Strategic Compensation

total compensation

salary + compensation + incentives

30%

how much does benefits make up of total compensation

Employee benefits

compensation that is not direct pay

1. legally required

2. employees expect benefits

3. Tax advantages

why companies offer benefits

who gets benefits

what benefits to offer

how to pay for benefits

with benefits, companies must decide

contributory plan

employee helps pay

non-contributory plan

employer pays the entire cost of benefits

flexible benefits

allows employee to choose which benefits they want

flexible benefits adv

employee get what fits their needs

higher satisfaction

flexible benefits disadv

complicated to manage

more administrative costs

benefits administration

communicating benefits

controlling costs

legally required benefits

workers compensation, social security, unemployment insurance, FLMA, COBRA

workers compensation

Insurance for job-related injuries.

Example:
Employee hurts back lifting boxes at work → company pays medical costs and lost wages.

Important:

• covers work injuries only

  • no-fault system (employee doesn’t need to prove employer caused injury)

social security

Government retirement and disability program.

Provides:

• retirement income

• disability payments

• survivor benefits

Funded by payroll taxes:
Employee pays 6.2%
Employer pays 6.2%

Example:
If you earn $50,000:
$3,100 paid into Social Security each year.

unemployment insurance

Temporary income if you lose job through no fault of your own.

Requirements:

• must be laid off (not quit)

• must be looking for work

• usually lasts about 26 weeks

Example:
Company downsizes → employees receive partial pay from government.

Family and Medical Leave Act

Allows employees to take up to 12 weeks unpaid leave for:

• birth of child

• serious illness

• caring for family member

Job is protected when employee returns

COBRA

Allows employees to keep health insurance after leaving job, but must pay full cost.

Example:
You quit job but want same insurance → pay entire premium + 2% fee

Defined benefit plan

Employer promises a specific retirement payment.

Example:
Employee will receive $2,000 per month after retirement.

Employer takes investment risk.

Good for employee security.

Defined contribution plan

Employer contributes money, but retirement amount depends on investment performance.

Example:
401(k)

Employer contributes $5,000 per year, but final amount depends on stock market.

Employee takes investment risk

Vesting

employee earns right to retirement money over time. encourages employees to stay longer

Tradition plan health

Employee can go to any doctor.

Most flexibility, most expensive.

PPO

Must use doctors in network for lower cost.

Balance between flexibility and cost.

HMO

Must use specific doctors.
Usually need referral to see specialist.

Cheapest option, least flexibl

how companies reduce health care costs

make employees more cost concious

change health care structure

encourage healthy behaior

external competitveness

how much a company pays in comparison to their competitors

Pay level policies

lead match lag

pax mix

WHAT types of pay a company emphasizes.

Types of pay:

• base salary

• bonuses

• benefits

• stock options

Example:

Company A pay mix:

• high salary

• low bonus

Company B pay mix:

• lower salary

• high bonus potential

Both could have same total compensation.

why external competitiveness matters

attracting employees

retaining employees

motivation

controlling costs

relevant labor market

the group companies use for salary comparison

market survey

collecting salary data from other companies

benchmark job

a job that exists in many companies and can be compared easily

pay policy line

Shows relationship between:
job value AND market pay.

It helps companies decide how much to pay each job.

The line connects:
internal job value → external salary data

steps to determine pay levels

set pay policy

choose relevant labor market

conduct salary survey

match jobs

create pay policy line

create pay grades

pay grade

group of jobs worth similar pay

pay range

min and max pay for each grade

freehand method

way of drawing pay policy line

Draw line that fits data visually.

Simple approach.

Regression method

way of calculating pay policy line

statistical method that calculates best-fit line.

More precise