Part J: Establishment of Pay Structures

pay
- is a powerful tool for meeting the organization’s goals.
- Pay has a large impact on employee attitudes and behaviors.
- It influences which kinds of employees are attracted to, and remain with the
organization.
- By rewarding certain behaviors, it can align employees’ interests with the organization’s
goals.

pay structures
- the pay policy resulting from job structure and pay-level decisions:
- Job structure: the relative pay for different jobs within the organization;
- Pay level: the average amount (including wages, salaries, and bonuses) the
organization pays for a particular job.
- Developed based on legal requirements, market forces and the organization’s
goals.

Legal requirements for pay

1. Equal Employment Opportunity
- employers cannot 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
2. Minimum wage
a. The lowest amount that employers may pay under federal or state law, stated as
an amount of pay per hour.
b. The Philippines has daily minimum wage rates that vary from region to region,
ranging from PHP316 (US$6.57) to P537 (US$11.17) a day for 2021.
3. Fair Labour Standards Act (FLSA)
a. Federal law that establishes a minimum wage and requirements for overtime
pay and child labour.
b. Overtime-
i. Exempt employees- Managers, outside salespeople, and any other
employees not covered by the FLSA requirement for overtime pay.
ii. Non-exempt employees- Employees covered by the FLSA requirements
for overtime pay
c. Child Labor- The FLSA sharply restricts the use of child labor, with the aim of
protecting children’s health, safety, and educational opportunities. The
restrictions apply to children younger than 18.
4. Prevailing Wages
 a. federal contractors must pay their employees at rates at least equal to the
prevailing wages in the area.

Economic influences on pay

- Decisions about how to respond to the economic forces of product markets and labour
markets limit an organization’s choices about pay structure.
- Although labour 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.
- Benchmarking
- A procedure in which an organization compares its own practices against those
of successful competitors.

Employee judgments about pay fairness

- Employee’s opinion about fairness should be considered in developing a pay
structure since this functions as a motivator.
- Job evaluation
- An administrative procedure for measuring the relative worth of the
organizations’ jobs. Usually, the organization does this by assembling and
training a job evaluation committee, consisting of people familiar with the jobs to
be evaluated. The committee often includes a human resource specialist and, if
its budget permits, may hire an outside consultant.

Job structure: relative value of jobs

- Hay Guide-Chart Profile method
- Method of job evaluation that creates a profile for each position based on its
required:
1. Know-how: the required skills, are of knowledge, and abilities;
2. Problem solving; the required degree of analysis, creativity, and
reasoning;
3. Accountability; the level of responsibility and the job’s impact on the
organization.

Pay structure
1. Piecework rate- Rate of pay for each unit produced.
2. Salary- Rate of pay for each week, month, or year worked.
3. Pay policy line- A graphed line showing the mathematical relationship between job
evaluation points and pay rate.
4. Pay grades- Sets of jobs having similar worth or content, grouped together to establish
rates of pay.
5. Pay ranges- A set of possible pay rates defined by a minimum, maximum, and
midpoint of pay for employees holding a particular job or a job within a particular pay
grade.
a. Red-circle rate- Pay at a rate that falls above the pay range for the job.
b. Green-circle rate- Pay at a rate that falls below the pay range for the job.
6. Pay differential- Adjustment to a pay rate to reflect differences in working conditions or
labour markets.
- Night hours are less desirable for most workers. Therefore, some companies
pay a differential for night work to compensate them.
7. Alternative to Job- based pay
a. Delayering- Reducing the number of levels in the organization’s job structure.
b. Skill-based pay systems- Pay structures that set pay according to the
employees’ levels of skill or knowledge and what they are capable of doing.
Part K: Recognizing Employee Contributions

pay system
- must encourage behaviours that both contribute to profits in the short run and build
customer satisfaction in the long run.
- differences in performance are used as a basis for differentiating pay among the
employees.
- different pay programs can have very different consequences for productivity and return
on investment, regardless of cost
- Pay plans are usually used to energise, direct, or control employee behaviour.

Incentive pay
- Forms of pay linked to an employee’s performance as an individual, group member,
or organization member.
- a plan must be fair when the rewards are distributed according to what the employees
contribute.
- several theories of how pay influences individual employees:
● Reinforcement Theory
- a response followed by a reward is more likely to recur in the future.
- high employee performance followed by a monetary reward will make
future high performance more likely;
● Expectancy Theory
- motivation is a function of valence, instrumentality, and expectancy.
- Behaviours can be described as a function of ability and motivation.
- a theory of motivation that holds that employees should exert greater
work effort if they have reason to expect that it will result in a reward
- Employees also must believe that good performance is valued by their
employer and will result in their receiving the expected reward. In
practice, the expectancy theory works in the following way:
● Expectancy: Effort will result in a level of performance; and the
organization must provide the means to support the performance
● Instrumentality: Performance leads to outcomes;
● Workers are only motivated by pay if they think performance leads
to pay outcomes — managers must link performance to pay
outcomes.
● Workers have preferences for outcomes — managers must
determine if pay outcomes are valued.
● Valence: How desirable pay is to a person.
● Agency Theory
- the interests of the principals (owners) and their agents (managers) may
not converge, producing agency costs.
- focuses on the divergent interests and goals of the organisations.
 - Agency costs may be minimized by the principal choosing a contracting
scheme that helps align the interests of the agent with the interests of
the principals, such as agents act in ways not beneficial to the principal,
differences in risk preferences of principals and agents, or differences in
decision-making horizons.
- Depends on the following factors: risk aversion, outcome uncertainty, job
programmability, measurable job outcomes, ability to pay, and tradition.
- Emphasis on the risk-reward trade off, an issue that needs close
attention when companies consider variable pay plans, which can carry
significant risk
- People:
Managers’ costs
1. managers can spend money on things not relevant to the
stakeholders.
2. Managers and stakeholders may differ in their attitudes towards
risk.
3. Decision making horizons may differ.
Agents are persons who are expected to act on behalf of a principal.
Principals are persons who are seeking to direct another person’s
behaviour.

Factors in deciding which type of contract to use:

● Risk aversion among actors makes outcome orientated contracts less likely;
● Outcome uncertainty;
● Job programmability. As jobs become less programmable outcome orientated
contracts become more likely because monitoring becomes more difficult;
● Measurable job out comes;
● Ability to pay;
● Tradition of using outcome orientated contracts will make such contracts more likely.

Pay for individual performance

1. Piecework rate- A wage based on the amount workers produce
a. Straight piecework plan- Incentive pay in which the employer pays the same
rate per piece, no matter how much the worker produces.
b. Differential piece rates- Incentive pay in which the piece rate is higher when a
greater amount is produced.
2. Standard hour plan- An incentive plan that pays workers extra for work done in less
than a preset “standard time.”
3. Merit pay- A system of linking pay increases to ratings on performance appraisals.
4. Bonuses for individual performance can be extremely effective and give the
organization great flexibility in deciding what kinds of behavior to reward.
5. Commissions- Incentive pay calculated as a percentage of sales.
- The nature of salespeople’s compensation also affects the kinds of people who
will want to take and keep sale jobs with the organization.
 - Hard-driving, ambitious, risk taking salespeople might enjoy the potential rewards
of a straight commission plan. An organization that wants salespeople to
concentrate on listening to customers and building relationships might want to
attract a different kind of salesperson by offering more of the pay in the form of a
salary.

Pay for group performance

1. Gain sharing- Group incentive program that measures improvements in productivity and
effectiveness and distributes a portion of each gain to employees.
- Scanlon plan- A gainsharing program in which employees receive a bonus if
the ratio of labour costs to the sales value of production is below a set
standard.

Pay for organizational performance

1. Profit sharing- Incentive pay in which payments are a percentage of the
organization’s profits and do not become part of the employee’ base salary. (S0, Base
Pay + additional pay from profit sharing)
- If profit sharing is offered to all employees but most employees think only
management decisions about products, price and marketing have much impact
on profits, they will conclude that there is little connection between their actions
and their rewards. In that case, profit-sharing plans will have little impact on
employee behaviour.
2. Stock options- Rights to buy a certain number of shares of stock at a specified price.
3. Employee stock ownership plan (ESOP)- An arrangement in which the organization
distributes shares of stock to all its employees by placing it in a trust.
4. Balanced scorecard- A combination of performance measures directed towards
company’s long and short-term goals and used as the basis for awarding incentive
pay.

Note I: a corporation would have financial goals to satisfy its stockholders (owners), quality- and
price-related goals to satisfy its customers, efficiency goals to ensure better operations, and
goals related to acquiring skills and knowledge for the future to fully tap into employees’
potential. Different jobs would contribute to those goals in different ways.

Note II: not only does the balanced scorecard combine the advantages of incentive-pay
plans, it helps employees understand the organization’s goals. By communicating the
balanced scorecard to employees, the organization shows employees information about what its
goals are and what it expects employees to accomplish.

Extra note on Balanced Scorecard: the four categories of a balanced scorecard include
financial, customer, internal learning and growth. The balanced scorecard is a means of
performance measurement that gives managers a chance to look at their company from the
perspective of internal and external customers, employees and shareholders. It shows what
company aspects need to be focused on, and in which degree stakeholders are satisfied.
Growth, customer satisfaction, time to launch new products and employee satisfaction are part
of the things found on the card. The critical indicators are based on the business strategies and
competitive demands. Employees also use the card so they can see the goals and
strategies of the company and how this is measured. It gives them information about the
company and its products. When evaluating the employees’ performance, the card is also used
and this information is shared with the employee. HRM is using the card to see how the
activities are linked to the company’s business strategy, and to evaluate the extent to which the
HRM function is helping the company meet its strategic objectives. The measurements relate to
productivity output divided by the input, people assessing behaviour, knowledge and processes;
which is focusing on employee satisfaction.

Short-term incentive include

- bonuses based on the year’s profits,
- return on investment,
- and other measures related to the organization’s goals.
Long-term incentives include
- stock options and
- stock purchase plans.
Part L: Employee Benefits

The role of employee benefits

- help employers attract, retain, and motivate employees.

Employee benefits
- Compensation in forms other than cash
- a variety of possible benefits also helps employers tailor their compensation
packages to attract the right kinds of employees.
- Employees expect at least a minimum level of benefits, and providing more than the
minimum helps an organization compete in the labor market.
- Benefits are also a significant expense, but employers provide benefits because
employees value them and many benefits are required by law.
- a part of total compensation but they have unique aspects:
1. question of legal compliance. Although direct compensation is subject
to government regulation, the scope and impact of regulation on benefits
is far greater. Law mandates some benefits, like social security. Others
are mandated by regulations like pensions and savings. The heavy
involvement of government in benefits decision reflects the central of
benefits play in maintaining economic security.
2. organisations typically offer them that they have come to be
institutionalised.
3. complexity.
- The benefits have grown over the years because of laws, wage and price controls, and
the tax treatment of benefits programs is often more favourable for employees
than the tax treatment of wages and salaries.
- The marginal tax rate is the percentage of an additional dollar of earnings that
goes to taxes. Deferring compensation until retirement allows the employee to
receive cash, but at the time when the employer’s tax rate is sometimes lower
because of a lower income level. Organisations that represent large groups of
employees can purchase insurance at a lower rate because of economies of
scale, which spread fixed costs over more employees to reduce the costs per
person.
- serve functions similar to pay.
- Employers need to examine their benefits package regularly to see whether they
meet the needs of today. At the same time, benefits packages are more complex than
pay structures, so benefits are harder for employees to understand and appreciate.
Employers need to communicate effectively so that the benefits succeed in motivating
employees.

Benefits required by law

The federal and state governments require various forms of social insurance to protect
workers from the financial hardships of being out of work. In general,
 - Social Security provides support for retired workers, unemployment insurance assists
laid-off workers, and workers’ compensation insurance provides benefits and services to
workers injured on the job.
- unpaid leave for certain family and medical needs. Because these benefits are required
by law, employers cannot gain an advantage in the labor market by offering them, nor
can they design the nature of these benefits. Rather, the emphasis must be on
complying with the details of the law.
1. Unemployment insurance- A federally mandated program to minimize the hardships
of unemployment through payments to unemployed workers, help in finding new jobs,
and incentives to stabilize employment.
2. Experience rating- The number of employees a company has laid off in the past and
the cost of providing them with unemployment benefits.
3. Workers’ compensation- State programs that provide benefits to workers who suffer
work-related injuries or illnesses, or to their survivors.

Optional benefits programs

● Paid Leave- The major categories of paid leave are vacations, holidays, and sick
leave. Employers also establish policies for other situations that may require time off.
● Group Insurance- When employees receive insurance as a benefit, rather than higher
pay so they can buy their own insurance, employees can get more for their money.
● Medical Insurance- Consolidated Omnibus Budget Reconciliation Act (COBRA):
Federal law that requires employers to permit employees or their dependents to extend
their health insurance coverage at group rates for up to 36 months following a qualifying
event, such as a layoff, reduction in hours, or the employee’s death.
- On February 2019, President Rodrigo Duterte signed the Universal Health Care
Bill into law, ushering in massive reforms in the Philippine health sector. Among
the salient features of the UHC Law are the expansion of population, service, and
financial coverage through an array of health system amendments. Along with
this is a planned paradigm shift to primary care, which is the core and center of
all health reforms under the UHC.
● Health maintenance organization (HMO)- A health care plan that requires patients to
receive their medical care from the HMO’s health care professionals, who are often paid
a flat salary, and provides all services on a prepaid basis.
- Note; the premiums paid for the HMO cover all the patient’s visits and
procedures, without an additional payment from the patient. By paying physicians
a salary, rather than a fee for each service, the HMO hopes to remove any
incentive to provide more services than the patients really need. HMO coverage
tends to cost less than traditional health insurance.
● Preferred provide organization (PPO)- A health care plan that contracts with health
care professionals to provide services at a reduced fee and gives patients financial
incentives to use network providers.
● Flexible spending account- Employee-controlled pre-tax earnings set aside to pay for
certain eligible expenses such as health care expenses during the same year.
● Employee wellness program (EWP)- A set of communications, activities, and facilities
designed to change health-related behaviors in ways that reduce health risks.
● Short-term disability insurance- Insurance that pays a percentage of a disabled
employee’s salary as benefits to the employee for six months or less.
● Long-term disability insurance- Insurance that pays a percentage of a disabled
employee’s salary after an initial period and potentially for the rest of the employee’s
life.
● Retirement Plans
○ Contributory plan- Retirement plan funded by contributions from the employer
and employee.
○ Non-contributory plan- Retirement plan funded entirely by contributions from
the employer.
○ Defined benefit plan- Pension plan that guarantees a specified level of
retirement income.
○ Employee Retirement Income Security Act (ERISA) Federal law that
increased the responsibility of pension plan trustees to protect retirees,
established certain rights related to vesting and portability, and created the
Pension Benefit Guarantee Corporation.
○ Defined contribution plan- Retirement plan in which the employer sets up an
individual account for each employee and specifies the size of the investment
into that account.
○ Cash balance plan- Retirement plan in which the employer sets up an individual
account for each employee and contributes a percentage of the employee’s
salary; the account earns interest at a predefined rate.
○ Vesting rights- Guarantee that when employees become participants in a
pension plan and work a specified number of years, they will receive a
pension at retirement age, regardless of whether they remained with the
employer.
○ Summary plan description
- Report that describes a pension plan’s funding, eligibility requirements,
risks, and other details.
- A defined benefit plan guarantees a specified retirement benefit level
to employees based typically on a combination of years of service and
age as well as on the employees’ earnings level. Defined plans insulate
employees from investment risk that is borne by the company. In the
event of severe financial difficulties that force the company to terminate or
reduce employee pension benefits. To manage the benefits, the company
compares their benefits plans with those of the competitors using
information of consultants. The costs have to be controlled to do this
you have to consider some factors:
● The larger the cost of a benefit category, the greater the
opportunity for savings;
 ● The growth of the benefit category is also important even if costs
are currently acceptable the rate of growth may result in serious
costs in the future;
● Cost containment efforts can only work to the extent that the
employer has significant discretion in choosing how much to
spend in a benefit category.

- Unlike defined benefit plans, defined contribution plans do not promise

a specific benefit level for employees upon retirement. Rather an
individual account is set up for each employee with guaranteed size of
contribution. The advantage of such plans for employers is that they shift
investment risk to employees and present fewer administrative
challenges because there is no need to calculate payments based on
age and service and no need to make payments to the PBGC. There is a
wide variety of defined contribution plans one of them is the
- money purchase plan under which an employer specifies a level
of annual contribution. At retirement age, the employee is entitled
to the contributions and the investment returns. Profit sharing
plans and employee stock ownership plans are also often used as
retirement vehicles.
- Summary plan description: a reporting requirement of the employee
retirement income security act that obligates employers to describe the
plan’s funding, eligibility requirements risks and so forth within 90 days
after an employee has entered the plan.

The major categories of paid leave are vacations, holidays, and sick leave. Although vacation
and other paid leave programs help attract and retain employees, there is a cost to providing
time off with pay especially in a global economy. Paid time-off may seem uneconomical, which
may be the reason U.S. employers tend to offer much less vacation time than is common in
Western Europe. At large U.S. companies, paid vacation is typically 10 days. The typical
number of paid holidays is 10 in both Western Europe and the United States. Sick leave
programs often provide full salary replacement for a limited period of time, with the amount of
sick leave usually based on length of service. Policies are needed to determine how the
organization will handle unused sick days at the end of each year. Some organizations let
employees roll over some or all of the unused sick days into the next year, and others let un-
used days expire at the end of the year. Other forms of paid leave include personal days and
floating holidays. The employer pays the employee for time not spent working, receiving no
tangible production value in return.
Therefore some employers may see little direct advantage. Sick programs often provide full
salary replacement for a limited period of time, usually not exceeding 26 weeks. The amount of
sick leave is often based on length of service, accumulating with service. Sick leave policies
need to be carefully structured to avoid providing employees with the wrong incentives. Some
organisations allow sick days to accumulate and then pay employee for these days.
Employers must contribute to the Old Age, Survivors, Disability, and Health Insurance program
known as Social Security through a payroll tax shared by employers and employees. Employers
must also pay federal and state taxes for unemployment insurance, based on each employer's
experience rating, or percentage of employees a company has laid off in the past. State laws
require that employers purchase workers' compensation insurance.

To ease employers’ conflicts between work and non work organisations, firms may use family
and friendly policies such as family leave policies and childcare. Employers have responded to
work-family role conflicts by offering family-friendly benefits, including paid family leave, child
care services or referrals, college savings plans, and elder care information and support. Under
the Family and Medical Leave Act, employees who need to care for a baby following birth or
adoption or for an ill family member must be granted unpaid leave of up to 12 weeks.
Companies increasingly provide some form of child care support to their employees. This
support comes in several forms that vary in their degree of organisation involvement. At the
lowest level of support the company only gives information. At a higher level the company gives
discounts to use at existing child care facilities. At the highest level the company provides a day
care centre itself.

Retirement plans may be contributory, meaning funded by contributions from employer and
employee, or non-contributory, meaning funded only by the employer. These plans may be
defined benefit plans, which guarantee a specified level of retirement income, usually based on
the employee's years of service, age, and earnings level. Benefits under these plans are
protected by the Pension Benefit Guarantee Corporation (PBGC). An alternative is to set up a
defined contribution plan, such as a 401(k) plan. The employer sets up an individual account for
each employee and guarantees the size of the investment into that account, rather than the
amount to be paid out on retirement. Because employees have control over investment
decisions, the organization may also offer financial planning services as an employee benefit. A
cash balance plan combines some advantages of defined benefit plans and defined contribution
plans. The employer sets up individual accounts and contributes a percentage of each
employee's salary. The account earns interest at a predetermined rate, so the contributions and
benefits are easier to predict.

Selecting employee benefits

1. Cafeteria-style plan- A benefits plan that offers employees a set of alternatives from
the types and amounts of benefits they want. 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.
2. Legal Requirements for Employee Benefits- Some benefits are required by law. This
requirement adds to the cost of compensating employees, thus organizations looking for
ways to minimize staffing costs may look for ways to structure the workforce so as to
minimize the expense of benefits.
3. Tax Treatment of Benefits- The IRS provides more favorable tax treatment of
benefits classified as qualified plans. To obtain status as a qualified plan, a benefit
 plan must meet certain requirements, e.g. in the case of pensions, these involve vesting
and nondiscrimination rules.
- In the design of employee benefits programs, the organization should be
aware of the antidiscrimination laws and the applicable accounting
requirements of their country.

Communicating benefits to employees

Communicating information about benefits is important so that employees will appreciate the
value of their benefits. Communicating their value is the main way benefits attract, motivate,
and retain employees. Employers have many options for communicating information about
benefits, such as
- brochures, meetings, intranets, memos, and e-mail. Using a combination of such
methods increases employees' understanding.