Employee Life Cycle and

Organizational Development

LECTURE 14
Types of Compensation - II

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Let us begin this lecture and discuss other types of compensation.

As you are aware, a comprehensive compensation package encompasses more than just a basic
salary. It comprises various components, such as incentive pay and other forms of compensation,
contributing to its overall composition.

First, let us discuss ‘Legally Mandated in the US: Social Security and Medicare’

Legally Mandated: Social Security

and Medicare
The Social Security Act of 1935 is an American Act
that imposes a legal obligation on employers to
deduct funds from employees' salaries to finance
retirement benefits, commonly known as a payroll
tax. It's important to emphasize that every
organization is obliged to provide this benefit.

Following multiple revisions, it is now referred to as

OASDHI, which stands for the Old Age, Survivors,
Disability, and Health Insurance Program.

To qualify for insurance coverage, employees must accumulate forty quarters of work, each with a
minimum earning of ₹82,967 per quarter. Once these funds are set aside, individuals born after
1960 become eligible for benefits at the age of 67.

In 2011, the OASDHI tax rate was 4.2 percent for employees, applicable to earnings up to
₹88,61,159, and 6.2 percent for employers within the same income limits. This allocation covers
both retirement income and medical benefits, known as Medicare, once the employee reaches the
retirement age.

In India, the concept of social security and healthcare is not available. However, there are other
types of compensation and benefits that are mentioned below:

§ Provident Fund (PF): The Employees' Provident Fund (EPF) is a security scheme mandated by
the government of India. Under this scheme, both employees and employers contribute a
percentage of the employee's salary towards a provident fund account. The employee can
access this fund upon retirement, resignation, or in case of specific emergencies. It serves as a
retirement savings and social security benefit for employees.
§ Employee State Insurance (ESI): The Employee State Insurance Act of 1948, mandates that
certain employers provide healthcare benefits to employees. Under this scheme, both
employees and employers contribute to the ESI fund. In return, employees are entitled to
medical benefits, including hospitalization, maternity, and disability benefits. The ESI scheme
ensures that employees have access to medical care, promoting their well-being and
productivity.

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§ Gratuity: The Payment of Gratuity Act of 1972, mandates that employers provide gratuity to
employees who have completed a certain period of continuous service (usually five years).
Gratuity is a lump sum amount paid to employees upon retirement, resignation, or death. It
serves as a form of financial security for employees.
§ Maternity Benefits: The Maternity Benefit Act of 1961, mandates that employers provide
maternity benefits to female employees. This includes paid leave during and after pregnancy, as
well as medical benefits. It aims to support the health and well-being of pregnant employees
and ensures job protection during maternity leave.
§ Employee Compensation Insurance: Under the Employee Compensation Act of 1923 (formerly
known as the Workmen's Compensation Act), employers are mandated to provide compensation
to employees in case of work-related injuries or accidents. This insurance provides financial
support to employees and their families in case of disabilities or fatalities due to workplace
accidents.
§ National Pension System (NPS): While not mandatory for all employees, the National Pension
System is a government-sponsored retirement savings scheme that allows individuals, including
employees, to invest in a pension account for their retirement. It offers tax benefits and provides
a source of retirement income.
§ Medical Insurance: While not mandated by law, many employers in India offer medical
insurance benefits to their employees. This includes coverage for hospitalization, medical
expenses, and sometimes coverage for family members. It enhances the overall well-being of
employees and their families.

These mandates ensure that employees receive financial security, access to healthcare, and
retirement benefits, contributing to their overall well-being and job satisfaction.

Now, let us learn about unemployment insurance and workers’ compensation.

Unemployment Insurance
Unemployment insurance (UI), also known as unemployment
benefits, is common in western countries. It is a form of
insurance provided by the state that disburses weekly
payments to individuals who have lost their jobs and meet
specific eligibility criteria.

Individuals who voluntarily resign or are terminated for a valid

reason are typically ineligible for UI. In simpler terms,
individuals who are separated from their employment due to
circumstances beyond their control and through no fault of
their own are typically eligible for unemployment benefits.

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Mandatory: Unemployment Insurance and
Workers’ Compensation
Unemployment insurance, also known as the Federal Unemployment Tax Act (FUTA), is a
requirement established under the Social Security Act of 1935. The primary objectives of this
program include providing financial assistance to employees facing involuntary unemployment,
facilitating job placement for workers, encouraging employers to maintain employment, and
enhancing the skills of laid-off workers.

The funding for this program primarily comes from payroll taxes paid by employers, amounting to
0.8 percent per employee. Although the tax rate is technically 6.2 percent of compensation,
employers receive a tax credit for these payments, resulting in a net rate of 0.8 percent.

Employees become eligible for unemployment benefits and potential job training if they are laid off
or involuntarily separated from their current employment. It's important to note that employees
who voluntarily resign from their jobs are not eligible for these benefits, as eligibility is contingent
upon involuntary job loss. Similar to the Social Security system, this payroll tax on employers is
obligatory.

Furthermore, some employers opt to provide workers' compensation benefits. In the event of a
workplace injury, employees may receive specific benefits, such as a portion of their regular pay.
Jobs are categorized into different risk levels, with the cost of insurance being higher for
occupations deemed riskier. While workers' compensation is not mandated at the federal level,
certain states and industries may require it for specific job roles.

Let us now be aware of the US’ Consolidated Omnibus Budget Reconciliation Act (COBRA).

COBRA
The Consolidated Omnibus Budget Reconciliation Act
(COBRA) is a significant federal legislation enacted in
1985 in the US. It offers the option of maintaining
group health insurance coverage to certain employees
and their families following a job loss or specific
qualifying events.

A qualifying event refers to a life-changing

circumstance that permits individuals to modify an
existing health insurance policy or enroll in a new one,
even when it's not during open enrollment periods.

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The COBRA is a federal statute that guarantees the entitlement to maintain health coverage for an
employee and their family in situations where health benefits would otherwise be terminated. If the
employee elects to do so, they can extend their group health benefits within their group health plan
for a specific duration.

In most instances, companies with a workforce of 20 or more employees in the preceding year are
obligated to provide COBRA when an employee faces circumstances that would lead to the
termination of their coverage. It's important to note that COBRA coverage generally comes at a
higher cost than what the individual would have paid while actively employed, and it does not
pertain to plans associated with the federal government or religious institutions.

When should one be mindful of the

Consolidated Omnibus Budget Reconciliation
Act (COBRA)?
There are specific situations in which a worker can make use of COBRA to maintain their healthcare
coverage. Some of these qualifying events include a reduction in work hours, the death of the
primary worker, voluntary or involuntary job loss, divorce, or a job transition. To be eligible, the
worker must have been enrolled in the employer's health plan prior to the qualifying event, and the
health plan must still be active for active employees.

What's essential to understand about the

Consolidated Omnibus Budget Reconciliation
Act (COBRA)?
Individuals who qualify for COBRA should be aware that their healthcare coverage won't remain
exactly the same as before.
There are certain differences to anticipate:
§ Typically, COBRA coverage spans from 18 to 36 months, depending on the specific
circumstances of the qualifying event.
§ Coverage may be terminated prematurely if premiums are not paid, the employer discontinues
the group health plan, a beneficiary becomes eligible for Medicare, or due to various other
reasons.
§ COBRA is not subsidized by the employer, so the worker may be required to pay up to 102% of
the cost, including administrative fees

Moving on, let us learn about the voluntary incentive pay system.

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A voluntary incentive pay system is a compensation approach where employees have the option to
participate in a program that provides additional pay or rewards based on their performance,
contributions, or achievements within the organization. Unlike mandatory incentive pay systems,
which require all employees to be part of the program, voluntary systems allow individuals to
choose whether or not they want to be involved.

Key features of a voluntary incentive pay system include:

§ Employee Choice: Employees can decide whether they want to participate in the incentive
program or not. They may opt in or opt out based on their preferences and career goals.
§ Performance-Driven Rewards: Incentive pay under this system is typically tied to specific
performance metrics, such as meeting sales targets, achieving project milestones, or
surpassing key performance indicators (KPIs). Employees who meet or exceed these criteria are
eligible for rewards.
§ Customization: Voluntary incentive systems often provide some degree of customization.
Employees may have the flexibility to choose from a range of performance metrics or select the
types of rewards they prefer (e.g., cash bonuses, gift cards, extra paid time off).
§ Motivation: The system is designed to motivate employees to excel in their roles by offering
them tangible rewards for outstanding performance. This can boost morale, engagement, and
productivity.
§ Alignment with Organizational Goals: Incentive programs are typically aligned with the
organization's strategic objectives, ensuring that employee efforts contribute to broader
company goals.
§ Transparency: To encourage participation, these programs are usually transparent about the
criteria for earning incentives and the potential rewards available. Employees understand what
is expected of them and what they can gain from their efforts.
§ Voluntary Nature: As the name suggests, participation in the incentive program is voluntary.
Employees are not obligated to join, and their decision to participate or not is based on their
individual motivations and circumstances.

Voluntary benefits are additional perks that employees can choose to enroll in, alongside the
standard benefits packages provided by their employers. Some instances of voluntary benefits
encompass life insurance, supplemental vision or dental coverage, as well as gym memberships.

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Medical Insurance
As the HR professional, it will typically be your responsibility to
select the healthcare plan that aligns best with the requirements
of your employees. There are various options to consider:

• Fee-for-service plans (Applicable in the US): Under this

plan, individuals initially cover their medical expenses from
their own pockets and subsequently receive reimbursement
based on the benefit level. For instance, if your insurance
plan includes doctor visits, you have the flexibility to consult
any doctor, settle the bill personally, and then seek
reimbursement from your insurer.

Generally, companies offer a foundational plan that covers major medical needs necessitating
hospitalization, while a separate component of the plan caters to routine services such as
doctor's appointments.
It's important to note that this type of plan has two potential drawbacks: the upfront costs for
employees and the potential delay in receiving reimbursements. It's crucial to keep in mind that
medical insurance can be instrumental in retaining and motivating employees, as well as
attracting new talent, so careful consideration of these disadvantages is essential.

• Health maintenance organizations (HMOs): HMOs usually provide more extensive coverage
compared to fee-for-service plans but come with restrictions on the choice of healthcare
providers for employees. There is often a limited pool of physicians and specialists available
within the network, and seeking care outside of the HMO network may result in out-of-pocket
expenses for employees. Most HMOs encompass a wide range of medical issues and typically
require employees to make co-payments. Some may also impose minimum deductibles that
must be met before full coverage kicks in.

• Preferred provider organization (PPO): PPOs share similarities with HMOs but offer employees
the flexibility to consult physicians outside of the network. This flexibility is especially valuable
when employees need specialized care, like dermatology services, from providers who may not
be part of the PPO network.

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Now, let us learn about voluntary 401(k) plans and paid time off.

401(k) plan
A 401(k) plan is a retirement account sponsored by a
company, allowing employees to allocate a portion of their
earnings, potentially matched by their employers.

The 401(k) plan, established by the United States Congress,

serves as an incentive for Americans to save for their
retirement and presents various tax benefits.
There are two primary options within this plan, each
carrying distinct tax advantages:

§ Traditional 401(k): In a traditional 401(k), employee contributions are deducted from their gross
income. This means that the funds are taken from their paychecks before income taxes are
applied. Consequently, the total contribution amount for the year reduces their taxable income
and can be claimed as a tax deduction for that particular tax year. Neither the contributed funds
nor the investment earnings are subject to taxation until withdrawal, typically during
retirement.
§ Roth 401(k): In a Roth 401(k), contributions are subtracted from an individual's after-tax income.
This implies that contributions are made with income that has already been taxed.
Consequently, there is no tax deduction in the year of contribution. However, when withdrawals
are made during retirement, no additional taxes are levied on the contributed amount or the
investment gains.

Note: Although contributions to a Roth 401(k) are made with post-tax funds, withdrawing funds
before the age of 59 1/2 can potentially result in tax implications. It is advisable to consult with an
accountant or a qualified financial advisor before making withdrawals from either a Roth or
Traditional 401(k).

However, it's important to note that not all employers provide the option of a Roth account. If the
Roth option is available, employees can choose between a traditional and Roth 401(k) or contribute
to both, up to the annual contribution limit.

Voluntary: Paid Time Off

It's crucial to address the topic of time off benefits, as these benefits can vary significantly,
particularly when comparing them to other regions of the world. For instance, French companies
are legally obligated to grant their employees five weeks of paid vacation time, as stipulated by
law. Conversely, in the United States, the allocation of days off is a significant budgetary
consideration.
Here are the primary categories of time off:

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Paid Holidays:
Many companies provide a predetermined number of paid holidays, such as New Year's Day, Holi,
Diwali, Christmas, and Independence Day.

Sick Leave:
The number of sick leave days varies widely among employers. On average, in the United States,
companies offer 8.4 paid sick days per year to their employees.

Paid Vacation
With full-time employment, most organizations include paid vacation as a standard component of
the compensation package. Organizations adopt varying methods for accruing vacation time. Some
grant one hour of vacation for each certain number of days worked, while others impose a waiting
period before employees begin earning paid time off (PTO). Moreover, some organizations permit
employees to carry forward unused vacation time from one year to the next, while others require
the utilization of vacation days annually, with no rollover option.

Paid Time Off (PTO)

Another approach is to offer a fixed number of days off, which employees can use for vacation,
holidays, and sick leave.
To encourage long-term commitment, certain organizations extend the option of paid sabbaticals
(e.g., 60 percent of salary paid) to their employees. For example, after five years of service, an
employee may be entitled to a one-month paid sabbatical.

References:

§ Publisher, A. R. a. R. O. O. (2016, March 22). 6.4 Other types of compensation. Pressbooks.

https://open.lib.umn.edu/humanresourcemanagement/chapter/6-4-other-types-of-compensation/
§ Hub International. (n.d.). consolidated-omnibus-budget-reconciliation-act.
https://www.hubinternational.com/insurance-glossary/c/consolidated-omnibus-budget-reconciliation-act/
§ What are voluntary benefits and why are they important? | ADP. (2022, October 20).
https://www.adp.com/resources/articles-and-insights/articles/v/voluntary-
benefits.aspx#:~:text=Voluntary%20benefits%20allow%20employers%20to,existing%20employees%20engaged%
20and%20productive.
§ Rudder, A. (2023, May 24). What are voluntary benefits? The ultimate guide. Forbes Advisor.
https://www.forbes.com/advisor/business/voluntary-benefits/