1

Functional Area 03

COMPENSATION AND
BENEFITS

International Human Resource Certification Institute

IHRCI® www.ihrci.org
 Associate Professional in Human Resources – International (aPHRi) Workbook

Module Three: Compensation and Benefits

2024 Edition

Copyright © 2024 by International Human Resource Certification Institute

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Table of Contents
Introduction ................................................................................................................................ 3
Table of Contents........................................................................................................................ 4
Part One: Pay Components ........................................................................................................ 6
1. Total Reward ................................................................................................................... 6
1.1. Pay ....................................................................................................................... 7
1.2. Benefits................................................................................................................ 8
1.3. Careers............................................................................................................... 10
1.4. Wellbeing ........................................................................................................... 10
2. Pay Design .................................................................................................................... 11
2.1. Job Structure ..................................................................................................... 11
2.2. Pay Level ............................................................................................................ 12
2.3. Pay Structure ..................................................................................................... 12
3. Legal Requirements for Pay .......................................................................................... 13
3.1. Equal Pay for Equal Work .................................................................................. 13
3.2. Minimum Wage ................................................................................................. 13
3.3. Overtime Pay ..................................................................................................... 14
3.4. Restriction on Child Labor ................................................................................. 14
4. Market Forces ............................................................................................................... 15
4.1. Product Markets ................................................................................................ 15
4.2. Labor Markets ................................................................................................... 16
5. Organization’s Goals ..................................................................................................... 16
5.1. External Competitiveness .................................................................................. 17
5.2. Internal Fairness ................................................................................................ 18
5.3. Direct and Indirect Compensations ................................................................... 18
6. Pay Level, Job Structure, and Pay Structure ................................................................. 19
6.1. Pay Level ............................................................................................................ 19
6.2. Job Structure ..................................................................................................... 20
6.3. Pay Structure ..................................................................................................... 22
7. Remuneration Surveys ................................................................................................. 27
7.1. Remuneration vs. Compensation ...................................................................... 28
7.2. Purposes of Remuneration Surveys .................................................................. 29
7.3. Market Select .................................................................................................... 29
7.4. Data Collect ....................................................................................................... 30
7.5. Data Analysis ..................................................................................................... 31
Part Two: Incentives and Benefits ............................................................................................ 34
1. Incentive Pay................................................................................................................. 34
1.1. Success Factors of Incentives ............................................................................ 34
1.2. Line of sight ....................................................................................................... 34
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1.3. Individual Incentives .......................................................................................... 35

1.4. Group Incentives ............................................................................................... 36
2. Individual Performance Pay Plans ................................................................................ 37
2.1. Merit Pay ........................................................................................................... 38
2.2. Piecework .......................................................................................................... 38
2.3. Sales compensation ........................................................................................... 39
2.4. Cash Award ........................................................................................................ 40
2.5. Recognition Programs ....................................................................................... 41
2.6. Standard Hour Plans .......................................................................................... 42
2.7. Performance Bonuses ....................................................................................... 42
3. Group Performance Pay Plans ...................................................................................... 42
3.1. Gainsharing........................................................................................................ 43
3.2. Profit Sharing ..................................................................................................... 43
3.3. Risk-Sharing Plans .............................................................................................. 44
3.4. Employee Stock Ownership Plans (ESOPs) ........................................................ 44
3.5. Performance-Sharing Plan ................................................................................. 44
4. Employee Benefits ........................................................................................................ 44
4.1. Legally required payments ................................................................................ 45
4.2. Retirement and Savings Plan Payments ............................................................ 46
4.3. Life Insurance and Death Benefits ..................................................................... 47
4.4. Health care and medical-related benefit payments.......................................... 48
4.5. Paid Rest Periods, Meal Break, Coffee breaks ................................................... 49
4.6. Pay for Time Not Worked .................................................................................. 49
4.7. Miscellaneous Benefits...................................................................................... 49
5. Work-Life Balance (WLB) Programs .............................................................................. 51
5.1. Caring for Dependents ...................................................................................... 51
5.2. Health and Wellness .......................................................................................... 52
5.3. Flexible Workplace ............................................................................................ 52
5.4. Financial Support ............................................................................................... 53
5.5. Paid and Unpaid Time Off ................................................................................. 54
5.6. Community Involvement ................................................................................... 54
5.7. WLB Culture....................................................................................................... 55
6. Payroll ........................................................................................................................... 55
6.1. Payroll processing .............................................................................................. 55
6.2. Components of Payroll ...................................................................................... 56
6.3. Payroll System.................................................................................................... 58
6.4. Payroll Outsourcing ........................................................................................... 58
Reference.......................................................................................................................... 60
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Part One: Pay Components

1. Total Reward
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.
Getting Total Rewards right can mean the difference between competing effectively in the
global talent marketplace and being left behind. A consumer-grade Total Rewards portfolio
of pay, benefits, wellbeing and career programs serves as a catalyst, driving attraction,
retention and engagement of talent essential to your business success. Yet, in many
organizations, Total Rewards are not evolving quickly enough to keep pace with the new
world of work.

Source: Willis Towers Watson Total Rewards Model (2021)

HR should analyze business strategy, plan and performance, among other items, and
combine these with market and employee insights to inform your Total Rewards philosophy,
strategy and subsequent design and implementation decisions for delivery. Once the desired
future state of Total Rewards is established, it is possible to define a Total Rewards approach
for different talent segments (e.g. critical talent) and develop a differentiated Total Rewards
portfolio and talent experience for those segments.
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A Total Rewards strategy can help organizations vary spend and allocation of their total
budget in line with business needs and financial constraints. At the same time, employers
can better align rewards with employee preferences to get the best value, promote specific
behaviors and drive higher productivity.
The right strategy can help you reimagine your Total Rewards portfolio, inspiring your
workforce and fueling the growth of your organization. HR should emphasis an approach to
strategy development and delivery that treats employees as consumers and includes all Total
Rewards elements:
1.1. Pay
Addressing global and region-specific pay challenges; balancing fixed and variable pay,
aligning pay to the external market and to support gender equity, legislative change
and the rapidly evolving landscape of work.
1.1.1. 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.
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.

• The bottom line to fixed pay practices need to be based on a competitive strategy
for each country.
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.
1.1.2. 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
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human resources of the specific organization incentive plans are devised and the
specific mode of incentive is decided.
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.
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.
Profit-Sharing Plans: 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.
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.
1.2. Benefits
Optimizing the benefit portfolio, financing, delivery and employee experience to meet
evolving talent and organizational needs.
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.
1.2.1. 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
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gaps in coverage.
1.2.2. 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.
1.2.3. Retirement and Investment Plans
Attract experienced employees in a very competitive job market: Retirement plans
have become a key part of the total compensation package. A troubled global economy
paired with longer life expectancies is forcing many to continue to work far past the
age they imagined because of a lack of sufficient savings. This shortfall has spurred
many governments to increase the age when citizens can receive money from social
security plans in an effort to minimize the number of people in the system.
1.2.4. Other benefits

• Housing Allowance

• Transportation Allowance

• Meal Allowance

• Phone Allowance

• Training Allowance
1.2.5. 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.
1.2.6. 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
10

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.
1.3. Careers
Transitioning from career management to career enablement through agile,
personalized experiences that optimize organizational and individual needs. Therefore,
“Performance & Recognition” and “Development & Career Opportunities” is required
for career management.
1.3.1. 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.).
1.3.2. 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.
1.4. Wellbeing
Addressing the full wellbeing spectrum: physical, emotional, social and financial
challenges and opportunities. Wellbeing is not an isolated program or initiative.
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Wellbeing is purpose-driven and woven into the fabric of an organization’s values and
the employee experience. It is inextricably linked to a myriad of policies, programs and
benefit offerings as well as to desired culture, productivity improvement, longer-term
organizational talent retention and sustainability of business results. Integrated
wellbeing incorporates four key dimensions:
1.4.1. Physical wellbeing
To thrive physically means understanding and managing one’s health, taking
appropriate preventive measures, improving health status where needed, managing
chronic conditions, navigating and recovering from an acute illness or unexpected
injury and successfully returning to peak functionality at home and at work.
1.4.2. Emotional wellbeing
Being emotionally balanced means being self-aware, maintaining good mental health,
being resilient by managing stress, coping with positive and negative emotional
triggers, dealing with life crises and maintaining stability through illness or injury.
1.4.3. Financial wellbeing
Achieving the state of being financially secure means having the ability to manage
budgetary commitments, meet financial goals, protect against risks, save for
contingencies or future needs like college or retirement and cope with financial shocks.
1.4.4. Social wellbeing
Social wellbeing is about being connected by understanding how to interact well with
others by accepting diversity, being inclusive, knowing how to support and collaborate
with others, being able to successfully resolve conflicts and adapting to change. Being
connected applies across one’s family and friends, one’s workplace and the larger
community.
2. Pay Design
Because pay is important both in its effect on employees and on account of its cost,
organizations need to plan what they will pay employees in each job. An unplanned
approach, in which each employee’s pay is independently negotiated, will likely result in
unfairness, dissatisfaction, and rates that are either overly expensive or so low that
positions are hard to fill. Organizations therefore make decisions about two aspects of pay
structure: job structure and pay level.
2.1. Job Structure
Job structure consists of the relative pay for different jobs within the organization. It
establishes relative pay among different functions and different levels of
responsibility. For example, job structure defines the difference in pay between an
entry level accountant and an entry level assembler, as well as the difference between
an entry—level accountant, the accounting department manager, and the
organization’s comptroller.
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2.2. Pay Level

Pay level is the average amount (including wages, salaries, and bonuses) the
organization pays for a particular job. Together, job structure and pay levels establish
a pay structure that helps the organization achieve goals related to employee
motivation, cost control, and the ability to attract and retain talented human
resources.
2.3. Pay Structure
The organization’s job structure and pay levels are policies of the organization rather
than the amount a particular employee earns. For example, an organization’s pay
structure could include the range of pay that a person may earn in the job of entry—
level accountant. An individual accountant could be earning an amount anywhere
within that range. Typically, the amount a person earns depends on the individual’s
qualifications, accomplishments, and experience. The individual’s pay may also
depend partly on how well the organization performs.
Especially in an organization with hundreds or thousands of employees, it would be
impractical for managers and the human resource department to make an entirely
unique decision about each employee’s pay. The decision would have to weigh so
many factors that this approach would be expensive, difficult, and often
unsatisfactory. Establishing a pay structure simplifies the process of making decisions
about individual employees’ pay by grouping together employees with similar jobs.
As shown in the following Figure, HR professionals develop this pay structure based
on legal requirements, market forces, and the organization’s goals, such as attracting
a high— quality workforce and meeting principles of fairness.

Noe, R.A., Hollenbeck, J.R., Gerhart, B., & Wright, P.M. (2018) Fundamentals of Human
Resource Management (Seventh Edition). New York, NY: McGraw-Hill.
 13

3. Legal Requirements for Pay

Pay policies and practices in many countries are subject to their government laws and
regulations. For example, just as competing businesses may not conspire to set prices,
they may not conspire to set wage rates. In addition, government regulation affects pay
structure in the areas of equal employment opportunity, minimum wages, pay for
overtime, and prevailing wages for federal contractors. All of an organization’s decisions
about pay should comply with the applicable laws.

Noe, R.A., Hollenbeck, J.R., Gerhart, B., & Wright, P.M. (2018) Fundamentals of Human
Resource Management (Seventh Edition). New York, NY: McGraw-Hill.

3.1. Equal Pay for Equal Work

In many countries, employers may not base differences in pay on an employee’s age,
sex, race, or other protected status. Any differences in pay must instead be tied to
such business—related considerations as job responsibilities or performance. The
goal is for employers to provide equal pay for equal work. Job descriptions, job
structures, and pay structures can help organizations demonstrate that they are
upholding these laws.
3.2. Minimum Wage
In many countries, employers must pay at least the minimum wage established by
law. (A wage is the rate of pay per hour.) Some countries or states have laws
specifying minimum wages in these states, employers must pay whichever rate is
higher. From the standpoint of social policy, an issue related to the minimum wage is
that it tends to be lower than the earnings required for a full-time worker to rise
above the poverty level. A number of cities have therefore passed laws requiring a
so-called living wage, essentially a minimum wage based on the cost of living in a
particular region.
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3.3. Overtime Pay

Overtime refers to time worked in addition to regular paid work hours. It is an extra
time worked beyond the normal hours of employment or the payment for extra time
worked. In many countries, overtime pay is required, whether or not the employer
specifically asked or expected the employee to work more than regular hours. In
other words, if the employer knows the employee is working overtime but does not
pay time and a half, the employer may be violating the labor laws.
3.3.1. Exempt employees
Not everyone is eligible for overtime pay. In the U.S., executive, professional,
administrative, and highly compensated white-collar employees are considered
exempt employees, meaning employers need not pay them one and a half times their
regular pay for working more than 40 hours per week. Exempt status depends on the
employee’s job responsibilities, salary level, and “salary basis,” meaning that the
employee is paid a given amount regardless of the number of hours worked or quality
of the work. Paying an employee on a salary basis means the organization expects
that this person can manage his or her own time to get the work done, so the
employer may deduct from the employee’s pay only in certain limited circumstances,
such as disciplinary action or for unpaid leave for personal reasons. Additional
exceptions apply to certain occupations, including outside salespersons, teachers,
and computer professionals in the U.S.
3.3.2. Non-exempt employees
Any employee who is not in one of the exempt categories is called a nonexempt
employee. Most workers paid on an hourly basis are nonexempt and therefore
subject to the laws governing overtime pay. However, paying a salary does not
necessarily mean a job is exempt.
3.4. Restriction on Child Labor
A majority of countries have adopted legislation to prohibit or place severe
restrictions on the employment and work of children, much of it stimulated and
guided by standards adopted by the International Labour Organization (ILO).
According to ILO, minimum age of admission to employment and work as below:
3.4.1. Hazardous work
Any work which is likely to jeopardize children’s physical, mental or moral health,
safety or morals should not be done by anyone under the age of 18.
3.4.2. Basic Minimum Age
The minimum age for work should not be below the age for finishing compulsory
schooling, and in any case not less than 15 (possible exceptions for developing
countries is 14 old).
3.4.3. Light work
Children between the ages of 13 and 15 years old (possible exceptions for developing
 15

countries are 12-14 years old) may do light work, as long as it does not threaten their
health and safety, or hinder their education or vocational orientation and training.
4. Market Forces
An organization cannot make spending decisions independent of the economy.
Organizations must keep costs low enough that they can sell their products profitably, yet
they must be able to attract workers in a competitive labor market. Decisions about how
to respond to the economic forces of product markets and labor markets limit an
organization’s choices about pay structure.

4.1. Product Markets

The organization’s product market includes organizations that offer competing goods
and services. In other words, the organizations in a product market are competing to
serve the same customers. To succeed in their product markets, organizations must be
able to sell their goods and services at a quantity and price that will bring them a
sufficient profit. They may try to win customers by being superior in a number of areas,
including quality, customer service, and price. An important influence on price is the
cost to produce the goods and services for sale. The cost of labor is a significant part of
an organization’s costs. If an organization’s labor costs are higher than those of its
competitors, it will be under pressure to charge more than competitors charge for
similar products.
Product markets place an upper limit on the pay an organization will offer. This upper
limit is most important when labor costs are a large part of an organization’s total costs
and when the organization’s customers place great importance on price. Organizations
that want to lure top—quality employees by offering generous salaries therefore have
to find ways to automate routine activities (so that labor is a smaller part of total costs)
or to persuade customers that high quality is worth a premium price. Organizations
under pressure to cut labor costs may respond by reducing staff levels, freezing pay
levels, postponing hiring decisions, or requiring employees to bear more of the cost of
benefits such as insurance premiums.
16

4.2. Labor Markets

Besides competing to sell their products, organizations must compete to obtain human
resources in labor markets. In general, workers prefer higher-paying jobs and avoid
employers that offer less money for the same type of job. In this way, competition for
labor establishes the minimum an organization must pay to hire an employee for a
particular job. If an organization pays less than the minimum, employees will look for
jobs with other organizations.
An organization’s competitors in labor markets typically include companies with similar
products and companies in other industries that hire similar employees. For example, a
truck transportation firm would want to know the pay earned by truck drivers at
competing firms as well as truck drivers for manufacturers that do their own shipping,
drivers for moving and storage companies, and drivers for stores that provide delivery
services. In setting pay levels for its bookkeepers and administrative assistants, the
company would probably define its labor market differently be— cause bookkeepers
and administrative assistants work for most kinds of businesses. The company would
likely look for data on the earnings of bookkeepers and administrative assistants in the
region. For all these jobs, the company wants to know what others are paying so that it
will pay enough to attract and keep qualified employees.
5. Organization’s Goals
Although labor and product markets limit organizations’ choices about pay levels, there is
a range within which organizations can make decisions. The size of this range depends on
the details of the organization’s competitive environment. If many workers are competing
for a few jobs, employers will have more choice. Similarly, employers can be more flexible
about pay policies if they use technology and work design to get better results from
employees than their competitors do.

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.
 17

When organizations have a broad range in which to make decisions about pay, they can
choose to pay at, above, or below the rate set by market forces. Economic theory holds
that the most profitable level, all things being equal, would be at the market rate. Often,
however, all things are not equal from one employer to another. For instance, an
organization may gain an advantage by paying above the market rate if it uses the higher
pay as one means to attract top talent and then uses these excellent employees’
knowledge to be more innovative, produce higher quality, or work more efficiently.
5.1. External Competitiveness
To compete for talent, organizations use benchmarking, a procedure in which an
organization compares its own practices against those of successful competitors. In
terms of compensation, benchmarking involves the use of pay surveys. These provide
information about the going rates of pay at competitors in the organization’s product
and labor markets.
Pay surveys are available for many kinds of industries (product markets) and jobs (labor
markets). Besides the government’s labor statistics, the most widely used sources of
compensation information include HR organizations such as WorldatWork in the U.S. In
addition, many organizations, especially large ones, purchase data from consulting
groups such as Mercer, Willis Towers Watson, and Aon Hewitt. Consulting firms charge
for the service but can tailor data to their clients’ needs. Employers also should
investigate what compensation surveys are available from any industry or trade groups
their company belongs to.
Human resource professionals need to determine whether to gather data focusing on
particular industries or on job categories. Industry—specific data are especially relevant
for jobs with skills that are specific to the type of product. For jobs with skills that can be
transferred to companies in other industries, surveys of job classifications will be more
relevant.
HR professionals should consider the following features when determining the quality of
a survey:
5.1.1. Cost.
All quality surveys cost something, but participants in a survey may enjoy a significantly
reduced purchase rate. HR professionals must budget for an annual expenditure on an
investment in salary surveys.
5.1.2. Participants.
Surveys should have an easily accessible list of participating organizations, so the
consumer can determine whether the survey group is relevant from a recruitment and
retention perspective. Ideally, the survey will demonstrate a low level of "participant
churn" and have enough participants to allow reporting of market rates. Typically,
surveys do not report market rates unless at least five data points are available to
calculate percentile information. For some metropolitan areas with lower participation,
surveys are periodically unable to report market rates. By and large, however, the
survey should have enough participation to provide market rates at the national,
metropolitan and various revenue levels.
18

5.1.3. Currency.
Most organizations specializing in salary surveys conduct them annually to capture
changes in the market. Some trade and professional organizations, however, may survey
their members only every other year or every third year. HR should make sure that a
survey more than a year old provides enough value and accurately reflects the market
before including it in the analysis.
5.2. Internal Fairness
In developing a pay structure, it is important to keep in mind employees’ opinions about
fairness. After all, one of the purposes of pay is to motivate employees, and they will
not be motivated by pay if they think it is unfair.
An organization can do much to contribute to what employees know and, as a result,
what they perceive. If the organization researches salary levels and concludes that it is
paying its employees generously, it should communicate this. If the employees do not
know what the organization learned from its research, they may reach an entirely
different conclusion about their pay.
Employers should recognize that as work becomes more collaborative and the emphasis
on knowledge sharing increases, it grows ever more likely that the shared knowledge
includes information about pay. Employers must also recognize that employees know
much more about what other employers pay now than they did before the Internet
became popular. In the past, when gathering wage and salary data was expensive and
diff cult, employers had more leeway in negotiating with individual employees.
Managers play the most significant role in communication because they interact with
their employees each day. The HR department should prepare them to explain why the
organization’s pay structure is designed as it is and to judge whether employee
concerns about the structure indicate a need for change.
5.3. Direct and Indirect Compensations
Employers must design a comprehensive system to reward employees for their hard
work. Components of these systems most often include:
5.3.1. Direct compensation
Payments made to employees to include base salary. Direct pay includes exempt
(employees who are exempt from overtime wage laws) and nonexempt (hourly paid)
workers, and may be tied to minimum wage. Laws and other regulated components of
direct pay programs.
5.3.2. Indirect compensation
All other rewards not associated with direct pay, including incentives, inducements,
time-off benefits such as sick time or holiday pay, and pension plan payments.
 19

6. Pay Level, Job Structure, and Pay Structure

6.1. Pay Level
Pay Level is fundamental unit in compensation structure of an organization, which is
used to denote difference in compensation due to smallest possible change in job
specification. Pay level generally rises along with the rise in hierarchy of an organization.
The pay is determined by the level of job, accountability, responsibility, position, or
experience in the company.
6.1.1. Close Pay Levels
When pay level are close, then difference in two job level in terms of job specification
becomes very thin. Due to this people gets promotion very easily as there are less
differentiation in two job levels. This structure acts as motivation to retain staff.
6.1.2. Wide Pay level
In this pay structure, pay levels are separated by wide difference in job specification.
Due to this person tend to be in same level for longer time period. People might be
given increments but changing level will require specific performance as required by job
specification.
6.1.3. Market Pay Level
Organizations can lead, lag or match the market at various levels of market position by
using a fixed percentile position or a fixed percentage above or below a point. For
instance, an organization can build its position at 10 percent above the 50th percentile
by increasing the survey rates by 10 percent. Spreadsheet programs afford the user
robust data analysis capabilities and rapid "what if" scenario modeling.
To determine the appropriate percentile to use when reviewing market data, HR should
consider the employer's compensation philosophy:
Matching the market. To target the 50th percentile means that an organization wants
to pay in the middle of all organizations that have a similar position. In other words, 50
percent of the organizations should be paying less than that market rate, and 50 percent
should be paying more than the market rate. "Matching the market" is the formal name
for this approach.
Market leader. If an organization chooses to focus on the 75th percentile and take a
"market leader" position, it will pay higher than 75 percent of other organizations with
similar positions. Organizations competing for employees with specialized skill sets in a
tight labor market or organizations that want to be a high payer in the market typically
select a market leader position. Organizations with less robust variable compensation or
benefits programs may also select a market leader base pay position to end up with an
overall 50th percentile total compensation program.
Market lag. If an organization chooses to focus on the 25th percentile and take a
"market lag" position, it will pay higher than only 25 percent of other organizations with
similar positions. Organizations with strong variable compensation or benefits
programs, or those encountering financial difficulties, may opt for a market lag position.
20

Lead-lag. As an additional variation, some organizations may choose to lead the base
pay market for the beginning of the fiscal year and then lag at the end of that year.
"Lead-lag" is the formal name for this approach to base pay management.
6.2. Job Structure
Along with market forces and principles of fairness, organizations consider the relative
contribution each job should make to the organization’s overall performance. In
general, an organization’s top executives have a great impact on the organization’s
performance, so they tend to be paid much more than entry—level workers. Executives
at the same level of the organization—for example, the vice president of marketing and
the vice president of information systems—tend to be paid similar amounts. Creation of
a pay structure requires that the organization develop an internal structure showing the
relative contribution of its various jobs.
One typical way of doing this is with a job evaluation, an administrative procedure for
measuring the relative worth of the organization’s jobs. Job evaluations provide the
basis for decisions about relative internal worth. Pricing jobs is a complex process that
requires dedication and skill. There are a few widely accepted methods HR may draw
upon to complete the task with confidence:
6.2.1. Point method
This method depends upon the identification of compensable factors shared by jobs in a
job family and assigns a weight (point) to each factor. These points have an assigned
value based on skill, responsibility, effort, working conditions, knowledge, degree of
problem solving, levels of importance, or any other job-content- based factor. Point
factors are also called “compensable factors.” A compensable factor is any skill,
responsibility, effort or physical demand for which an employer is willing to pay an
employee. The purpose of the point system is to quantify individual elements of a job.
6.2.2. Ranking
The job ranking method of evaluation places jobs in order of importance from highest to
lowest. The most important job has the highest salary.
6.2.3. Classification
In this method of evaluation, job classes are created by grouping positions with
common characteristics. The job classes are then graded, with a minimum and
maximum pay established for employee salaries. The job classifications are then
referred to as grade 1 or grade 2, with shared educational or experiential characteristics
defined and valued.
6.2.4. Factor comparison
This model is a complicated hybrid of the ranking and point job evaluation methods. It
involves ranking each job using compensable factors, and then assigning a monetary
value to each factor to build a pay rate for each job.
 21

Reed, S.M. (2017). A Guide to the Human Resource Body of Knowledge (HRBoK).
Hoboken, New Jersey: John Wiley & Son.

Once an employer feels confident that it has current and accurate job descriptions, it
should determine whether to group the jobs into separate job families or have one pay
grade system for all positions throughout the organization. For example, an organization
may have an administrative job family, technical job family, management job family and
executive job family. It may have different job families based on geographic locations
(different countries or regions) or different divisions.
A "job family" is a group of jobs involving similar types of work and requiring similar
training, skills, knowledge, and expertise. The job family concept helps organize related
jobs and is particularly useful when job titles vary across the organization. Job family can
be used by managers, staff and Human Resources to:

• Define career development opportunities for staff within a current or another job
family

• Facilitate career planning discussions, clarify the need for specific training, and
assist staff members considering course enrollment and career advancement

• Comply with mandated affirmative action reporting, job applicant tracking, and
associated data analysis

• Obtain accurate market pricing through greater understanding of job content and
job requirements

• Ensure greater consistency in job evaluations through the comparison of similar

jobs within the same job family

• In addition, the HR or Compensation department can use job family information to

assist department managers with questions regarding internal equity and/or
external competitiveness.
22

6.3. Pay Structure

As we described above, the pay structure reflects decisions about how much to pay
(pay level) and the relative value of each job (job structure). The organization’s pay
structure should reflect what the organization knows about market forces, as well as its
own unique goals and the relative contribution of each job to achieving the goals. By
balancing this external and internal information, the organization’s goal is to set levels
of pay that employees will consider equitable and motivating.
Organizations typically apply the information by establishing some combination of pay
rates, pay grades, and pay ranges. Within this structure, they may state the pay in terms
of a rate per hour, commonly called an hourly wage; a rate of pay for each unit
produced, known as a piecework rate; or a rate of pay per month or year, called a
salary.
6.3.1. Pay Rates
If the organization’s main concern is to match what people are earning in comparable
jobs, the organization can base pay directly on market research of as many of its key
jobs as possible. To do this, the organization looks for survey data for each job title. If it
finds data from more than one survey, it must weigh the results based on their quality
and relevance. The final number represents what the competition pays. In light of that
knowledge, the organization decides what it will pay for the job.
As illustrated on the following figure, the vertical axis shows a range of possible pay
rates, and the horizontal axis measures the points from the job evaluation. The analyst
plots points according to the job evaluation and pay rate for each key job. Finally, the
analyst fits a line, called a pay policy line, to the points plotted. (This can be done
statistically on a computer, using a procedure called regression analysis.)
Mathematically, this line shows the relationship between job evaluation and rate of pay.
Thus, the line slopes upward from left to right, and if higher-level jobs are especially
valuable to the organization, the line may curve upward to indicate even greater pay for
high-level jobs.
Using this line, the analyst can estimate the market pay level for a given job evaluation.
Looking at the graph will give approximate numbers, or the regression analysis will
provide an equation for calculating the rate of pay. For example, using the pay policy
line in the following Figure, a job with 315 evaluation points would have a predicted
salary of $6,486 per month.
 23

Noe, R.A., Hollenbeck, J.R., Gerhart, B., & Wright, P.M. (2018) Fundamentals of Human
Resource Management (Seventh Edition). New York, NY: McGraw-Hill.

The pay policy line reflects the pay structure in the market, which does not always
match rates in the organization. Survey data may show that people in certain jobs are
actually earning significantly more or less than the amount shown on the pay policy
line. For example, some kinds of expertise are in short supply. People with that
expertise can command higher salaries because they can easily leave one employer to
get higher pay somewhere else. Suppose, in contrast, that local businesses have laid off
many warehouse employees. Because so many of these workers are looking for jobs,
organizations may be able to pay them less than the rate that job evaluation points
would suggest.
When job structure and market data conflict in these ways, organizations have to de—
side on a way to resolve the two. One approach is to stick to the job evaluations and
pay according to the employees’ worth to the organization. Organizations that do so
will be paving more or less than they have to, so they will likely have more difficulty
competing for customers or employees. A way to moderate this approach is to consider
the importance of each position to the organization’s goals. If a position is critical for
meeting the organization’s goals, paying more than competitors pay may be
worthwhile.
At the other extreme, the organization could base pay entirely on market forces.
However, this approach also has some practical drawbacks. One is that employees may
conclude that pay rates are unfair. Two vice presidents or two supervisors will expect to
receive similar pay because their responsibilities are similar. If the differences between
their pay are large, because of different market rates, the lower-paid employee will
likely be dissatisfied. Also, if the organization’s development plans include rotating
managers through different assignments, the managers will be reluctant to participate
24

if managers in some departments receive lower pay. Organizations therefore must

weigh all the objectives of their pay structure to arrive at suitable rates.
6.3.2. Pay Grades
A large organization could have hundreds or even thousands of different jobs. Setting a
pay rate for each job would be extremely complex. Therefore, many organizations
group jobs into pay grades—sets of jobs having similar worth or content, grouped
together to establish rates of pay For example, the organization could establish five pay
grades, with the same pay available to employees holding any job within the same
grade.

Tower Watson Global Grading System

A pay grade or pay scale is a step within a compensation system that defines the
amount of pay an employee will receive. The pay grade is generally defined by the level
of the responsibilities performed within the job description of the position, the
authority exercised by the position, and the length of time the employee has performed
the job.
Pay grades provide a framework for compensation by defining the amount of pay
available at each step in the employment process. Pay grades take the place of salary
negotiation, particularly in public sector employment where fairness trumps
contribution. Pay grades are also typical of union-represented positions.
A drawback of pay grades is that grouping jobs will result in rates of pay for individual
jobs that do not precisely match the levels specified by the market and the
organization’s job structure.

Organizations have responded to these problems with a number of alternatives to job-

 25

based pay structures. Some organizations have found greater flexibility through
delayering, or reducing the number of levels in the organization’s job structure. By
combining more assignments into a single layer, organizations give managers more
flexibility in making assignments and awarding pay increases. These broader groupings
often are called broad bands.
Broadband salary structures are more flexible and consolidate pay grades into fewer
structures with wider salary ranges. Broadband structures tend to be used by relatively
flat organizations with few levels and small companies without a dedicated
compensation staff to establish traditional structures.
6.3.3. Pay Ranges
Usually, organizations want some flexibility in setting pay for individual jobs. They want
to be able to pay the most valuable employees the highest amounts and to give
rewards for performance, as described in the next chapter. Flexibility also helps the
organization balance conflicting information from market surveys and job evaluations.
Therefore, pay structure usually includes a pay range for each job or pay grade. In other
words, the organization establishes a minimum, maximum, and midpoint of pay for
employees holding a particular job or a job within a particular pay grade. Employees
holding the same job may receive somewhat different pay, depending on where their
pay falls within the range.

Noe, R.A., Hollenbeck, J.R., Gerhart, B., & Wright, P.M. (2018) Fundamentals of Human
Resource Management (Seventh Edition). New York, NY: McGraw-Hill.

A typical approach is to use the market rate or the pay policy line as the midpoint of a
range for the job or pay grade. The minimum and maximum values for the range may
also be based on market surveys of those amounts.
26

Usually pay ranges overlap somewhat, so that the highest pay in one grade is somewhat
higher than the lowest pay in the next grade. Overlapping ranges gives the organization
more flexibility in transferring employees among jobs, because transfers need not
always involve a change in pay. On the other hand, the less overlap, the more important
it is to earn promotions in order to keep getting raises. Assuming the organization
wants to motivate employees through promotions (and assuming enough opportunities
for promotion are available), the organization will want to limit the overlap from one
level to the next.
6.3.4. Pay Differentials
In some situations organizations adjust pay to reflect differences in working conditions
or labor markets. For example, an organization may pay extra to employees who work
the night shift because night hours are less desirable for most workers. Similar
organizations may pay extra to employees in locations where living expenses are higher.
These adjustments are called pay differentials.
Usually, the human resource department is responsible for establishing the
organization’s pay structure. But building a structure is not the end of the organization’s
decisions about pay structure. The structure represents the organization’s policy, but
what the organization actually does may be different. As part of its management
responsibility, the HR department therefore should compare actual pay to the pay
structure, making sure that policies and practices match.
A common way to do this is to measure a compa-ratio, the ratio of average pay to the
midpoint of the pay range. The following Figure shows an example. Assuming the
organization has pay grades, the organization would find a compa—ratio for each pay
grade: the average paid to all employees in the pay grade divided by the midpoint for
the pay grade. If the average equals the midpoint, the compa-ratio. More often, the
compa-ratio is somewhat above 1 (meaning the average pay is above the midpoint for
the pay grade) or below 1 (meaning the average pay is below the midpoint).

Noe, R.A., Hollenbeck, J.R., Gerhart, B., & Wright, P.M. (2018) Fundamentals of Human
Resource Management (Seventh Edition). New York, NY: McGraw-Hill.
 27

Assuming that the pay structure is well planned to support the organization’s goals, the
compa-ratios should be close to 1. A compa-ratio greater than 1 suggests that the
organization is paying more than planned for human resources and may have difficulty
keeping costs under control. A compa-ratio less than 1 suggests that the organization is
underpaying for human resources relative to its target and may have difficulty attracting
and keeping qualified employees. When compa-ratios are more or less than 1, the
numbers signal a need for the HR department to work with managers to identify
whether to adjust the pay structure or the organization’s pay practices. The compa-
ratios may indicate that the pay structure no longer reflects market rates of pay.
6.3.5. Skill-Based Pay
Another way organizations have responded to the limitations of job-based or
competency-based pay has been to move away from the link to jobs and toward pay
structures that reward employees based on their knowledge and skills.20 Skill-based
pay systems are pay structures that set pay according to the employees’ level of skill or
knowledge and what they are capable of doing. Paying for skills makes sense at
organizations where changing technology requires employees to continually widen and
deepen their knowledge. For example, modern machinery often requires that operators
know how to program and monitor computers to perform a variety of tasks.
Skill-based pay also supports efforts to empower employees and enrich jobs because it
encourages employees to add to their knowledge so they can make decisions in many
areas. In this way, skill-based pay helps organizations become more flexible and
innovative. More generally, skill-based pay can encourage a climate of learning and
adaptability and give employees a broader view of how the organization functions.
These changes should help employees use their knowledge and ideas more
productively.
Of course, skill-based pay has its own disadvantages. It rewards employees for acquiring
skills but does not provide a way to ensure that employees can use their new skills. The
result may be that the organization is paying employees more for learning skills that the
employer is not benefiting from. The challenge for HRM is to design work so that the
work design and pay structure support each other. Also, if employees learn skills very
quickly, they may reach the maximum pay level so quickly that it will become difficult to
reward them appropriately. Skill-based pay does not necessarily provide an alternative
to the bureaucracy and paperwork of traditional pay structures because it requires
records related to skills, training, and knowledge acquired. Finally gathering market
data about skill-based pay is difficult because most wage and salary surveys are job-
based.
7. 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.
28

7.1. Remuneration vs. Compensation

The term "remuneration" means compensation or pay, but it has a broader meaning
than pay because it can include not just base salary or bonuses but commissions and
other payments or benefits paid under the terms of an employment contract as well.
Compensation, ideally, refers to a form of monetary payment for either the
performance of some work or service or as a recompense for a damage or injury
suffered. It is, therefore, of a financial nature.
In contrast, Remuneration is a broader term and refers not only to monetary payment
for the performance of a work or service, but also includes non-monetary payments
such as medical insurance, family support, housing, transport, pension schemes and/or
other retirement benefits. Ideally, it is inclusive of Compensation paid to an employee
for damage or injury suffered by the employee.
7.1.1. Compensation
The term Compensation is defined as something of value given in exchange for some
other thing. Compensation can occur in two instances. The first instance refers to the
monetary payment paid to someone for work carried out by that person. The second
instance refers to the monetary payment given to a person who has suffered a loss or
injury. The first instance represents an ideal employer-employee scenario. Thus,
Compensation can refer to the payment given to an employee for his/her services or
work performed. This type of Compensation is typically in the form of a salary or
wages. The second instance can also be present in an employee setting. If the
employee suffers any harm or injury as a result of performing work for the employer,
then the employer will pay that Worker Compensation.
Compensation can also include other forms of payment such as overtime payment,
bonuses, payment to cover medical costs, and other miscellaneous payments. Some
sources have defined Compensation to also include non-monetary payments. However,
this definition will not really distinguish Compensation from Remuneration as we will
see below. In the law too, Compensation refers to a form of monetary payment
provided to a person who has suffered damage, harm, or injury. As mentioned before,
Compensation is best understood as a monetary payment.
7.1.2. Remuneration
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.
 29

7.2. Purposes of Remuneration Surveys

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. The purposes of
remuneration survey are:

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

Gerhart, B., Newman, J., Milkovich, G. (2022). Compensation. (14th Edition). McGraw Hill
Education.

7.2.1. Adjust the pay level in response to changing rates paid by competitors.
7.2.2. Set the mix of pay forms relative to that paid by competitors.
7.2.3. Establish or price a pay structure.
7.2.4. Analyze pay-related problems.
7.2.5. Estimate the labor costs of product/service market competitors
7.3. Market Select
To determine the prevailing rate for a job, companies can "benchmark" jobs against
30

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:
7.3.1. For same occupations or skills.
7.3.2. For employees in same geographic area.
7.3.3. With same products and services
7.4. 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:
7.4.1. Government sources (e.g., ministries of labor or government statistical offices.
7.4.2. International organizations (e.g., the International Labor Organization).
7.4.3. Private firms (e.g., consulting organizations around the world that provide
current global and local information for a fee).
7.4.4. Membership-based business organizations (e.g., employer federations and local
chambers of commerce).
7.4.5. 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.

• 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.
 31

• 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
precise market.
7.5. Data Analysis
7.5.1. Effective Date
For those surveys conducted on a regular basis, such as annual surveys, the effective
32

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.
7.5.2. 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.
7.5.3. Geographic area
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.
7.5.4. Compensation data.
There are many things to consider when analyzing the compensation components of a
 33

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.
34

Part Two: Incentives and Benefits

1. Incentive Pay
In contrast to decisions about pay structure, organizations have wide discretion in setting
performance-related pay, called incentive pay. Organizations can tie incentive pay to
individual performance, profits, or many other measures of success. They select incentives
based on their costs, expected influence on performance, and fit with the organization’s
broader HR and company policies and goals. These decisions are significant.
Along with wages and salaries, many organizations offer incentive pay—that is, pay
specifically designed to energize, direct, or maintain employees’ behavior. Incentive pay is
influential because the amount paid is linked to certain predefined behaviors or outcomes.
For example, as we will see in this chapter, an organization can pay a salesperson a
commission for closing a sale, or the members of a production department can earn a
bonus for meeting a monthly production goal. Usually, these payments are in addition to
wages and salaries. Knowing they can earn extra money for closing sales or meeting
departmental goals, the employees often try harder or get more creative than they might
without the incentive pay. In addition, the policy of offering higher pay for higher
performance may make an organization attractive to high performers when it is trying to
recruit and retain these valuable employees.
1.1. Success Factors of Incentives
For incentive pay to motivate employees to contribute to the organization’s success,
the pay plans must be well designed. In particular, effective plans meet the following
requirements:
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
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
 35

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.
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.
36

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
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
 37

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.

Gerhart, B., Newman, J., Milkovich, G. (2022). Compensation. (14th Edition). McGraw Hill
Education.

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,
38

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
Almost all organizations have established some program of merit pay-a system of
linking pay increases to ratings on performance appraisals. A merit pay system links
increases in base pay to how highly employees are rated on a 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.
Organizations establish and revise merit increase grids in light of changing economic
conditions. When organizations revise pay ranges, employees have new compa-
ratios. A higher pay range would result in lower compa-ratios, causing employees to
become eligible for bigger merit increases. An advantage of merit pay is therefore
that it makes the reward more valuable by relating it to economic conditions.
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.
Another drawback of merit pay is that it makes assumptions that may be misleading.
Rewarding employees for superior performance ratings assumes that those ratings
depend on employees’ ability and motivation. But performance may actually depend
on forces outside the employee’s control, such as managers’ rating biases, the level
of cooperation from co-workers, or the degree to which the organization gives
employees the authority, training, and resources they need. Under these conditions,
employees will likely conclude that the merit pay system is unfair.
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
 39

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,
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.
2.2.1. Straight Piecework Plan
As an incentive to work efficiently, some organizations pay production workers a
piecework rate, a wage based on the amount they produce. The amount paid per
unit is set at a level that rewards employees for above—average production volume.
For example, suppose that, on average, assemblers can finish 10 components in an
hour. If the organization wants to pay its average assemblers $8 per hour, it can pay a
piecework rate of $8/hour divided by 10 components/hour, or $.80 per component.
An assembler who produces the average of 10 components per hour earns an
amount equal to $8 per hour. An assembler who produces 12 components in an hour
would earn $.80 X 12, or $9.60 each hour. This is an example of a straight piecework
plan because the employer pays the same rate per piece no matter how much the
worker produces.
2.2.2. Differential Piece Rates
A variation on straight piecework is differential piece rates (also called rising and
flitting differentials), in which the piece rate depends on the amount produced. If the
worker produces more than the standard output, the piece rate is higher. If the
worker produces at or below the standard, the amount paid per piece is lower. In the
preceding example, the differential piece rate could be $1 per component for
components exceeding 12 per hour and $.80 per component for up to 12
components per hour.
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
40

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
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.
 41

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
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.
42

They need recognition of extra effort. They need to “feel” it. This will never go away
as a basic human need.
2.6. Standard Hour Plans
Another quantity—oriented incentive for production workers is the standard hour
plan, an incentive plan that pays workers extra for work done in less than a preset
“standard time.” The organization determines a standard time to complete a task,
such as tuning up a car engine. If the mechanic completes the work in less than the
standard time, the mechanic receives an amount of pay equal to the wage for the full
standard time. Suppose the standard time for tuning up an engine is 2 hours. If the
mechanic finishes a tune up in one and a half hours, the mechanic earns 2 hours’
worth of pay in 1.5 hours. Working that fast over the course of a week could add
significantly to the mechanic’s pay.
In terms of their pros and cons, standard hour plans are much like piecework plans.
They encourage employees to work as fast as they can, but not necessarily to care
about quality or customer service. Also, they only succeed if employees want the
extra money more than they want to work at a pace that feels comfortable.
2.7. Performance Bonuses
Like merit pay, performance bonuses reward individual performance, but bonuses are
not rolled into base pay. The employee must earn them during each performance
period. In some cases, the bonus is a one-time reward. Bonuses may also be linked to
objective performance measures, rather than subjective ratings.
Bonuses for individual performance can be extremely effective and give the
organization great flexibility in deciding what kinds of behavior to reward. In many
cases, employees receive bonuses for meeting such routine targets as sales or
production numbers. Airlines can reward good customer service with bonuses for
meeting goals for on—time performance, and trucking firms can reward safe practices
with bonuses for accident—free driving. Companies can award bonuses for learning,
innovation, or any other behavior they associate with success. Savant Capital
Management wanted its financial advisers to take more responsibility for bringing in
new clients and helping to grow a firm that will remain strong after its founders retire.
So the Rockford, Illinois, financial planning firm shifted part of advisers’ pay from
salary to a potentially larger set of bonuses. Each adviser may earn a bonus based on a
percentage of revenue from each of his or her clients and additional bonuses for each
new client brought in. Besides these individual bonuses, Savant pays bonuses linked to
the firm’s overall achievement of goals for profit, revenues, and new assets (clients’
investments).
All this flexibility makes it essential to be sure bonuses are tied to behavior that makes
a difference to the organization’s overall performance. Also, employees have to have
some control over whether they can meet the bonus requirements.
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
 43

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.
3.2. 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
44

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.
3.3. 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
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.
4. Employee Benefits
As a part of the total compensation paid to employees, benefits serve functions similar to
pay. Benefits contribute to attracting, retaining, and motivating employees. The variety of
possible benefits also helps employers tailor their compensation to the kinds of employees
they need. Different employees look for different types of benefits. Employers need to
examine their benefits package regularly to see whether they meet the needs of today. At
 45

the same time, benefits packages are more complex than pay structures, so benefits are
harder for employees to understand and appreciate. Even if employers spend large sums
on benefits, if employees do not understand how to use them or why they are valuable,
the cost of the benefits will be largely wasted. Employers need to communicate effectively
so that the benefits succeed in motivating employees.
Employees have come to expect that benefits will help them maintain economic security
Social Security contributions, pensions, and retirement savings plans help employees
prepare for their retirement. Insurance plans help to protect employees from unexpected
costs such as hospital bills. This important role of benefits is one rea— son that benefits
are subject to government regulation. Some benefits, such as Social Security, are required
by law. Other regulations establish requirements that benefits must meet to obtain the
most favorable tax treatment. Later in the chapter, we will describe some of the most
significant regulations affecting benefits.
Even though many kinds of benefits are not required by law, they have become so common
that today’s employees expect them. Many employers find that attracting qualifi ed
workers requires them to provide medical and retirement benefits of some sort. A large
employer without such benefits would be highly unusual and would have difficulty
competing in the labor market.
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.

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

4.1. Legally required payments

There are two types of employee benefits must provide by law those the employer
46

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.
4.1.1. 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.
4.1.2. 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.
4.1.3. 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
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.
4.2. Retirement and Savings Plan Payments
A pension plan is a retirement program established and funded by the employer and
employees.
4.2.1. 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
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the funding in a defined-benefit plan is insufficient, the employer may have to make
up the shortfall.
4.2.2. 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.
4.2.3. 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.
4.2.4. 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
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.
4.3. 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.
4.3.1. 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.
4.3.2. 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
48

disability insurance is much more common because many employers cover short-term
disability situations through sick leave programs.
4.3.3. 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.
4.4. 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.
4.4.1. 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.
4.4.2. 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.
4.4.3. 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.
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4.5. Paid Rest Periods, Meal Break, Coffee breaks

4.5.1. 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. According to the International Labour
Organization (ILO), weekly rest is a minimum one day long break (a 24 consecutive
hour weekly rest period) within a 7-day period.
4.5.2. 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.
4.5.3. 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.
4.6. 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.
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.
4.7. 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
50

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.
4.7.1. Cafeteria Plans
Organizations can address differences in employees’ needs and empower their
employees by offering flexible benefits plans in place of a single benefits package for
all employees. These plans, often called cafeteria-style plans, offer employees a set of
alternatives from which they can choose the types and amounts of benefits they
want. The plans vary. Some impose minimum levels for certain benefits, such as
health care coverage; some allow better employees to receive money in exchange for
choosing a“light” package; and some let employees pay extra for the privilege of
receiving more benefits. For example, some plans let employees give up vacation days
for more pay or to purchase extra vacation days in exchange for a reduction in pay.
4.7.2. Voluntary Benefits
Voluntary benefits (also called supplemental insurance) can be offered at no direct
cost to employers. Voluntary benefits have become a way for employers to provide
employees the resources they need every day to quickly resolve financial, legal and
medical issues (beyond the standard vision, dental and life insurance offerings). This is
a win/win, as improved voluntary benefits are offered by the employer through the
workplace where employees can choose to buy them in addition to the core
employee benefits they may get as part of a benefits package.
When employers offer a wide range of benefits, employees can create a package to fit
their current lifestyle needs. And these customizations pay off for employers. Willis
Towers Watson highlighted four critical life needs that voluntary benefits fulfill:

• Health – typically helping employee well-being, while minimizing health risk at a

reasonable cost

• Wealth accumulation – protecting income and assets (Willis Towers Watson calls
this one Wealth, but arguably a more relevant term is “Lifestyle”)

• Security – protecting our survivors, vulnerable people or even people’s identities

• Personal – products that cover what’s important to the individual interests and
needs of the person
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5. Work-Life Balance (WLB) Programs

With globalization and rapid technological advances, boundaries between work and home
are blurring and demands on workers and enterprises have never been higher. This has
meant increasing challenges for workers to be able to successfully reconcile the conflicting
demands of paid work and their personal lives. Dramatic increases in women’s labor force
participation and the resulting demise of the so-called “male breadwinner” model have
often resulted in a “double burden” for women of both paid and unpaid work. In addition,
with the aging of the workforce in many countries, there are increasing concerns about
how workers can address the needs not only of their immediate families, but of their
extended families as well (e.g. elderly parents, disabled or ill relatives, etc.).
Work-life refers to specific organizational practices, policies and programs that are guided
by a philosophy of active support for the efforts of employees to achieve success within
and outside the workplace. The term “work-life” refers to the intersection of self (the
worker), career (work), family and community. These employer sponsored initiatives
comprise a strategic framework referred to as the work-life portfolio, a key element of the
organization’s total rewards strategy to attract, motivate and retain employees.
WorldatWork, A non-profit association dedicated to knowledge leadership in
compensation, benefits and total rewards, proposed seven categories of work-life
effectiveness:
5.1. Caring for Dependents
Work-life support began in response to the influx of women into the workforce after
World War II. The first work-life issue that employers faced was the need to find or
provide quality care for the children of mothers going to work. Employer-sponsored
child care is the highest quality in the country today. At a time when only a third of
secondary school students’ graduate and employers are faced with too many poorly
educated workers, investment in dependent care for employees’ children not only
pays off in more productive, engaged employees but creates a more solid educational
foundation for the workforce of the future. Dependent care encompasses policies and
services that are designed to reconcile parenthood, other unpaid care giving and
employment, for men as well as women. This service has greatly expanded over the
past decade to include elder-care support for the parents and other elderly relatives
of the growing number of dual-career families. More recently, given an increase in the
incidence of children with special needs (such as autism) and elders with Alzheimer’s,
there is a new focus on providing support for employed caregivers themselves. Some
examples of typical programs and services are:

• Child-care resource and referral services

• Child-care discount program at national providers

• Emergency backup child-care service (two options: center-based and in-home

care)

• Elder-care resource and referral services

• Long-term care insurance

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• Emergency backup elder-care service

5.2. Health and Wellness
Reduction of performance-inhibiting and morale-draining stressors in the workplace is
the central premise of work-life effectiveness. Because the negative impact of stress-
related illness has been shown to eclipse the combined annual profits of the FORTUNE
500 companies, focusing on this category of work-life support holds the most promise
of contributing to the reduction of escalating health-care costs. Some examples of
these programs and services are:

• Employee assistance programs (EAP), an employer-sponsored service designed

for personal or family problems, including mental health, substance abuse, and
various addictions

• Health promotion initiatives

• Concierge service

• Workplace convenience services

• Fitness center affiliations

• On-site work-life seminars (e.g., stress reduction, financial planning, parenting,

etc.)
5.3. Flexible Workplace
Workplace flexibility refers to management practices that optimize control over when,
where and how work gets done by individuals and teams. Flexibility (broadly defined)
is empirically shown to increase engagement, retention, productivity and even
wellness, and is thus an essential pillar of the work-life portfolio. It is grounded in a
business strategy that connects flexible management practices with the need to
increase the levels of speed, agility, innovation and creativity in an increasingly
complex and ever changing global economic, social and political context. There are
many tools and approaches employed to enhance workplace flexibility, including
flexible career strategies, flexible benefit options, management training and work
redesign that streamlines processes and eliminates low-value work. One of the most
common tools employed to increase workplace flexibility involves the provision of
flexible scheduling. When the employer’s focus is on the work being done, the
employees can focus on meeting deadlines and producing good work - not on
watching the clock tick the seconds until it’s time to go home. Some examples of
these options for customizing how work is done are:
5.3.1. Flextime
Flextime requires employees to work an established number of hours per week but
allows starting and ending times to vary. However, the utility costs may be higher
because of longer operating hours, and it may be hard to administer attendance.
5.3.2. Telecommuting
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Telework or Telecommuting is the process of working via electronic computing and

telecommunications equipment. It is often referred to as "home-based work."
Accordingly, telecommuting may become a reasonable accommodation for others
with disabilities.
5.3.3. Compressed Workweek
Compressed workweek refers a full week's work is accomplished in fewer than
regulated work days.
5.3.4. Part-time Schedule
A work schedule that is less than full time but is at least half of the regularly scheduled
full time amount.
5.3.5. Job Sharing
Two employees voluntarily share the responsibilities of one full time job, and receive
salary and benefits on pro-rata basis. Job sharing creates regular part time where
there was one full time position, and thus avoids a total loss of employment in a
layoff.
5.3.6. Phased Return From Leave
Phased return from leave offers employees the opportunity to return to work at an
earlier stage of recovery from illness (they may not yet be fully fit) by allowing them to
do fewer hours and/or modified duties based on a structured return to work plan.
5.4. Financial Support
Providing financially for one’s self and loved ones is fundamental to achieving work-
life effectiveness. On this front, benefits, compensation and work-life professionals
collaborate and communicate the value of financial strategies and programs. Some
examples of these programs and services are:

• Personal financial planning service

• Pension plan

• Adoption reimbursement

• Tuition reimbursement (student aid/loan programs)

• Dependent care flexible spending accounts

• Health care flexible spending account

• Voluntary benefits (e.g., auto, home, pet insurance)

• Mortgage assistance

• Pre-negotiated discounts on a variety of products and services

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5.5. Paid and Unpaid Time Off

Time to spend with loved ones and in one’s community is the most fundamental
element of work-life support. Some newer policies in this category include paid family
leave for new fathers as well as mothers, and paid or release time for community
service. Some examples of these programs and services are:

• Personal days/vacation

• Paid holidays

• Paid family leave for new parents (fathers as well as mothers)

• Sabbaticals (a time period in which a person does not report to his regular job
but who remains employed with that company.)

• Responsive shift-work policies (work that takes place on a schedule outside the
traditional work schedule)

• Paid leave bank and buy-back programs

• Extreme travel comp-time policies

• After-hours email and calling policies

International Labour Organization (ILO) entitles workers to a right to take three weeks’
paid leave each year. Annual leave can be expressed in working days, calendar days (or
weeks), or days excluding paid public holidays. Annual leave is the longest period of
rest available to workers. Annual leave can be expressed in working days, calendar
days (or weeks), or days excluding paid public holidays.
5.6. Community Involvement
Employers’ and employees’ interests are in close alignment when it comes to
community, because both the workforce and customers come from the community in
which the organization operates. Community focus is expanding to include not only
new types of external community outreach, but also a renewed internal focus on
building a strong internal sense of community. Some examples of these programs and
services are:

• Community volunteer program

• Matching gift program

• Shared leave program (donating personal/vacation time to others facing

emergency situations, such as a child with terminal illness or other family
catastrophe)

• Disaster relief fund

• Corporate Social Responsibility

• “Green” initiatives
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5.7. WLB Culture

Achieving culturally embedded work-life effectiveness at all organizational levels
requires strong leadership in culture change management, change communication,
new approaches to management education, training and role modeling to create
collegial, agile, productive and more profitable work environment. Culture is the
organizational oxygen that everyone breathes, so employees need to understand their
accountability as well. Great workplaces aren’t accidental. They are engineered and
sustained by a workforce committed from top to bottom to a higher quality of life for
the good of the business, workers, their families and communities.
In order to eliminate any residual barriers to the full engagement and productivity of
every contributor, it is sometimes necessary to launch specific interventions to
eliminate existing cultural barriers to the full productivity of every individual
contributor. Thus, there is synergy between work-life effectiveness, diversity
initiatives, women’s advancement, mentoring, networking and other change
management endeavors. Some examples of these programs and services are:

• Diversity/inclusion initiatives

• Women’s advancement initiatives

• Work redesign (efforts to reduce work overload and burnout by transforming the
work itself and not the people who do it)

• Team effectiveness approaches

• Generational diversity management

• Work environment initiatives

• Affinity or employee interest groups

6. Payroll
Payroll is essentially defined as a combination of a list of qualified employees, eligible for
payment, and the total amount that the employer has to pay his employees. It is a critical
step in reimbursing employees for the time and work they put in for the organization.
Usually handled by the HR department, the payroll has to be detailed and accurately
marked up according to the local laws. Any mistakes within the payroll can result in non-
compliance and monetary fines as levied by the regulatory bodies.
The payroll record needs to be maintained throughout the tenure of the organization to
keep track of the business’s finances. Payroll processing involves a series of actions where
the employer pays the employees after making appropriate deductions on various
grounds. The process involves five major steps as follows.
6.1. Payroll processing
6.1.1. Data collection
Once an organization hires a new employee, the payroll information has to be
56

entered in the tax withholding form to facilitate hassle-free deduction of taxes every
time payroll is processed.
6.1.2. Net payroll calculation
The net pay of an employee is his or her gross pay minus the corresponding tax
deductions and withholdings involved. These deductions and withholdings usually
include social security, healthcare and other local taxes that are mandatory.
6.1.3. Payment distribution
Once the deductions are made and the net pay is finalized, the employer distributes
it to the employee either via cheque or direct payment deposit.
6.1.4. Taxes filing and payment
After the distribution of payment to the employees, the organization has to submit a
tax filing regarding withholdings to the state authorities. Then, forwarding all taxes
and other benefit payments to corresponding authorities, including, healthcare
insurance companies and retirement plan firms accordingly.
6.2. Components of Payroll
While there are many components in the payroll process, they can be broadly divided
into three main categories: employee information, pay and deductions.

6.2.1. Employee information

As mentioned earlier, the first thing to do when a new employee joins the
organization is to fill the tax withholding form (if applicable). Apart from the
employee’s income tax withholding, the tax withholding form also contains the
employee’s name, residential address, social security number and much more. These
details help in processing payroll and take care of deductions in a seamless way.
Common mistakes such as employee misclassifications happen during onboarding,
which impacts your employees’ health insurance and retirement benefits, and tax
withholdings. Add a checkpoint here to confirm the employee classification is correct
and for your employee to verify their personal information and tax code are accurate
before their first payroll run.
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For timesheets, HR should have a system in place that checks for inconsistencies with
employee type, hours worked and pay scale. A preventative measure here reduces
the risk of overspend on payroll.
HR need to know how much each employee will cost the business beyond their
wages to spot inconsistencies during each pay period. Always factor in gross wages,
benefits, tax and National Insurance withholdings for each employee. HR also need to
consider Statutory Sick Pay (SSP), statutory pay for parents (maternal/paternal leave),
tips, bonuses, pensions and suspensions as they apply.
6.2.2. Pay
The second component in the list is the employee’s pay. Irrespective of the nature of
the payment (hourly, weekly, bi-weekly and monthly), a fixed sum of money gets
added to the employee’s account. The pay stub shows everything about the
employee’s payroll, including the gross pay, deductions and withholdings, net pay,
total hours at work, overtime pay, reimbursement, additional pay and much more.
6.2.3. Deduction
Deductions refer to the amount that is taken away from the employee’s account
towards payroll taxes, withholdings, benefit deductions and other purposes.
(i) Payroll Taxes
Payroll taxes are the most common forms of deductions applicable in salary
processing. It mainly includes social security taxes and Medicare taxes at large.
(ii) Payroll Withholdings
Payroll withholdings refer to the kind of deduction towards both income and
unemployment taxes. The income tax deduction depends upon the details filled in
the tax withholding form of an employee. However, both income and unemployment
taxes vary from one location to the other.
(iii) Wage Garnishments
This deduction does not apply to everyone. It is usually carried out on account of a
court order in connection to credit or civil matters. Wage garnishment involves a
wide range of payments, including, medical bills, personal loans, student loans,
consumer debts, child support and many more.
(iv) Benefit deductions
Benefit deductions refer to health insurance and life insurance and retirement plan
costs. While the employee and the employer contribute to health insurance, the
retirement plan costs are deducted from the employee’s salary to be added to the
retirement plan account.
(v) Unpaid leave
If a full-time, monthly-paid employee takes unpaid leave throughout the month, they
are regarded to have performed an incomplete month of work. Therefore, the
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amount that will be deducted for each day of unpaid leave will be determined as the
monthly wages divided by the number of days in the month/wage period.
6.3. 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
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.
6.4. 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
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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.
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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Reference

• 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.

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