to work toward, achieving a Tier 1 status, and
whose outcomes consider the objectives of candidates, employees, customers,
investors, and society.
3. Employee Engagement
Gallup found that whether unionized or not, world-class organizations have two crucial
things in common: They recognize that talented managers are the core of an organization's
success, and they understand and leverage the fact that engagement predicts
performance. Employee engagement has become a widely used and popular term, and it
has its basis in practice rather than theory and empirical research, while its construct often
overlaps with other constructs, such as organization commitment, job involvement, or
organizational citizenship behaviors (OCB). However, engagement is not an attitude; it is
the degree to which an individual is attentive and absorbed in the performance of their
roles. In HR practice, the concept is commonly seen as capturing levels of commitment and
discretionary effort exhibited by employees.
*Organizational citizenship behaviors (OCBs) are discretionary workplace behaviors that
exceed one's basic job requirements. They are often described as behaviors that "go above
and beyond the call of duty".
An engaged employee is a person who is fully involved in, and enthusiastic about, his or
her work. Truly engaged employees are attracted to, and inspired by, their work (“I want
to do this”), committed (“I am dedicated to the success of what I am doing”), and
fascinated (“I love what I am doing”). Engaged employees care about the future of the
company and are willing to invest the discretionary effort – exceeding duty’s call – to see
that the organization succeeds.
According to Aon Hewitt, there are three dimensions through which organizations can
measure the strength of their employee engagement – which the consulting firm defines
as “the psychological state and behavioral outcomes that lead to better performance”.
These dimensions are labelled by Aon Hewitt simply as Say, Stay and Strive.
Engaged employees: Say—speak positively about the organization to coworkers, potential
employees and customers; Stay—have an intense sense of belonging and desire to be a
part of the organization; and Strive—are motivated and exert effort toward success in
one’s job and for the company.
Aon Hewitt’s Engagement Model also covers “Engagement Drivers.” These are the areas
over which management has a great deal of control—the action areas. Their extensive
research formed the six major categories of the work experience that include the work
people do, the people they work with, opportunities, total rewards, company practices and
general quality of life.
88

Engagement Engagement Business

Drivers Outcomes Outcomes

Brand Talent
Reputation Retention
Brand/EVP Absenteeism
Differentiators

Corporate responsibility Wellness

Leadership
Senior leadership
The
BU leadership Operational
Work
Productivity
Experience
Safety
Performance
Foundation

Career opportunities
Learning and development
Performance management
Customer
People management Satisfaction
Rewards and recognition NPS
Retention

Company Practices The Basics The Work

Communication Benefits Collaboration
Financial
Customer focus Job security Empowerment/autonomy
Revenue/sales growth
Diversity and inclusion Safety Work tasks Op. income/margin
Enabling infrastructure Work environment Total shareholder return
Talent and staffing Work/life balance

Employee Engagement Model

Source: Aon Hewitt
3.1. Brand
The organizational reputation of a company isn’t just important from a consumer point
of view, says Aon Hewitt. The consulting firm explains that how the business is
perceived, both internally among employees and externally to the public can have a big
impact on employee engagement. It is therefore important to consider your employee
value proposition, or EVP, and recognize its role in connecting “an external brand
promise to customers with delivery on the internal brand promise to employees”. Aon
Hewitt revealed that around 82 per cent of employees value this aspect of a company’s
brand, and a solid reputation as an employer of choice can go a long way in engaging
employees.
3.2. Leadership
A company does not become a best employer without strong leadership. Companies
that excel at leadership are differentiated through four disciplines: 1) Leaders set the
tone for the importance of leadership by cultivating and developing talent; 2) they
pursue an unrelenting focus on talent beyond a typical performance management
cycle; 3) leadership programs and practices are aligned with business strategy; and 4)
leadership is a way of life—it is embedded into the values and expected behaviors and
culture of the organization. Leaders play an important role in employee engagement
and becoming a best employer company. They do this in direct and indirect ways. First,
leaders have an indirect “multiplier effect” on all the top engagement drivers and other
best employer indices. Ultimately, leaders make the decisions on brands, performance
goals, pay and recognition, communication to employees, work process and
innovation.
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3.3. Performance
Lastly, a strong “performance focus” is essential to employee engagement. Getting real
about employee engagement requires moving beyond a generic concept and clarifying
the behaviors in which you would like employees to go above and beyond. For many
employers there is increasing need for agility, speed and flexibility—these traits and
behaviors will vary by industry and job profile. Clarifying what engagement looks like
for employees is a prerequisite to their engagement. Aligning performance
management, people management, learning and development, and rewards and
recognition with these engaged behavior expectations will focus, enable and reinforce
employees’ efforts and energy.
3.4. The Basics
Many organizations with lower levels of engagement struggle to jump right to a
“culture of engagement.” Leaders should not overlook the positive impact of strong
company practices and enabling infrastructure; basics like benefits, safety and work-life
balance; or fulfilling work itself. Many companies that have had significant increases in
employee engagement in a short period of time focus on fixing issues in some of these
basic elements. Getting the foundation right is often the first step in building a culture
of engagement, and cracks in this foundation can quickly erode employee engagement
for any organization.
3.5. The Work
Collaboration: The act of working with other people to achieve a mutual benefit is vital
to employee engagement. Surveys indicate that being cared about by colleagues is a
strong predictor of employee engagement. Thus, a continuous challenge for leaders is
to rally individuals to collaborate on organizational, departmental, and group goals,
while excluding individuals pursuing their self-interest.
Empower/autonomy: Employees are given the freedom and authority they need to
make necessary decisions. Empowerment is therefore critical to driving higher
performance. Give people more autonomy, empower them to act and you increase the
chances of them delivering more.
Work task: Meaning and purpose are core employee performance motivators that
money doesn’t compare to. Meaningful work is work that makes sense because we
know what’s expected and have the resources to do it, while understanding how our
part contributes to a greater company goal and how it benefits others.
3.6. Company Practices
Communication: Internal communication is important for building a culture of
transparency between management and employees, and it can engage employees in
the organization’s priorities. Executives employ a variety of communication methods,
including face-to-face communication, to communicate with employees. The
executives’ chosen communication strategies aim to build trust and engagement with
employees.
Customer Focus: Customer focus and employee engagement are two sides of the same
90

coin. Clearly if your customers are going to be satisfied it takes an engaged workforce
that is passionate about their work and holds a strong desire to deliver great
experiences. In line with meaning of work, employees become disengaged when they
lose meaning in their work. This meaning can only come from recognition and
acknowledgment from customers (whether internal or external).
Diversity and inclusion: Diversity and Inclusion are values that reflect a company’s
culture of respect for people and the value it place on differences. An open and more
inclusive environment will build trust and confidence within the organization and
generate a culture in which everyone feels valued and respects their colleagues, and
therefore increase employee engagement.
The business outcomes often result from strong engagement drivers and higher
employee engagement levels. Researches have consistently found that companies with
higher engagement levels also have better talent, operational, customer and financial
outcomes.
4. Employee Retention
Retention of employees as human resources is part of HR staffing and planning efforts.
Turnover, as the opposite of retention, often has been seen as a routine HR matter
requiring records and reports. However, what was once a bothersome detail has become a
substantial HR issue for many employers. Thus, organizations are being forced to study why
employees leave and why they stay. Sometimes an individual in the HR area is assigned to
specifically focus on retention to ensure that it receives high priority.
Keeping good employees is a challenge that all organizations share and that becomes even
more difficult as labor markets change. Unfortunately, some myths have arisen about what
it takes to retain employees. Some of the most prevalent myths and realities are as follows:

 Money is the main reason people leave. Money certainly is a vital HR tool, and if
people feel they are being paid inadequately, they may be more likely to leave. But if
they are paid close to the competitive level they expect, other parts of the job become
more important.

 Hiring has little to do with retention. This is not true. Recruiting and selecting the
people who fit the jobs and who are less likely to leave in the first place, and then
orienting them to the company, can greatly increase retention. It is important to select
for retention.

 If you train people, you are only training them for another employer. Developing skills
in employees may indeed make them more marketable, but it also tends to improve
retention. When an employer provides employees with training and development
assistance, job satisfaction may increase and employees are more likely to stay,
particularly if they see more future opportunities internally.

 Do not be concerned about retention during organizational change. That is exactly the
time to worry about retention. Although some people’s jobs may have to be cut
because of economic organizational factors, the remaining employees that the
company would like to keep may have the most opportunity and reason to leave
voluntarily. For example, during a merger or acquisition, most workers are concerned
 91

about job security and their employer’s future. If they do not feel a part of the new
organization early on, many may leave or evaluate alternatives.

 If solid performers want to leave, the company cannot hold them. Employees are best
viewed as “free agents,” who indeed can leave when they want. The key to keeping
solidly performing employees is to create an environment in which they want to stay
and grow.
4.1. Retention Matrix
Because both people and jobs are so varied, managers and HR professionals need to
realize that individuals may remain or leave their employment for both job-related and
personal reasons. For instance, if employees choose to leave an organization for family
reasons (e.g., because a spouse is transferring or to raise children), there may be a
limited number of actions the employer can take to keep them on the job. However,
there are significant actions that an employer can take to retain employees in many
other circumstances. The below figure illustrates some of these “drivers” of retention,
or areas in which employers can take action to strengthen the possibility of keeping
employees.

Rewards:
Compensation,
Benefits, and
Performance

Organizational
Career
and
Training and
Management
Development
Factors

Retention

Employee- Employer
Supervisor Policies and
Relationships Practices

Job and Work-

Life

Phillips, J.J. & Connell, A.O. (2011). Managing Employee Retention. London, UK:
Routledge.

The actual reasons that people stay or leave vary according to job groupings, industry
92

and organizational issues, geographical global aspects, and other factors. For instance,
a survey of executives by Robert Half International found that the most common
factors that caused satisfactory employees to quit their jobs were unhappiness with
management, limited career advancements and recognition, insufficient pay and
benefits, and job boredom. This survey illustrates that many of the factors involved in
retention drivers are organizational and management factors within the employer’s
control.
4.1.1. Organizational and Management Factors
A number of organizational/management factors influence individuals in their
decisions to stay with or leave their employers. Organizations that have clearly
established goals and hold managers and employees accountable for accomplishing
results are viewed as better places to work, especially by individuals wishing to
progress both financially and career-wise. Further, effective management provides the
resources necessary for employees to perform their jobs well. These factors reflect
workplace commitment by employees, which leads to more positive organizational
views in the industry and communities.
Other organizational components that affect employee retention are related to the
management of the organization. Some organizations see external events as
threatening, whereas others see changes as challenges requiring responses. The latter
approach can be a source of competitive advantage, especially if an organization is in a
growing, dynamic industry. Another organizational factor that can affect employee job
performance and potential turnover intentions is “organizational politics.” This can
include managerial favoritism, having to be involved in undesirable activities, taking
credit for what others do, and other actions that occur in many departments and
organizational settings.
A final factor affecting how employees view their organizations is the quality of
organizational leadership. Often, leaders have an identified strategic plan that guides
how the firm responds to changes. If a firm is not effectively managed, then employees
may be disappointed by the ineffective responses and inefficiencies they deal with in
their jobs. A survey of 700 workers identified that “bad bosses” who do not give
employees recognition for accomplishments or who fail to keep promises can lead to
almost 40% of the workers being dissatisfied and more likely to look for other jobs.
4.1.2. Work Relationships
Work relationships that affect employee retention include supervisory/management
support and coworker relations. A supervisor or manager builds positive relationships
and aids retention by being fair and nondiscriminatory, allowing work flexibility and
work-family balancing, giving feedback that recognizes employee efforts and
performance, and supporting career planning and development.
Additionally, many individuals build close relationships with coworkers. Such work-
related friendships do not appear on employee records, but these relationships can be
an important signal that a workplace is positive. Overall, what this means is that it is
not just where people work, but also with whom they work, that affects employee
retention. If individuals are not linked with or do not relate well to their coworkers,
 93

there is greater likelihood for turnover to occur.

4.1.3. Job and Work-Life
Many individuals have seen a decline in job security during the past decade. All the
downsizings, layoffs, mergers and acquisitions, and organizational restructurings have
affected employee loyalty and retention. As coworkers experience layoffs and job
reductions, the anxiety levels of the remaining employees rise. Consequently,
employees start thinking about leaving before they too get cut. Organizations in which
job continuity and security are high tend to have higher retention rates.
Some jobs are considered “good” and others are thought to be “bad,” but not all
people agree on which jobs are which. As mentioned previously, the design of jobs and
peoples’ preferences can vary significantly. Job design factors that can impact retention
include the following:

 A knowledge, skills, and abilities mismatch, either through overqualification or

underqualification, can lead to turnover.

 Job accomplishments and workload demands that are dissatisfying or stressful

may impact performance and lead to turnover.

 Both timing of work schedules and geographic locations may contribute to

burnout of some individuals but not others.

 The ability of employees to balance work and life requirements affects their job
performance and retention.
Numerous examples could be given on how each of these items affect retention, but
one example comes from a survey of chief financial officers on the impact of these
issues in their firms. In this survey, work-life flexibility efforts were seen as creating
significant retention, recruitment, and productivity results. This study illustrates that
how organizations address jobs can drive retention efforts, including global retention
as discussed in the HR Perspective.
4.1.4. Rewards: Compensation, Benefits, and Performance
The tangible rewards that people receive for working come in the form of pay,
incentives, and benefits. Employees often cite better pay or benefits as the reason for
leaving one employer for another. Employers do best if they offer competitive pay and
benefits, which means they must be close to what other employers are providing and
what individuals believe to be consistent with their capabilities, experience, and
performance. If compensation is not close, often defined as within 10% to 15% of the
“market” rate, turnover is likely to be higher.
However, the reality of compensation is a bit more complex than it seems at first
glance. For instance, one study of public-sector employees identified that broad reward
programs, not just pay and benefits, aided with workforce retention in difficult
economic situations. A number of employers have used a wide range of special
benefits and perks to attract and retain employees. For example, Student Media Group
in Delaware added work-related plasma television screens, videogame players, and
94

free soda and snacks as part of a special rewards package to create more positive views
to aid in retaining employees.
Another part of rewards generally is that individuals need to be satisfied with both the
actual levels of pay and the processes used to determine pay. That is why the
performance management systems and performance appraisal processes in
organizations must be designed so they are linked to compensation increases. To
strengthen links between organizational and individual performance, an increasing
number of fast-growing private-sector firms are using variable pay and incentives
programs. Some programs offer cash bonuses or lump-sum payments to reward extra
performance, which also aids with retention efforts.
Another rewards aspect that affects retention is employee recognition, which can be
both tangible and intangible. Tangible recognition comes in many forms, such as
“employee of the month” plaques and perfect-attendance certificates. Intangible and
psychological recognition includes feedback from managers and supervisors that
acknowledges extra effort and performance, even if monetary rewards are not given.
For instance, one firm, Fairmont Hotels and Resorts, is using a “Serviceplus Colleague
Recognition Program” to engage its 30,000 employees. Different types of recognitions
include “Star of the Month” and “Memory Maker” for significant service. For such
recognition, a small amount of money (under $50) and other types of rewards are
given. An employee survey has shown significant increases in positive employee views
of both their jobs and the Fairmont firm.
4.1.5. Career Training and Development
Many employees in all types of jobs consistently indicate that organizational efforts to
aid their career training and development can significantly affect employee retention.
Opportunities for personal growth lead the list of reasons why individuals took their
current jobs and why they stay there. In one survey, nearly one-third of workers
identified the lack of career advancement opportunities to be the most important
reason for potentially changing employers.
Training and development efforts can be designed to indicate that employers are
committed to keeping employees’ knowledge, skills, and abilities current. Also, training
and development can help underused employees attain new capabilities. Such a
program at Southwest Airlines has been very successful. Recruiters were reassigned to
different departments, which resulted in their generating sales and revenues in flight
operations and other areas.50
Organizations address training and development in a number of ways. Tuition aid
programs, typically offered as a benefit by many employers, allow employees to pursue
additional educational and training opportunities. These programs often contribute to
higher employee retention rates because the employees’ new knowledge and
capabilities can aid the employer. Also, through formal career planning efforts,
employees discuss with their managers career opportunities within the organization
and career development activities that will help them to grow.
Career development and planning efforts may include formal mentoring programs. For
instance, information technology (IT) organizations are using career development
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programs so that IT individuals can expand their skills outside of technical areas.
Programs in some firms cover communication and negotiation tactics, which gives the
employees additional capabilities that are needed in managerial and other jobs.51
Companies can help reduce attrition by showing employees that they are serious about
career advancement opportunities.
4.1.6. Employer Policies and Practices
A final set of factors found to affect retention is based on the employer relations
policies that exist. Such areas as the reasonableness of HR policies, the fairness of
disciplinary actions, and the means used to decide work assignments and opportunities
all affect employee retention. If individuals feel that policies are unreasonably
restrictive or are applied inconsistently, they may be more likely to look at jobs offered
by other employers.
To ensure that appropriate actions are taken to enhance retention, management
decisions require data and analyses rather than subjective impressions, anecdotes of
selected individual situations, or panic reactions to the loss of key people.
The analysis of turnover data is an attempt to get at the cause of retention problems.
Analysis should recognize that turnover is a symptom of other factors that may be
causing problems. When the causes are treated, the symptoms can go away.
Some of the first areas to consider when analyzing data for retention include the work,
pay/benefits, supervision, and management systems. Common methods of obtaining
useful perspectives are employee surveys, exit interviews, and first-year turnover
evaluations.
4.2. Employee Surveys
Employee surveys can be used to diagnose specific problem areas, identify employee
needs or preferences, and reveal areas in which HR activities are well received or
viewed negatively. Whether the surveys are on general employee attitudes, job
satisfaction, or specific issues, the survey results must be examined as part of retention
measurement efforts. For example, a growing number of “mini-surveys” on specific
topics are being sent via e-mail questionnaires, blogs, and other means.
Regardless of the topics in a survey, obtaining employee input provides managers and
HR professionals with data on the “retention climate” in an organization. By obtaining
data on how employees view their jobs, their coworkers, their supervisors, and
organizational policies and practices, these surveys can be starting points for reducing
turnover and increasing the length of time that employees are retained. Some
employers conduct attitude surveys yearly while others do so intermittently.
By asking employees to respond candidly to an attitude survey, management is building
employees’ expectations that actions will be taken on the concerns identified.
Therefore, a crucial part of conducting an attitude survey is providing feedback to
those who participated in it. It is especially important that even negative survey results
be communicated to avoid fostering the appearance of hiding the results or placing
blame.
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4.3. Exit Interviews

One widely used means for assisting retention assessment efforts is the exit interview,
in which individuals who are leaving the organization are asked to give their reasons.
HR must regularly summarize and analyze the data by category (e.g., reasons for
leaving, department, length of service, etc.) to provide managers and supervisors with
information for improving company efforts.
In exit interview is an interview conducted when an employee is leaving with a
company. Exit interviews can have value not only in terms of assessing and improving
corporate culture but also in minimizing an employer's exposure in litigation. The
following are suggestions for conducting an appropriate exit interview:

Purposes
• Glean feedback from employees in order to improve organization
• Minimize an employer's exposure in litigation
• Retain high performers or talents
Principle
• Should be a neutral person (HR or a consultant)
• Should provide a sufficient training for the interviewer
• Should be a structure interview format that contains questions about unavoidable
and avoidable reasons for leaving
• Should prepare for each exit interview by reviewing the interview format and the
interviewee’s personnel file
• Should be conducted in a private place, before the employee’s last day
• Should confidential and that only will used for retention
• Should be aligned with the organization's business needs

4.4. First-Year Turnover Evaluations

A special type of retention assessment focuses on first-year employees. It is not
unusual for turnover to be high among newer employees during their first year.
Sometimes the cause of departure is voluntary; for example, individuals may identify a
mismatch between what they expected in their jobs and managers and what actually
occurs, or between their perceptions of the new job and its reality. Other times
individuals are involuntarily removed in the first year. Some causes can be excessive
absenteeism and poor performance, mismatches with job requirements, and conflicts
with other employees and managers. If these situations occur too often, HR may need
to reevaluate its recruiting and selection processes, as well as its job previews to make
sure they are realistic.
Overall, focus on first-year retention and turnover is useful because individuals who
stay for a year are more likely to extend their employment and have greater retention
beyond the first year. Also, effective first-year efforts may lead to future career
development, higher performance, and other positive retention factors.
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4.5. Retention Evaluation and Follow-Up

Management can take numerous actions to deal with retention issues. The choice of a
particular action depends on the analysis of the turnover and retention problems in a
particular organization and should be custom tailored for that organization.
Tracking of intervention results and adjustment of intervention efforts should be part
of retention evaluation and follow-up. Some firms use pilot programs to see how
changes affect retention before extending them to the entire organization. For
instance, to test the effect of flextime scheduling on employee turnover, a firm might
try flexible scheduling in one department. If the turnover rate in that department
drops in comparison to the turnover rates in other departments still working set
schedules, the firm might extend the use of flexible scheduling to other departments.
Retention evaluation and follow-up are key facets of the broader organizational HR
planning and staffing. Effective retention management can have major impacts on the
integrated HR attraction, recruiting, and selection processes.
4.6. Job Embeddedness
Job embeddedness represents a broad set of influences on an employee’s decision to
stay on the job. In other word, job embeddedness is the collection of forces that
influence employee retention. It can be distinguished from turnover in that its
emphasis is on all of the factors that keep an employee on the job, rather than the
psychological process one goes through when quitting.
Job embeddedness is a construct developed to explain why people stay in their jobs.
Job embeddedness theory suggests that we are held in our jobs and the communities
in which we live by ties to other people, groups, organizations, places, and things. Each
tie can vary in strength and size; however, it is the ‘totality of embedding forces’ that
results in someone becoming enmeshed in their job. Job embeddedness predicted
turnover, over and above job satisfaction and commitment.
4.6.1. Implications
Being embedded in an organization and one’s community is associated with reduced
intent to leave and actual leaving. Thus, enhancing job embeddedness could be an
effective retention tool. Organizations that offer flexible scheduling and family friendly
programs may further enhance employee embeddedness by strengthening employees’
social bonds to others within the community. Family perception of fit to the
organization could be improved by educating families on the value of the employees’
work to the organization and creating a sense of pride in the organization.
4.6.2. Pros and Cons
Job embeddedness may actually strengthen employees' motivation to generate,
spread, and implement innovative ideas in organizations for individuals in the mid- and
late stages of their careers than for those in the early stage of their careers.
One potential downside of job embeddedness that warrants consideration is that
people who feel stuck in an unfavorable job may lose motivation, experience
frustration, and even engage in counterproductive workplace behaviors.
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