Human Resource Management

10th Edition
Chapter 10
BENEFITS, NONFINANCIAL
COMPENSATION, AND OTHER
COMPENSATION ISSUES

© 2008 by Prentice Hall 10-1

 HRM in Action: Nontraditional
Benefits

• Organizations are continually competing

for top caliber employees
• Benefits may not serve as strong
motivators of performance
• They are obviously important in attracting
and retaining these desired individuals

© 2008 by Prentice Hall 10-2

Benefits (Indirect Financial
Compensation)

All financial rewards

that are not paid
directly to the
employee

© 2008 by Prentice Hall 10-3

 Benefits in a Total Compensation Program
External Environment
Internal Environment
Compensation
Financial Nonfinancial
Direct Indirect (Benefits) The Job Job Environment

Legally Required Benefits

Social Security
Unemployment Compensation Workers’
Compensation Family &
Medical Leave
Voluntary Benefits Payment
for Time Not Worked Health Care
Life Insurance
Retirement Plans
Disability Protection
Employee Stock Option Plans
Supplemental Unemployment Benefits
Employee Services
Premium Pay
Customized Benefit Plans

© 2008 by Prentice Hall 10-4

Mandated Benefits
(Legally Required)

• Social security
• Unemployment
compensation
• Worker’s compensation
• Family and Medical
Leave Act of 1993
(FMLA)
© 2008 by Prentice Hall 10-5
 Social Security
• Created system of retirement benefits
• Federal payroll tax to fund
unemployment and retirement
benefits
• Amendments included disability
insurance, survivors’ benefits, and
Medicare
© 2008 by Prentice Hall 10-6
Unemployment Compensation

• Laid off individual receives

compensation for up to 26
weeks
• Administered by states
• Payroll tax paid solely by
employers

© 2008 by Prentice Hall 10-7

Worker’s Compensation
• Expenses resulting from
job-related accidents or
illnesses
• Administered by states
• Program paid for by
employers
• Premium expense
directly tied to past
experience
© 2008 by Prentice Hall 10-8
 Family and Medical Leave Act of
1993 (FMLA)
• Private employers with 50 or more
employees and governmental employers
regardless of number of employees
• Up to 12 workweeks of unpaid leave per
year for absences due to employee’s own
serious health condition, need to care for
newborn or newly-adopted child, seriously
ill child, parent, or spouse

© 2008 by Prentice Hall 10-9

Discretionary Benefits (Voluntary)
• Payment for time not worked
• Health care
• Life Insurance
• Retirement plans
• Disability protection
• Employee Stock Option Plans (ESOP)
• Supplemental Unemployment Benefits (SUB)
• Employee services
• Premium pay
© 2008 by Prentice Hall 10-10
 Payment for Time Not Worked -
Paid Vacations
• Provide workers with opportunity to rest,
become rejuvenated, and more productive
• Encourage employees to remain with the firm
• Increases with seniority
• American workers are giving back 415 million
vacation days a year
• 35% of U.S. workers feel stressed about work
even while on vacation

© 2008 by Prentice Hall 10-11

 Payment for Time Not Worked -
Sick Pay and Paid Time Off

• Many firms allocate each employee a

certain number of days of sick leave
• Some managers are very critical of sick
leave programs
• Paid time off (PTO) - Certain number of
days off provided each year that
employees can use for any purpose

© 2008 by Prentice Hall 10-12

 Payment for Time Not Worked -
Sabbaticals

• Temporary leaves of absence from

organization, usually at reduced pay
• Used for years in academic community
• Some companies are now using
• Helps reduce turnover and prevents
burnout

© 2008 by Prentice Hall 10-13

 Payment for Time Not Worked -
Other Forms
• Perform civic duties
• Handle personal affairs
• Jury duty
• National Guard or military reserve
• Voting time
• Bereavement time
• Rest periods, coffee breaks, lunch
periods, cleanup time, and travel time
© 2008 by Prentice Hall 10-14
 Health Care
• Employers spend $300 billion annually on
health insurance for employees,
dependents, and retirees
• Health insurance typically constitutes 25%
of employer’s benefit costs
• Premiums for average family of 4 now cost
about $11,000 a year

© 2008 by Prentice Hall 10-15

 Factors Contributing to the High
Cost of Health Care

• Aging population
• Growing demand for medical care
• Increasingly expensive medical
technology
• Inefficient administrative processes

© 2008 by Prentice Hall 10-16

 Canadian Province of Ontario
Surpassed Michigan in Car
Production
• Manufactured by General Motors, Ford
and Daimler-Chrysler
• Companies are shifting production out of
U.S. because of enormous health-care
costs
• In Canada, which has a government-
funded and -run health-care system, cost
to employer per worker is just $800
© 2008 by Prentice Hall 10-17
 Forms of Managed-care Health
Organizations
• Health maintenance organizations (HMOs) cover all
services for a fixed fee but control is exercised over which
doctors and health facilities a member may use.
• Preferred provider organizations (PPO) are managed-
care health organizations in which incentives are
provided to members to use services within the system;
out-of-network providers may be utilized at greater cost.
Point-of-service (POS) requires a primary care
physician and referrals to see specialists, as with HMOs,
but permits out-of-network health care access
• Exclusive provider organizations (EPOs) offers a
smaller PPO provider network and usually provides little,
if any, benefits when an out-of-network provider is used
© 2008 by Prentice Hall 10-18
 Consumer-Driven Health Care Plans
• Defined-contribution health-care plan - Employee gets
set amount of money to purchase health-care coverage
• Health savings account (HSA) - Tax-sheltered account
similar to IRA, but earmarked for medical expenses with
high-deductible health plans that have deductibles of at
least $1,050 for individuals and $2,100 for families
• Flexible spending account (FSA) - Established by
employers that allow employees to deposit certain
portion of salary into account (before paying income
taxes) to be used for eligible expenses

© 2008 by Prentice Hall 10-19

 On-Site Health Care
• Trend of providing on-site medical care
growing because it permits employers to
better manage and reduce growth of
health care costs
• Assists in treating minor illnesses and
injuries and provides follow-up care

© 2008 by Prentice Hall 10-20

Major Medical Benefits
Plans provide for
major medical
benefits to cover
extraordinary
expenses that result
from long-term or
serious health
problems

© 2008 by Prentice Hall 10-21

Dental and Vision Care

Employers
typically pay
entire costs for
both types of
plans except for
a deductible

© 2008 by Prentice Hall 10-22

 Long-Term Care (LTC) Insurance
• Increasing costs of 24-hour home health
care for elderly relatives have given rise to
LTC programs
• LTC insurance picks up most or all of
expenses for skilled and custodial care for
people in own homes, adult day-care
centers, assisted-living facilities, and
nursing homes

© 2008 by Prentice Hall 10-23

Life Insurance

Group life insurance

commonly provided
benefit to protect
employee’s family
in event of death

© 2008 by Prentice Hall 10-24

Retirement Plans
• Defined benefits plans
• Defined contribution plan
• Cash balance plan -

© 2008 by Prentice Hall 10-25

 Defined Benefit Plans
• Formal retirement plan that provides the
participant with a fixed benefit upon
retirement
• Typically based on the participant’s final
years’ average salary and years of service
• Use has declined in recent years although
older workers tend to prefer them

© 2008 by Prentice Hall 10-26

 Defined Contribution Plans
• Requires specific contributions by an
employer to a retirement or savings fund
established for the employee
• Has been a shift from defined benefits to
defined contribution pension plans
• Amount of retirement income from a
defined contribution plan will depend upon
the investment success of the pension
fund
© 2008 by Prentice Hall 10-27
 401(k) Plan
• Defined contribution plan in which employees
may defer income up to a maximum amount
allowed
• Some employers match employee contributions
50 cents for each dollar deferred
• Has required about 42 million employees to
become investment managers, shifting the
burden of retirement planning from employers to
employees

© 2008 by Prentice Hall 10-28

 Cash Balance Plans
• Plan with elements of both defined benefit
and defined contribution plans
• Pension Benefit Guaranty Corporation
usually insures cash balance plans
• Employer contributes to each participant’s
account annually, and investment earnings
are at a set amount

© 2008 by Prentice Hall 10-29

Disability Protection

Provides
monthly benefit
to employees
who, due to
illness or injury,
are unable to
work for an
extended period
© 2008 by Prentice Hall 10-30
Employee Stock Option Plan (ESOPs)
• Firm contributes stock shares to a trust
• Trust allocates stock to participating
employee accounts according to
employee earnings
• Some employees want ability to sell
their shares prior to retirement, which
ESOPs do not allow
• Enron experience
© 2008 by Prentice Hall 10-31
Supplemental Unemployment
Benefits (SUB)

• Provide additional income for

employees receiving unemployment
insurance benefits
• Usually financed by company
• Tend to benefit newer employees

© 2008 by Prentice Hall 10-32

Employee Services
• Relocation
• Child care
• Educational assistance
• Food service/subsidized
cafeterias
• Financial services
• Legal services
• Scholarships for Dependents

© 2008 by Prentice Hall 10-33

 Customized Benefit Plans
(Cafeteria Compensation)
• Employees make yearly elections to
largely determine benefit package by
choosing between taxable cash and
numerous benefits
• Twenty years ago or so firms offered a
uniform package that generally reflected a
typical employee
• Today, the workforce has become
considerably more heterogeneous
© 2008 by Prentice Hall 10-34
 Compensation Vehicles Utilized in a
Customized Benefit Plans Compensation Approach
• Accidental death, dismemberment insurance • Health maintenance organization fees
• Birthdays (vacation) • Home health care
• Bonus eligibility • Hospital-surgical-medical insurance
• Business and professional membership • Incentive growth fund
• Cash profit sharing • Interest-free loans
• Club memberships • Long-term disability benefit
• • Matching educational donations
Commissions
• Nurseries
• Company medical assistance
• Nursing home care
• Company-provided automobile
• Outside medical services
• Company-provided housing
• Personal accident insurance
• Company-provided or –subsidized travel • Price discount plan
• Day care centers • Recreation facilities
• Deferred bonus • Resort facilities
• Deferred compensation plan • Sabbatical leaves
• Dental and eye care insurance • Salary continuation
• Discount on company products • Savings plan
• Education costs • Scholarships for dependents
• Educational activities (time off) • Severance pay
• Free checking account • Sickness and accident insurance
• Free or subsidized lunches • Stock appreciation rights
• Group automobile insurance • Stock bonus plan
• Group homeowners’ insurance • Stock purchase plan
• Group life insurance
© 2008 by Prentice Hall 10-35
 Premium Pay
• Compensation paid to employees for
working long periods of time or working
under dangerous or undesirable
conditions
• Hazard Pay - Pay for work under
extremely dangerous conditions
• Shift Differentials - Pay for inconvenience
of working less desirable hours

© 2008 by Prentice Hall 10-36

 Health-Care Legislation

• Consolidated Omnibus Budget Reconciliation

Act (COBRA)
• Health Insurance Portability and Accountability
Act (HIPAA)
• Employee Retirement Income Security Act
(ERISA)
• Older Workers Benefit Protection Act
(OWBPA)
• Pension Protection Act (PPA)

© 2008 by Prentice Hall 10-37

 Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA)

• Enacted to give employees opportunity to

temporarily continue their coverage they
would otherwise lose because of
termination, layoff, or other change in
employment status
• Applies to employers with 20 or more
employees
• May keep coverage for up to 18 months
after employment ceases
© 2008 by Prentice Hall 10-38
 Health Insurance Portability and
Accountability Act of 1996 (HIPAA)
• Protection for approximately 25 million
Americans who move from one job to
another, are self-employed, or have
preexisting medical conditions
• Make health insurance portable and
continuous
• Eliminate ability of insurance companies to
reject coverage for individuals because of
a pre-existing condition
© 2008 by Prentice Hall 10-39
 Employee Retirement Income
Security Act of 1974 (ERISA)

• Strengthens existing and future retirement

programs
• Intended to ensure that when employees
retire, they receive deserved pensions
• Does not force employers to create an
employee retirement plans

© 2008 by Prentice Hall 10-40

 Older Workers Benefit Protection
Act of 1990 (OWBPA)

• Amendment to Age Discrimination in

Employment Act
• Prohibits discrimination in administration
of benefits on basis of age
• Permits early retirement incentive plans as
long as they are voluntary
• Establishes wrongful termination waiver
requirements
© 2008 by Prentice Hall 10-41
 Pension Protection Act of 2006
(PPA)
• Strengthen the funding rules for defined
benefit pension plans
• Ensure that employers make greater
contributions to their pension funds
• Makes it easier for employers to
automatically enroll workers in their 401(k)

© 2008 by Prentice Hall 10-42

Communicating Information
about Benefits Package

• Workers need to fully

understand benefits that are
provided them
• Many times organizations do not
have to improve benefits to keep
their best employees

© 2008 by Prentice Hall 10-43

Nonfinancial Compensation

• Historically,
compensation
departments in
organizations have
not dealt with
nonfinancial factors
• This is changing

© 2008 by Prentice Hall 10-44

 Nonfinancial Compensation in a Total Compensation Program
External Environment
Internal Environment

Financial Nonfinancial
Direct Indirect (Benefits) The Job Job Environment
Skill Variety Task Sound Policies
Identify Task Competent Employees
Significance Congenial Coworkers
Autonomy Suitable Status Symbols
Feedback Working Conditions
Workplace Flexibility
Flextime
Compressed Workweek
Job Sharing
Customized Benefit Plans
Telecommuting
More Work, Fewer Hours
Part-time
Work

© 2008 by Prentice Hall 10-45

 The Job Itself as a Nonfinancial
Compensation Factor
Answering following questions can provide
considerable insight into value of job:
• Is job meaningful and challenging?
• Is there recognition for accomplishment?
• Do I get feeling of achievement from doing job?
• Is there possibility for increased responsibility?
• Is there opportunity for growth and advancement?
• Do I enjoy doing the job itself?

© 2008 by Prentice Hall 10-46

 Job Characteristics Theory
• Employees experience intrinsic
compensation when jobs rate high on five
core job dimensions
• Skill variety – Extent work requires
number of different activities for successful
completion
• Task identity – Extent job includes
identifiable unit of work carried out from
start to finish
© 2008 by Prentice Hall 10-47
Job Characteristics Theory (Cont.)
• Task significance – Impact job has on
other people
• Autonomy – Individual freedom and
discretion employees have in performing
their jobs
• Feedback – Amount of information
employees receive about how well they
have performed job

© 2008 by Prentice Hall 10-48

Job Environment as a Nonfinancial
Compensation Factor
• Sound policies
• Capable managers
• Competent employees
• Congenial coworkers
• Appropriate status
symbols
• Working conditions

© 2008 by Prentice Hall 10-49

Workplace Flexibility
(Work-Life Balance)
• Flextime
• Compressed workweek
• Job sharing
• Telecommuting
• Part-time work
• More work, fewer hours

© 2008 by Prentice Hall 10-50

 Flextime

• Practice of permitting employees to

choose, with certain limitations, their
own working hours
• Work same number of hours per day as
they would on standard schedule
• Many firms are using

© 2008 by Prentice Hall 10-51

 Illustration of Flextime

Flexible
Flexible Time Core Time Time Core Time Flexible Time
(Lunch)
6 a.m. 9 a.m. Noon 3 p.m. 6 p.m.

Bandwidth

© 2008 by Prentice Hall 10-52

 Compressed Work Week

• Arrangement of work hours that

permits employees to fulfill their
work obligation in fewer days than
typical 5-day workweek
• Four 10-hour days
• Often greater job satisfaction

© 2008 by Prentice Hall 10-53

 Job Sharing
• Two part-time people split duties of one
job in some agreed-on manner and are
paid according to contributions
• Partners must be compatible, have good
communication skills and trust must exist
between job sharers and their manager

© 2008 by Prentice Hall 10-54

Telecommuting
• Work arrangement
whereby employees,
called teleworkers or
telecommuters, are able
to remain at home, or
otherwise away from
office, and perform work
using computers and
other electronic devices
that connect them with
office

© 2008 by Prentice Hall 10-55

 Part-time Work
• Some people do not either want or need
full-time employment
• Part-time work was listed as the most
important flexible work option
• Adds many highly qualified individuals to
labor market by permitting both
employment and personal needs to be
addressed

© 2008 by Prentice Hall 10-56

 More Work, Fewer Hours
• Variation of part-time work where
employees receive full-time pay and get
more done in fewer hours
• Corporate athlete paradigm - One training
habit of world-class athletes is that they
have short periods of very demanding
work, but then “when they rest, they really
rest.”

© 2008 by Prentice Hall 10-57

Other Compensation Issues

• Severance pay
• Comparable worth
• Pay secrecy
• Pay compression

© 2008 by Prentice Hall 10-58

 Severance Pay

• Compensation designed to assist

laid-off employees as they search for
new employment
• Typically offer 1 - 2 weeks of pay for
every year of service, up to some
predetermined maximum

© 2008 by Prentice Hall 10-59

 Comparable Worth
• Requires value for dissimilar jobs, such
as company nurse and welder, to be
compared under some form of job
evaluation, and pay rates for both jobs
to be assigned according to their
evaluated worth
• Supreme Court has ruled the law does
not require comparable worth

© 2008 by Prentice Hall 10-60

Pay Secrecy

• Some organizations
keep pay rates secret
for various reasons
• If firm’s compensation
plan is illogical,
secrecy may be
appropriate

© 2008 by Prentice Hall 10-61

 Pay Compression
• Hiring new employees at pay rates
comparable to, or higher than, those of
current employees who have been with
firm for several years and who hold same
or higher rated jobs
• May also occur when pay adjustments are
made at lower end of job hierarchy without
commensurate adjustments at top

© 2008 by Prentice Hall 10-62

© 2008 by Prentice Hall 10-63