SHRM-CP / SHRM-SCP Certification Exam: People - Total Rewards

Functional Area 5—Total Rewards
Here is SHRM’s BoCK definition: “Total Rewards refers to the design and implementation of compensation systems and benefit packages, which employers use to attract and retain employees.”

Key Concepts
- Approaches to gathering compensation and benefits-related market and competitive intelligence (e.g., remuneration surveys)
- Basic accounting and financial knowledge for managing payroll (e.g., total compensation statements)
- Compensation philosophies
- Compensation plans for common and special workforce groups (e.g., domestic, global/expatriate, executive, sales)
- Job evaluation for determining compensation and benefits
- Leave plans and approaches (e.g., vacation, holiday, sick, paid/unpaid leave)
- Other benefits (e.g., disability, unemployment insurance, employee assistance programs, family, flex, wellness programs)
- Other compensation (e.g., deferred compensation, direct/indirect compensation, stock options)
- Pay practices and issues (e.g., pay increases, base pay, pay levels, banding, variable pay)
- Remuneration and labor market data collection and interpretation
- Remuneration data analysis (e.g., comparable worth, determining compensation, internal alignment, external competitiveness)
- Retirement planning and benefits (e.g., pension plans)
- Total rewards metrics and benchmarks

The following are proficiency indicators that SHRM has identified as key concepts:
Compensation and benefits plans play a key role that help attract and retain talent. HR professionals are responsible for the development and application of an organization’s compensation and benefits philosophy, along with benchmarking to determine their competitiveness in the marketplace. A total rewards program will integrate and maximize monetary compensation, benefits, and other forms of compensation that are ideally designed to retain top talent. Total reward encompasses direct and indirect remuneration approaches that employers use to attract, recognize, and retain workers.

Total Rewards and Organizational Strategy
Compensation and benefits are the lifeblood of the employment relationship between the worker and the employer. But this relationship reaches beyond the scope of compensation and benefits alone, including recognition programs and assorted fringe benefits; thus, total rewards has become a popular term that best defines this aspect of the employment relationship.
Direct compensation, simply referred to as compensation, as a strategic objective, significantly impacts all of the other HR functions, including staffing, performance evaluations, training and development, and employee relations, and these HR functions likewise influence compensation. Compensation affects organizational processes, job satisfaction, productivity, and turnover. Compensation must be viewed not only on the basis of what is legal and motivating but also on the ethical basis of what is fair and just.
Key terms used in this section include the following:
- Total rewards Includes six elements (compensation, benefits, work-life effectiveness, recognition, performance management, and talent development) that collectively define an organization’s strategy to attract, motivate, retain, and engage employees.91
- Benefits Benefits in kind (also called fringe benefits and perks) include various types of nonwage compensation paid to employees in addition to their normal wages and salaries. Examples of these benefits include housing (employer-provided or employer-paid), group insurance (health, dental, life, etc.), disability income protection, retirement benefits, daycare, tuition reimbursement, sick leave (paid and nonpaid), vacation (paid and nonpaid), Social Security, profit sharing, funding of education, and other specialized benefits.
- Compensation This includes all of the rewards earned by employees in return for their labor. It includes direct financial compensation consisting of pay received in the form of wages, salaries, bonuses, and commissions provided at regular and consistent intervals.
- Perquisites Colloquially referred to as “perks,” these are benefits of a more discretionary nature. Often, perks are given to employees who are doing notably well and/or have seniority. Common perks are company cars, company-paid mobile devices, free refreshments, leisure activities on work time (golf, etc.), allowances for meals, and—when multiple choices exist—first choice of job assignments and vacation scheduling.
- Incentives These are systems of rewarding success and effort in the workplace by allowing employees to earn awards or recognition.


Developing a Total Rewards Strategy
Employers want to attract and retain good, qualified workers who are motivated to a degree of high productivity, but employers must make compensation decisions with competing pressures. Simply paying more or providing better company benefits may make some employees happy but will, in the long term, raise labor costs and make the company less competitive.
A total rewards strategy can be described as a four-step process that consists of assessment, design, implementation, and evaluation. A number of factors affect the planning and design of a total rewards strategy. As an example, if the organization operates in a union environment, the planning and design elements will be affected by collective bargaining requirements. Important HR competencies needed to develop a successful total rewards strategy include excellent interpersonal and communication skills.
 

Assessment   The assessment stage focuses on a competent evaluation of the organization’s current compensation and benefits programs, if any. In particular, attention is paid to the effectiveness of existing programs in fulfilling their purposes in an effective manner. Employee surveys are an important mechanism to develop good information regarding employee attitudes and opinions. Surveys typically address employee pay, benefits and growth, and development issues. During this stage, current policies and practices are also examined. An important result of the assessment phase is producing an assessment report that includes information on the current status of existing compensation and benefits coupled with recommendations for changes based on the assessment findings. Ultimately, the assessment report should address the following:
- Who should be eligible for coverage?
- What behaviors of value should be rewarded?
- What type of rewards will do the best job?
- How will changes, if any, be funded?
 

Design   The objective of this phase is to identify the best reward strategies for the organization based on the conclusions of the assessment report. To reach this objective, a team of HR leaders and senior management should be taxed with the job of identifying the best combination of pay and benefits needed to accomplish the goals stated in the assessment report. In addition to the direct pay and benefits possibilities, the project team responsible for the design effort should also explore additional benefits such as flexible work scheduled, time off, and similar options as well as personal development opportunities that can be offered such as training and development opportunities.
 

Implementation   Typically, HR is heavily involved in this phase. A new rewards program needs information planning and material describing the new program’s features and benefits. In many cases, additional training will be required. The success of needed changes to an organization’s rewards programs is largely dependent on the image that is communicated to the organization’s workforce.
 

Evaluation   An organization’s ultimate responsibility is to measure the success of its new rewards programs. Even the best of plans will often require additional attention. Slight modifications may be necessary, but, barring any new unforeseen elements, diligently following these four steps should ensure a successful result.

Objectives of a Total Rewards Strategy
All organizations need to have their compensation and benefits systems support their organization’s mission and strategy. Although the degree of sophistication may vary, a good total rewards strategy should hold to some basic principles. That is, in the face of competitive market pressures, all pay decisions should have the following attributes:
- Be legal They must be consistent with numerous federal, state, and local laws.
- Be adequate They must be large enough to attract qualified employees to join the organization and stay.
- Be motivating They should provide sufficient incentives to motivate employees to perform effectively.
- Be equitable Employees should feel that their compensation is internally equitable relative to other employees in the organization and externally equitable relative to employees doing similar work in other organizations.
- Provide security Employees want to feel that their monthly income is secure and predictable. They need to feel that their pay is somewhat insulated from changes in employment, profitability, individual performance, and personal health.
- Be cost-benefit effective The organization must administer its compensation system efficiently and have the financial resources to support it on a continuing basis.
 

Organizational Mission and Strategy   Larger and more mature organizations generally have a written business plan that outlines the organization’s mission and strategy. Normally, the compensation and benefits system are an outgrowth of the organization’s business plan in these organizations.
A basic principle is that a business must generate sufficient revenue to cover its expenses. When the demand for workers exceeds the supply, there is an upward pressure on pay levels. The degree of competition, the level of market demand, and each industry’s overall characteristics influence compensation and benefits programs. Other factors such as the organization’s lifecycle stage also play a role. The bottom line is that the objective is to design and implement a total rewards plan that will attract the right people to the right jobs at the right time and the right place at the right cost.
 

Organizational Culture   Regardless of the other factors, a compensation system must fit the organization’s culture. By “organizational culture,” we mean a system of shared assumptions, values, and beliefs that governs how people behave in organizations. Every organization has a distinct value for each of these characteristics, which, when combined, defines the organization’s unique culture. Typically, organizations take one of two basic approaches toward their employees.
Entitlement-Oriented   These companies promote a caring, protective feeling and want employees to feel they are part of the family. Sometimes called a fairness orientation, or emphasis on people, these companies place a high value on how their decisions affect the people in their organizations. For these companies, it is important to treat their employees with respect and dignity. These organizations feel that employees are entitled to benefits such as health care, employee assistance, or disability insurance as a condition of employment. They place less emphasis on individual contributions and more emphasis on the success of the organization as a whole.
Contribution-Oriented   These companies are more performance driven. They put greater emphasis on job performance and the contributions of individual employees. They focus on results but not so much on how the results are achieved. A company that instructs its sales force to do whatever it takes to get sales orders has a culture that places a high value on outcomes. Their compensation systems emphasize performance-based pay, incentives, and shared responsibility for benefits.
Although few organizations have a compensation system based solely on a performance approach, the trend is moving further from an entitlement approach and closer to a performance approach. Most organizations have compensation systems with elements associated with both approaches.
Workforce   A rewards program must consider the type of workforce involved. An organization with a large number of entry-level or unskilled workers will likely have a significantly different total rewards program than an organization with mostly high-level, skilled professionals. In either case, an important tool used to measure employee attitudes and opinions is a survey.
Equity   Equity is fairness and impartiality toward all concerned, based on the principles of even-handed dealing. Equity implies giving as much advantage, consideration, or latitude to one party as it is given to another. Along with economy, effectiveness, and efficiency, equity is essential for ensuring that the extent and costs of funds, goods, and services are fairly divided among their recipients.
Pay Equity   Pay equity is not equal access to jobs offered by an employer. This is called employment equity, which means that women, men, and minorities have equal opportunity when applying for jobs. Nor is pay equity the fact that a person working in company X is being paid $2,000 less than the person of the same gender sitting nearby for exactly the same job. This is called internal equity and is unrelated to employment equity. So, what does pay equity mean? At first, it meant as equal pay for equal work. However, as organizations tried to achieve pay equity, they quickly realized that it was difficult to compare the same two jobs and their compensation since each one comprised a different set of tasks. The difficulties experienced by organizations with this approach prompted the government to adopt the following definition: “Equal pay for different but equivalent work.”
This change ensures that there is no sexist bias in the comparison of compensation so that predominantly female jobs are paid equally to predominantly male jobs of equivalent value. The change also enabled comparisons between jobs of different types but equivalent in terms of tasks. An example of this would be to compare trade and service jobs with clerical jobs of equivalent value.
Internal Equity   Internal equity is a situation that results when people feel that performance fairly determines the pay for each individual with a certain job or that relative difficulty results in appropriate differences in pay rates between jobs. Worker dissatisfaction may arise when internal equity principles aren’t met. Internal equity studies analyze the nature of a particular position including skill, effort, responsibility, and working conditions. The internal equity study determines whether there is “pay equity” between like positions. This study ensures compliance with the Federal Equal Pay Act and state laws, thereby avoiding potential lawsuits. Additionally, an internal equity study makes good managerial sense in that employee morale, and consequently productivity, will increase.
External Equity   An effective employee compensation system must balance two factors: worker motivation and labor costs. In designing a company’s pay plan, you must consider external equity as well as internal equity. External equity refers to comparisons with other competitive pay structures. An employer’s goal should be to pay what is necessary to attract, retain, and motivate a sufficient number of qualified employees. This requires a base pay program that pays competitively. Among others, internal data such as turnover rates and exit interviews can be helpful in determining the competitiveness of pay rates.
As is true for internal equity perceptions, global pay experts indicate that employee external pay fairness perceptions mostly focus on base pay, career development opportunities, and merit increases. Personal recognition perceptions were not as prevalent as base pay, career development, and merit pay. This is probably because it is not easy in the international marketplace for most employees to compare what is done in the employee’s own organization compared to other organizations.
 

Strategies that will provide the best competitive advantage to the employer.

These strategies can be summarized in three ways, as shown in this table.

Table:     Pay Strategies

Ultimately, an effective pay strategy has to accomplish the following objectives:
- Attract talented employees. Rewards should be used to entice talented employees to the company or position. Companies should allocate a certain amount of funds to recruiting and hiring high-caliber employees.
- Motivate employees to perform optimally. Most programs focus on the motivational component of rewards. They use rewards to shape employee behavior in the most desired direction. This outcome should be carefully considered when designing a rewards program.
- Foster personal growth and development. Rewards should be used to encourage and promote personal growth and professional development. When rewards are used to encourage employees to engage in behavior that will increase their work performance, the company ultimately benefits from a more skilled workforce.
- Increase employee satisfaction with their work. Rewards can promote engagement with work, resulting in increased workplace satisfaction. They can motivate an employee to persist in the face of challenges, come up with creative solutions to tackling tasks, and encourage them to derive more pleasure with their work.
- Keep talented employees from leaving. When employees love what they do and are rewarded for their performance, they are less likely to leave a company. Keeping talented employees on board should be a priority of any company. Thus, companies should devote resources necessary to ensure that their rewards program meet the needs of their most talented employees.
 

Global Remuneration Issues and Challenges   HR and compensation professionals in organizations that operate on a global scale often find themselves faced with the task of managing compensation practices across multiple jurisdictions on a regular basis. Many factors increase the complexity of HR operations in a global context. Not only are additional proficiencies required on a daily basis, but there is the need for more collaboration with legal, finance, accounting, tax, and local and country management, which are all key elements in the global environment.
There are two key issues to keep in mind. The concept of “at-will” employment does not generally exist outside of the United States. In the United States, barring a contract to the contrary and in a nonunionized environment, employers are free to hire, fire, and change terms and conditions of employment without notice and without reason (as long as it is not an unlawful reason). Outside the United States, employment is typically a matter of contract, and employers cannot unilaterally change terms and conditions of employment. This limits the ability of an employer to make any changes for its non-U.S. workforce.

Different types of employees have different protections outside the United States. In the United States, the distinctions between type of employee are driven in large part by federal and state minimum wage and overtime laws, i.e., exempt versus nonexempt status. Outside the United States, the distinctions for application of collective bargaining agreements (CBAs) and local labor laws on wage rates, vacation entitlements, and the like are not tied to whether an employee is equivalent to an exempt or nonexempt employee in the United States but rather vary by levels of workers. As an example, in Italy, an executive-level employee, as defined under the applicable CBA, will have different wage entitlements than a blue-collar worker. In France, levels of remuneration are dependent on the coefficient applicable to the position. In Japan, directors can be considered nonemployees, in which case they are generally not protected under the Labor Standards Law.
This presumes that the workforce is composed of employees, as opposed to independent contractors or other contingent workers. Where a company engages nonemployee workers, issues of misclassification of contractors as employees and joint employer liability for contingent workers can arise in almost all jurisdictions, and thus compensation structures for those workers should be carefully managed.93
 

Alignment with Global Staffing   Total rewards must support global talent acquisition and management strategies. Compensation practices must support the hiring and retention of an engaged and productive workforce, domestic and global.
Howard V. Perlmutter first formulated the differences among ethnocentric, polycentric, regiocentric staffing with the geocentric approach to international staffing added later.

The approaches shown in this table directly affect the strategies, policies, and practices related to global compensation and benefits.

Table:      Global Orientation on Global Compensation and Benefits Strategy
 

Influencing Factors in a Global Environment   Many forces influence global remuneration. They include labor market dynamics that exist in the business; regulatory, political, and cultural differences; taxation of compensation and benefits; operational legal and reporting structures in different geographies; and the role that mobility will play in future workforce strategy and deployment. Largely driven by these operational and country specifics, strategies for compensation and benefits delivery are then often capped by market practices.

This table describes major issues and challenges, and it notes the general implications for global HR.

Table:      Issues and Challenges in Global Compensation and Benefits

Special Considerations in a Total Rewards Strategy
Two factors must be addressed as part of developing a total rewards strategy. They are PEST factors and the employee lifecycle.
PEST factors address political, economic, social, and technological factors that may influence an organization’s total rewards strategy. The following examples describe the conditions that may impact total rewards:

- Political The head of government or legislative body in control most likely has a particular agenda/position on employee pay as well as executive pay. Their approach and legislation impacts an organization’s total rewards at least from a legal standpoint (e.g., minimum pay, tax withholding rates).
HR needs to be proficient in compliance with total rewards–related acts and legislation where the organization does business (e.g., cities, states, countries), as they are charged with (and expected to) provide expertise, particularly in the area of compliance.
- Economic A city, state, or country economy, as well as the global economy, impacts an organization’s ability to provide total rewards. Pay may be frozen, and variable compensation may not be paid.
Poor economies stunt organizational growth and, in turn, the hiring of new talent. The positive outcome of this may be that employee retention increases because of slow job growth/few external opportunities.
Growing and prosperous economies benefit organizational bottom lines and encourage and promote hiring but accentuate the need for employee retention as more employees will probably be in the job market and look to leave for a better opportunity.
- Social Citizens have views toward organizational pay, particularly that of the C-suite and the CEO. The information on the pay of these individuals is easily accessible if the organization is publicly traded. Even though compensation committees have the ability to control and impact executive total rewards, all too often compensation for the highest levels of an organization is viewed as exorbitant and leads to negative public opinion.
Organizations come under significant scrutiny when their fired or ousted CEO receives a significant severance package on the way out the door. Many people fail to realize that this may have been contractually negotiated as part of the pre-employment negotiations. At a minimum, this translates to an unfavorable view and perception of the organization or the board of directors.
- Technological An organization’s ability to automate, streamline, and improve the efficiency of many transactions that accompany total rewards from regular, periodic base pay to tax withholding to government-mandated reporting and filing are directly impacted by technological advances. Organizations may outsource their technology requirements to third-party vendors that develop and manage applications. However, software may also be licensed so that organizations can perform the function in-house.

A less common approach is for companies to develop the technology themselves. This usually is because they lack the money, the expertise, and/or the ability to maintain the technology.
Any of these approaches can have a significant impact on employee total rewards, much of which is highly emotional to employees.
Employee lifecycle (ELC) refers to the various stages of the employment process. It starts with the recruitment and ends with termination. The various stages of the employee lifecycle call for different HR management techniques for individual employees. As an example, compensation and benefit practices are increasingly planned and managed in response to the individual employee’s lifecycle stage.
Some of the more commonly recognized lifecycle stages include the following:
- Recruitment The employee lifecycle begins before the individual employee is even identified. HR considerations begin when the employer begins its planning and engages in its initial search for potential applicants.
- Onboarding Most employers agree that complete integration into the workforce is most effective when it begins during the onboarding stage. This is the best time to begin the creation of a productive relationship to make sure the employee is aware of their responsibilities and is comfortable in their new role in the organization.
- Orientation During this stage, the employee settles into the job, integrates with the organization’s corporate culture, familiarizes himself with co-workers and management, and establishes his role within the organization. Typically, as individuals move through their various lifecycle stages, the value of their contributions increases along with their total rewards.
- Promotion An employee who stays with the employer will likely want to advance within the workplace at an average to speedy rate. Managers, supervisors, and HR practitioners must be adept at recognizing changing interests and needs and capable of matching the organization’s interests with the individual’s needs.
- Termination Whether an employee quits, retires, or is terminated by the employer, at some point the employment relationship will end. As planning begins the employee lifecycle, also planning for succession and replacement needs is an ongoing management activity supported by HR counsel and advice that ensures the orderly positioning of the organization toward new opportunities.
Studies show that organizations that are able to effectively adapt to employee lifecycle changes are organizations that succeed.

Communication of the Total Rewards Strategy
A typical total rewards package can include compensation, benefits, work-life balance, performance and recognition, personal development, and career opportunities. Recent strong global competition for talent and shortages of critical-skill workers, particularly in the fast-growing economies of Asia and Latin America, have driven a surge of interest in applying core total rewards principles to designing and delivering workforce programs. Critically, the total rewards framework is grounded in three core principles of sound design and delivery.
- Align the total rewards strategy with the organization’s business strategy and related workforce goals. Effective workforce programs are an extension of an organization’s business strategy, explicitly supporting key priorities and goals and clearly communicating the level and nature of the contribution the organization expects from its people.
- Optimize the money spent by allocating it among the programs that matter to employees, and deliver the right return while being sensitive to cost and risk objectives. Despite the magnitude of spending on reward programs, many organizations don’t consistently measure returns or clearly understand the relationship between program costs and the value employees attach to them.
- Design, communicate, implement, and deliver rewards that drive the specific employee behaviors you need to achieve your business strategy. Identifying the right mix is not only a function of cost versus value but also of the culture and work environment your company is building and sustaining to meet strategic goals.
 

The Challenges of Transparency   How much to communicate about pay is a continual debate, one for which there is no clear answer. Those in favor of open communication feel that unless employees understand their organization’s pay system and how their pay is determined, it will not achieve its primary objective of supporting the achievement of strategic business objectives. But, even proponents of reward program transparency recognize that a level of employee privacy must be preserved. The result of complete openness can foster jealousy and performance problems.
Effective total rewards communications have become even more important now when employees are faced with making a decision between their economic needs (i.e., their pay) and the level of health and retirement benefits they would like to receive.
Today, employers have an array of communication tools to choose from. Technology enables the creation of individualized reports informing employees about reward program eligibility and payouts. Computers make the dissemination of rewards information via e-mails, web sites, webinars, DVDs, and other electronic media fast and cost-effective at work, at home, and, in fact, almost anywhere. Despite this, experts agree that rewards communications are, more times than not, done poorly; for the most part, employees do not understand how they are paid and what factors determine their eligibility for most reward programs.
 

Effective Communication of Total Rewards   

Considerations that affect the effective communications of total rewards include the following:
- Type of Information
- Required communications Laws and regulations often mandate certain communications such as disclosure and reporting requirements associated with pension benefits plans as well as payroll record and disclosure requirements. It is the organization’s responsibility to ensure compliance with these legal requirements.
- Voluntary communications Legal compliance is not sufficient to achieve a full objective of employee knowledge and understanding. Organizations must go beyond the legal minimum and fashion communications policies that clearly identify the message outlining policies and procedures as well as management expectations. To be effective, these communications should be of a two-way nature as a direct link between management, HR, and the organization’s employees.
- Communication Plans The larger the organization, the greater the need for a comprehensive communications plan. A good place to start is with a SWOT analysis (strengths, weaknesses, opportunities, and threats) considering both internal and external factors. Plans vary and should be written. They may include a description of the organization’s compensation strategy; its policies, practices, and procedures; and any other pertinent important information.
- Individualized compensation and benefits statements Total compensation statements made their appearance in the workplace during the past 20 years. Sometimes they were called employee benefit statements, hidden paycheck statements, or total reward statements, the purpose is to show true compensation value to employees. This is particularly important in a world where benefit premiums continue to increase while, at the same time, many employers plan to increase salaries minimally. The net result tends to create some negativity in the workplace and grumblings of job searches. The total compensation statement can provide a reassuring picture to your employees and a tangible reminder of the organization’s financial commitment to its employees. Total compensation statements contribute to improved employee morale. When employers take the time to present and explain these statements to their employees, they typically improve the employees’ overall perceptions of the employer by increasing awareness of the company’s total employee benefits (pay and benefits) offering. Total compensation statements also help to attract and retain quality employees by identifying a more rounded picture of both the direct and indirect compensation.
- Self-service technologies Employee self-service (ESS) software is an HR technology tool that gives employees the power to manage their own personal data. Employee self-service applications enable employees to view and amend personal data (such as banking details), make requests for leave, easily access corporate policies, access the employee directory, view organizational structuring, access corporate communications, and much more. This gives employees a much higher level of control over the data that pertains to them. Enabling employees to provide input into decision-making is one of the top drivers of employee engagement according to the experts. From the tactical advantages that autonomy can bring to the strategic implications of giving greater responsibility to each employee for their career direction, employee self-service technology is an incredibly powerful tool for engagement when effectively utilized.
- Consistent key messages An organization spread across multiple locations requires extra effort to a clearly communicated consistent message. This is even a greater challenge when this is a global organization. Cultures become varied; the same message can be understood in different ways depending on the cultural perspectives. As a result, there is no one way to communicate the organization’s compensation and benefits strategy. This results in a number of different approaches that have one objective in common, that is, to create open, effective communications designed to send and receive a clearly understood message.

Evaluation of the Total Rewards Strategy
The last phase of implementing a total rewards program, the evaluation, often is the most overlooked phase of total rewards. In this phase, the actual results of the executed total rewards strategies are compared against the desired results. The objective of this evaluation is to show top management that the company’s investment in its total rewards system has paid off. To get the most from the evaluation phase, HR should be encouraged to measure the outcomes of the executed total rewards system and to interpret the findings correctly.
 

Measures, Metrics, and Analytics   

Three terms are often play a major role in the evaluation phase.
- Measures The process of collecting and tabulating data. This is a standard unit used to express the size, amount, or degree of something.
- Metrics Performance parameters based on the relationship between two or more measures. Metrics are a quantifiable measure organizations use to track, monitor, and assess the success or failure of various business processes.
- Analytics Convert a metric into a decision-supported insight. This is information resulting from the systematic analysis of data or statistics.
There are three key questions that must be addressed to effectively conduct a total rewards strategy evaluation.
- Is the total rewards strategy in legal compliance?
- Is the total rewards strategy compatible with the organization’s mission and strategy?
- Does the total rewards strategy fit the culture?
- Is the total rewards strategy internally equitable and externally competitive?

The following evaluation guidelines are offered to ensure appropriate measures, metrics, and analytics are used in the evaluation phase of a total rewards strategy:
- Align HR measurements to the organizational strategic plan.
- Measure what can help improve employee performance or make better decisions.
- Avoid the problem of gathering data solely for its own sake.

Compensation Structure
People are willing to work in exchange for rewards they receive from the work they do. The objective is to provide a balance between what work is performed and the reward received for doing the work. Total rewards includes the financial inducements and rewards (direct pay, cash-based incentives, and benefits) as well as nonfinancial inducements and rewards such as the value of good job content as well as a good working environment. Employers strive to offer an attractive compensation package, including a fair base pay, incentives, and benefits, in addition to a good job match and working environment to attract employees and retain them.

Total rewards includes compensation that is both direct and indirect. Direct compensation (e.g., cash) applies to a variety of pay programs that are, in one way or another, cash-based, whereas indirect compensation (e.g., benefits) applies to programs primarily designed to provide recognition and benefits and, therefore, are indirectly cash-based.

Examples of these two types of compensation are listed in this table.

Table:      Direct and Indirect Compensation

Some of the direct compensation programs are discretionary (i.e., cash awards, differential pay, and certain bonuses), while others are mandatory and governed by federal, state, and, in some cases, local law and regulation (base pay and incentives). Some of the indirect compensation programs are also discretionary—that is, they are employed at the option of the employer. They include paid vacation, sick leave (four states now offer paid sick leave: Connecticut, California, Massachusetts, and Oregon94), paid time off, 401(k) and similar retirement plans, and pensions. Finally, some benefits are mandatory and governed by federal law and regulation. Social Security, workers’ compensation, and unemployment insurance are examples. Even discretionary programs are subject to regulation when they are employed.

Compensation System Design
The compensation system design process (See Figure) includes four key activities: job analysis, job documentation, job evaluation, and pay structure.

Figure:      Compensation system design process

Job Analysis
Before we address the process of a job analysis, we should first address what is a job. A job may be best understood as an organization of total work into units or positions. According to Dale Yoder,95 “A job is a collection of tasks, duties and responsibilities which, as a whole, is treated as assigned duties for individual employees and which is different from other assignments.” Thus, a job may be defined as a group of positions involving some duties, responsibilities, knowledge, and skills.
Jobs each have a definite title based on typically accepted business and industry standards. Each job is different from other jobs such as receptionist, accountant, supervisor, and so on. A job such as an accountant may include many positions (i.e., accounting specialist, forensic accountant, and so on). A position is a particular set of duties and responsibilities regularly assigned to an individual.
 

Job Analysis Defined   Job analysis is the process of collecting information about a job. It refers to the superstructure of the job. According to Herbert G. Heneman III,96 “A job is a collection of tasks that can be performed by a single employee to contribute to the production of some product or service provided by the organization. Each job has certain ability requirements (as well as certain rewards) associated with it. Job analysis is the process used to identify these requirements.”
 

Job Analysis Considerations   The following considerations must be factors in conducting a job analysis:
- The facts identified must relate to the job and not the job incumbent.
- The duties and responsibilities must be for the job as it actually exists rather than what it is thought to be.
- Job facts must be verified to make sure they are accurate.
- Each duty must be analyzed to ensure it is essential to the job function.
- When there is more than one job incumbent, only one job analysis should be required.
 

Job Analysis Methods   There are multiple methods that can be used to collect information as part of a job analysis.
- Observation This involves the direct observation of employees performing the tasks of a job, recording observations, and translating them into the necessary knowledge, skills, and abilities. This method provides a realistic view of the daily tasks and activities performed in a job but works best for short-cycle jobs in production rather than long-term jobs.
- Interview This involves a face-to-face interview where the interviewer obtains the necessary information from the employee, peers, supervisors, and team/unit members about the knowledge, skills, and abilities needed to perform the job. The interviewer uses predetermined questions with new ones added as follow-up based on the response of the employee being interviewed. This method is particularly good for professional jobs.
- Highly structured questionnaire This involves questionnaires structured in a way that requires specific responses aimed at determining the frequency certain specific tasks are performed, their relative importance, and the skills required. This method defines a job with a relatively objective approach that also enables analysis that is easily adaptable to using computer models. It’s good when a large number of jobs must be analyzed and there are insufficient resources to do it.
- Open-ended questionnaire This involves the use of questionnaires to job incumbents, and sometimes to their supervisors or managers, asking about the knowledge, skills, and abilities necessary to perform the job. After the answers are combined, a composite statement of job requirements is published from which a job description can be refined.
- Work diary or log This is a diary or log is maintained by the employee in this method. Job information, including the frequency and timing of tasks, is recorded in the diary. Logs are usually kept over an extended period of time. They are analyzed, and patterns are identified and translated into duties and responsibilities. While data can be collected over a long period of time with this method, it can result in an enormous amount of information to be culled and summarized.
Job Analysis Outcomes   Possible results from job analysis include the following:
- Job description This is a functional description of what contents the job includes. It is a narration of the job contents, a description of the activities and duties to be performed in a job, the relationship of the job with other jobs, the equipment and tools involved, the nature of supervision, working conditions, and job hazards including physical and mental requirements.
- Job specifications This focuses on the person doing the job, i.e., the job holder. The job specification is a statement of the minimum levels of qualifications, skills, physical and other abilities, experience, judgment, and attributes required to effectively perform the job. It is a statement of the minimum acceptable qualifications that an incumbent must have to perform a given job. It sets forth the knowledge, skills, and abilities required to do the job effectively.
- Job competencies Normally focused on “core” or “critical” competencies, these are the measurable or observable knowledge, skills, abilities, and behaviors, sometimes called KSABs, that are critical to successful job performance. Choosing the right competencies allows employers to do the following:
- Plan how they will organize and develop their workforce.
- Determine which job classes best fit their business needs.
- Recruit and select the best employees.
- Manage and train employees effectively.
- Develop staff to fill future vacancies.
- Core competencies may be divided into three categories.
- Knowledge competencies The practical or theoretical understanding of subjects
- Skill and ability competencies The natural or learned capacities to perform acts
- Behavioral competencies Patterns of action or conduct
 

Job Analysis Uses   

The following are the many uses of a job analysis:
- Human resource planning It can be used to forecast human resource requirements in terms of knowledge and skills.
- Recruitment It can be used to find out how and when to hire people for future job openings.
- Selection It is not possible to select the right person for the job without a proper understanding of what is to be done on a job.
- Placement and orientation After selecting people, we have to place them on jobs best suited to their interests, activities, and aptitude.
- Training Required training efforts cannot be initiated if there is any confusion about what the job is and what is supposed to be done.
- Counseling Managers can properly counsel employees about their careers when they understand the different jobs in the organization. Likewise, employees can better appreciate their career options when they understand the specific needs of various other jobs.
- Performance appraisal The worth of the person doing the job can be assessed by comparing what the person is supposed to be doing (based on job analysis) to what the individual has actually done.
- Job design and redesign Once the jobs are properly understood, it becomes easier to locate weak spots and undertake remedial steps.

Job Documentation
Job documentation includes the creation of job descriptions, specifications, and competencies. In the context of a compensation system, job documentation does the following:
- Helps establish evaluation criteria for job performance
- Provides data used to compare pay with that of other organizations
- Helps the assignment of objective classifications or job titles to employees
- Communicates performance expectations to supervisors and employees
- Reduces an organization’s liability exposure to discrimination charges allegations
- Assists employers in recognizing and addressing reasonable accommodation and other legal compliance requirements

Job Evaluation
The systematic determination of the relative worth of jobs in an organization is known as job evaluation. The importance of job evaluation is that it is a critically important pay equity concept applied through a formalized process designed to prevent internal pay inequities as employers create structure within the organization’s cost parameters while responding to its workforce expectations. Conducting a job evaluation is an essential first step in creating an appropriate wage structure that accommodates jobs of different worth, while it preserves the core objective of internal pay equity. Market surveys are a tool that enables organizations to understand and recognize market pressures with an objective of external equity.
Job-Content Based (Internal) Job Evaluation   Job evaluation options can be divided into job-content-based (internal) job evaluation and market-based (external) job evaluation. In job-content-based job evaluation, the relative worth and pay opportunities of different jobs are based on an assessment of their content (e.g., responsibilities and requirements) and their relationship to other jobs within the organization. In a market-based evaluation approach, the relative worth and pay opportunities of different jobs are based on their market value or going rate in the marketplace.
Nonquantitative Job-Content Job Evaluation   Job evaluation methods can be nonquantitative or quantitative. The primary objective of a nonquantitative method is to establish a relative hierarchy of jobs based on each job’s relative worth. Nonquantitative methods often are referred to as whole-job methods because they rank jobs as a whole based on their perceived worth without placing a numerical value on each job. An example of a nonquantitative method would be to rank a clerical job below a supervisory job on the basis of their relative, nonquantitative worth.
Quantitative job evaluation methods include point-factor and factor comparison methods.

Quantitative methods evaluate factors on a defined measurable scale and provide a score as the result that is a measurable comparison of one job to another (see Table).

Table:      Job Evaluation Methods

- Job ranking The job ranking method is often called a whole-job comparison because it is a comparison of the whole job compared to another whole job rather than a comparison based on each job’s measurable factors. Job ranking using the whole-job method is quick and easy but not very precise. It is easy to explain which is why it is popular, but it leaves unanswered why one job is worth more than another as well as how much of a “gap” exists between jobs.
When there are a large number of jobs to evaluate, a paired-comparison method of ranking can be used. This method enables each job to be compared with every other job. Jobs are methodically compared to the next job and, depending on the perceived worth, moved up or below the next job. Ultimately, the job with the highest number of upward movements is the highest ranked. Other jobs are ranked accordingly.
- Job classification Jobs can be compared to an outside scale. This also can be done on a whole-job basis called a job classification method. Job classification is the result of grouping jobs into a predetermined number of grades or classifications. Each classification has a class description. The federal government has a classification system known as the General Schedule. The General Schedule (GS) is the predominant pay scale for federal employees, especially employees in professional, technical, administrative, or clerical positions. The system consists of 15 grades, from the lowest level of GS-1 to the highest level of GS-15. There are also ten steps within each grade. The grade level assigned to a position determines the pay level for that job.

Classes can be further identified by using benchmark jobs that fall into each class. Benchmark jobs have the following characteristics:
- The essential functions and knowledge, skills, and abilities (KSAs) are established and stable.
- They represent the entire range of jobs in each class.
- A significant percentage of workers is employed in these jobs.
- External market rates for these jobs are an acceptable basis for setting wages.

The job classification method is a nonquantitative job evaluation method. In the job classification method, a job may be compared to a similar job or to other jobs in the General Schedule to determine its relative ranking. This is considered a nonquantitative method called a job-to-predetermined-standard comparison. Job classification comparisons are a good method when evaluating a large number of jobs and are understandable by employees but may not be effective when jobs overlap as they look only at whole jobs.
 

Quantitative Methods   The difference between nonquantitative job evaluation methods and quantitative job evaluation methods is that quantitative methods use mathematical data, whereas nonquantitative methods use qualitative data. The following methods are two quantitative methods:
- Point-factor method The most commonly used job evaluation method is the point-factor method, which uses specific compensable factors as its reference points to measure relative job worth. Compensable factors are significant job characteristics that contribute to the value of the work and organization as a whole. Two well-known systems used to identify compensable factors are the following:
- The Hay plan Uses a standard criteria comprising three compensable factors: know-how, problem-solving, and accountability.
- The factor evaluation system (FES) Determines levels of duties and responsibilities using a point rating system to evaluate selected positions. Uses weighted factors to address the major position characteristics of responsibility, education/experience, job conditions, physical requirements, supervision, training, and so on.

There are five steps involved in the point-factor method of job evaluation:
1.   Identify key jobs. These are benchmark jobs, not necessarily the most important jobs in the organization but jobs that are equitably paid, stable, and well-defined.
2.   Identify the compensable factors. These are the factors that will be used to distinguish one job from another. Six to eight factors are generally sufficient. Experience, responsibility, and education are most often used. Other factors that can be considered, depending on their general applicability, include physical demands, mental requirements, skill, working conditions, and supervisory responsibilities.
3.   Weight the factors according to their overall worth. Usually, the most heavily weighted factors are knowledge, responsibility, experience, education, degree of difficulty, and supervisory responsibilities.
4.   Divide each job factor into degrees that range from high to low. Assign points to each degree. The number of points assigned to each degree should correspond with the weighting of the factors. As an example, if the factor for skill is weighted 40 percent, the factor of working conditions is weighted 10 percent, and both factors have five degrees, degree two for skill should have four times as many points as degree two for working conditions.
5.   Determine the total points. This will usually determine the pay grade to which the job will be assigned. The final result will be determined using a table (see Table 4-17) that has a range of points from 50 (the least number, column 1) to 200 (the most, column 5).

Based on the point values assigned, the job in this example is 126 on a scale of 50 to 200 points.

Table:   Point-Factor Job Evaluation Method

- Factor comparison method The factor comparison method is more complex than the ranking, classification, or point-factor methods and is rarely used. It involves ranking each job by each compensable factor and then, as an additional step, identifying dollar values for each level of each factor to develop an actual pay rate for the evaluated job.
The factor comparison method is most often used in union negotiations as part of a labor contract and in limited cases where wages are steady over a period of time and the organization uses a flat rate for each job.
Market-Based (External) Job Evaluation   A market-rate system is not a true job evaluation system; however, in certain cases, market value can be used to price jobs—particularly when the organization is sensitive to competition. These prevailing rates are used to represent the relative worth of the jobs. In this approach, key jobs are measured and valued against the market, and the remaining jobs are inserted into a hierarchy based on their whole-job comparison to the benchmark jobs.

NOTE    When matching a job with the competition, it is important to compare duties, scope, and reporting relationships but not titles because they are often misleading.
Market-based evaluation can be particularly beneficial when an organization has similar jobs in various locations throughout the United States. The disadvantage of a market-based evaluation is that the data will be reliable only when gathered for a significant number of jobs in the organization. Market-based evaluation results are more vulnerable to legal challenge than job-content approaches. Another disadvantage is that market-based evaluations do not recognize internal job value and, as a result, are more likely to lead to discontent and frustration from within the organization.
Remuneration (Pay) Surveys   Many organizations rely on pay surveys as a systematic way to collect, evaluate, and classify their jobs; adjust pay structures; and provide market information to top management. Pay surveys collect data on prevailing market rates and provide information such as starting wage rates, base pay, pay ranges, overtime pay, shift differentials, and incentive pay plans.
Options to collecting pay survey data include whether the survey should be conducted internally or gathered externally. Organizations that want to maintain maximum control over their pay information often choose to sponsor a custom survey. The advantage of this approach is that the organization has the ability to design the survey, manage its administration, do its own data analysis, and customize its report specifically for its own use. Another advantage is that the organization is able to maximize its control over the transfer of data, thereby reducing the risk of an inappropriate disclosure of highly sensitive confidential information.
While choosing to conduct its own internal survey, an organization should contract with an outside consulting group or independent consultant to design the survey and process the data received in a confidential manner. Using an outside person or group relieves pressure on the organization and ensures compliance with Department of Justice antitrust guidelines.
External surveys have different options. National surveys are widely available through the U.S. Department of Labor and the Bureau of Labor Statistics. Many professional groups such as the Society of Human Resource Management (SHRM) and consulting firms conduct surveys of wage and job data for a wide range of professions and organizations.

Data Analysis
Organizations have an interest in survey data based on their market exposure, completion, product or service, and employees. To be accurate, survey data must be verified and often aged, leveled, and factored for geography.
Survey Data Analysis   Survey data must be verified and may need aging, leveling, and/or factoring for location (geography).
- Aging This is a technique used to make outdated data current, a phenomenon that regularly occurs with printed data as a result of the time lapse between when the data is collected, organized, printed, and published. An example of aging occurs when pay movement or increases average 1.5 percent a year. If you use a pay survey that is 1 year old, to be reasonably accurate, you would increase the survey data by 1.5 percent.
- Leveling Pay surveys provide summary descriptions of each job surveyed. In many cases, this description is close but not an exact match with the organization’s job. To accommodate this separation between the two jobs, a leveling technique is used. Leveling consists of adjusting the survey number by an appropriate percentage needed to achieve a match. As an example, an organization’s Engineering I job description indicates an approximate 10 percent less scope of responsibility than described in the same job in a pay survey. Reducing the pay survey job data with a 10 percent reduction would be an appropriate technique to provide an accurate match.
- Geography While many surveys are developed with a specifically described geographical location identified, in cases where this is not done, it would be appropriate to determine the percent difference in job value for a given location and factor that into the comparison.
Frequencies Distributions and Tables   Frequencies distributions and tables are used to sort salary data gathered from various remuneration (sometimes called pay or salary) surveys. A frequency distribution is a listing of grouped data, from lowest to highest.

A frequency table lists the number of incumbents who receive a specific salary, as shown in this table.

Table:      Frequency Distribution and Table

The following are techniques used to organize data in a logical manner for ease and accuracy of interpretation.
Measures of Central Tendency   Measures of central tendency are another way to analyze salary survey data. Common measures of central tendency are mean (or average), median, mode, and quartiles and percentiles.
- Mean (average) The arithmetic average or mean is the average value arrived at by giving equal weight to every participant’s actual pay. This method is appropriate when the data to be determined is the average pay for a given job as opposed to actual pay levels applicable to that job. This figure is also known as the unweighted average.
- Weighted average This number provides an average result taking into account the number of participants and each participant’s pay. This result is known as the weighted average.
- Median This number is sometimes referred to in pay surveys as the 50th percentile. This is the middle number in a range. The median is calculated by averaging the two middle numbers in a range when the range data is sorted from lowest to highest.
- Mode This is the most frequently appearing number (or wage in a pay survey) in a range.

The following calculations are based on the data shown in the table:

Table:      Weighted and Unweighted Mean Calculation

- The unweighted average is $67,500 ($270,000 ÷ organization salaries = 67,500).
- The weighted average is $69,500 ($695,000 ÷ 10 organization salaries = 69,500).

Pay Structure
After an organization has determined its relative internal job values (i.e., job evaluation) and collected appropriate market survey data through pay surveys, work begins on developing the organization’s pay structure, including creating pay grades and establishing pay ranges.
 

Pay Grades   Pay grades, or job groups, are the way an organization organizes jobs of similar values. The valuation is a result of the job evaluation process. Jobs, even though dissimilar in function, of the same or comparatively the same value are paid within the same pay grade.
No fixed rules apply to creating pay grades; rather, the number of pay grades and their structure are more of a reflection of organizational structure and philosophy. Issues that should be considered include the following:
- The size and structure of the organization
- The “distance” between the lowest and the highest job in the organization
- The organization’s pay increase and promotion policy
- The grouping of nonexempt and exempt jobs as well as job families, i.e., clerical, technical, professional, supervisory, and management jobs
- Creating sufficient grades to permit distinguishing difficulty levels but not so many that the difference between adjoining grades is insignificant
Well-structured pay grades enable management to develop a well-coordinated pay system rather than having to create a separate pay range for each job.
 

Pay Ranges   Pay ranges establish the upper and lower boundaries of each pay grade. Market data for a benchmark job (ideally, a “key” job that will link to market value) in each pay range helps to determine the range midpoint. The range spread reflects the equal dispersion of pay on either side of the midpoint to the lower and upper range boundary.
 

Quartiles and Percentiles   Quartiles and percentiles show dispersion of data throughout a range. These are commonly recognized reference points an organization uses to measure its position against the market as well as for internal compensation management purposes.
 

Range Spreads   The range spread is the dispersion of pay from the lowest boundary to the highest boundary of a pay range.
 

Range Spread Calculation
Range spread is calculated by subtracting the range minimum from the range maximum and dividing that figure by the range minimum. Range spread is expressed as a percentage.

 

Example: The range spread for a pay range with a $30,000 minimum and a $45,000 maximum would be as follows:

Typical range spreads in organizations are as follows:
- Nonexempt jobs: 40 percent
- Exempt jobs: 50 percent
- Executive jobs: 60 percent
Generally, lower-level jobs have a narrow range between minimum and maximum pay ranges. Jobs at a lower level tend to be more skill-based, which provides for more movement opportunity than higher levels where jobs are more knowledge-based and progression is slower.
Ranges should overlap so that progression is steady within a pay grade; as a worker’s pay increases with movement to a higher range quartile, the opportunity for managed movement is possible in a measured way.
There also should be a large enough distance between range midpoints so that pay compression between a lower pay grade and a high pay grade does not occur.
 

Compa-ratios   Compa-ratios are indicators of how wages match, lead, or lag the midpoint, normally an indicator of market value. Compa-ratios are computed by dividing the worker’s pay rate by the midpoint of the pay range.

Compa-ratios less than 100 percent (usually expressed as a compa-ratio less than 1.00) mean the worker is paid less than the midpoint of the range. Compa-ratios greater than 100 percent (1.00) mean that wages exceed the midpoint.
 

Broadbanding   Broadbanding is a recent concept that combines several pay grades or job classifications with narrow range spreads with a single band with a wider spread. Organizations usually adopt broadbanding as a way to simplify their pay levels and reduce management oversight requirements. As a result, broadbanding typically is more popular in large organizations than smaller ones.
While broadbanding has some advantages, it also has some disadvantages. In some cases, broadbanding does not work well with the organization’s compensation philosophy. This is particularly true in organizations that focus on promotional opportunities. The reduction of pay grades as a result of broadbanding correspondingly reduces the number of opportunities for promotion.

Compensation Systems
A compensation system is the sum total of all monetary and nonmonetary benefits provided to employees in exchange for their willingness to work.

Base Pay Systems
After an organization has analyzed, evaluated, and priced its jobs, as well as designed its pay structure, the next step is to determine a type of base pay system that will help attract, motivate, and retain employees. In most cases, employees receive some type of base pay, either as an hourly wage (paid to hourly employees) or a salary (a fixed wage that doesn’t change regardless of the hours worked). Base pay system choices include single or flat-rate systems, time-based step rate systems, performance-based merit pay systems, productivity-based systems, and person-based systems. Each of these systems is designed to best achieve the objectives of attracting, motivating, and retaining employees each under a different set of circumstances.
Single or Flat-Rate System   A flat-rate pay system compensates all workers at the same rate for each task performed or hour worked, regardless of factors such as performance or seniority. Often, this is used for task-based jobs. It incentivizes workers to complete tasks as quickly as possible but can penalize those unable to meet the established standards and in some cases may encourage workers to sacrifice quality for speed.
Time-Based Step Rate System   The time-based step rate system bases the employee’s pay rate on the length of time in the job. Pay increases are published in advance on the basis of time. Increases occur on a predetermined schedule. This system has three variations, as described in the sections that follow.
Automatic Step Rate   In the automatic step rate system, the pay range is divided into several steps, each a predetermined range apart. At the prescribed time interval, each employee with the required seniority receives a one-step pay increase. This system is common in public-sector jobs and in a union environment.
Step Rate with Variability Considerations   The step rate with performance considerations system is similar to the automatic system except that performance can influence the size or timing of the pay increase.
Combination Step Rate and Performance Structure   In the combination step rate and performance system, employees receive step rate increases up to the established job rate. Above this level, increases are granted only for superior job performance. To work, this system requires a supporting performance appraisal program as well as good communication and understanding by the workers paid under this system.
Performance-Based Merit Pay System   The performance-based merit pay system is based on an employee’s individual job performance. A performance-based pay system is often referred to as merit pay or pay for performance. In this system, employees are typically hired at or near the minimum for their applicable pay range. Pay increases are normally awarded on an annual basis (or annualized if awarded on other than an annual basis) and influenced by the individual’s overall job performance. A document identifying the percent pay increase linked to levels of performance and the individual’s position in the applicable pay range is communicated to employees as an incentive to increase their performance, thereby earning a higher percentage increase.

This document is known as “Merit Guidelines,” and this table shows an example.

Table:      Merit Guidelines Example

To be effective, the merit pay system must be understood by employees affected by the system. In addition to the merit pay system, a clearly stated performance appraisal program is required to support the merit pay system. Key points that should be addressed in designing and implementing an effective merit pay system include those depicted in this table.

Table:     Key Points Applicable to Merit Pay and Performance Appraisals
 

Productivity-Based System   In the productivity-based system, pay is determined by the employee’s output. This system is mostly used on an assembly line in a manufacturing environment. The following sections describe two types of productivity-based systems.
Straight Piece Rate System   With the straight piece rate system, the employee receives a base rate of pay and is awarded additional compensation for the amount of output produced.
Differential Piece Rate System   In the differential piece rate system, the employee receives one rate of pay up to the production standard and a higher rate of pay when the standard is exceeded. Both the straight piece system and the differential piece rate system focus on quantity rather than quality. As a result, other quality control programs may be required to ensure the required quality standard is met.
Person-Based System   In the person-based system, employee capabilities, rather than how the job is performed, determine the employee’s pay. For example, two employees do the same work, but one employee with a higher level of skill and experience receives more pay. There are three types of person-based systems, as described here:
- Knowledge-based system In the knowledge-based system, a person’s pay is based on the level of knowledge the person has in a particular field. This system is often used in the learned professions such as lawyers and doctors.
- Skill-based system Employees paid in the skill-based system are paid for the number and depth of skills that they have that are applicable to their job. Heavy equipment operators are typically paid in this system.
- Competency-based system In the competency-based system, pay is linked to the level at which an employee can perform in a recognized competency. In HR, a professional with specialty skills in organizational development or labor relations will typically be paid for their competency, for example, organizational development or labor relations in the HR field.

Pay Variations
Pay ranges must be periodically evaluated and adjusted to reflect organizational and market changes. Red circle rates, green circle rates, and cost-of-living adjustments are some of the techniques used to adjust to these changes.
Red Circle Rates   Organizations use red circle rates as a method to increase an employee’s pay to a new rate higher than the maximum for the assigned pay range. This situation occurs more often in smaller organizations where promotional opportunities may be limited. When this happens, an employee’s next pay raise indicated by the organization’s merit guidelines might place the new pay level above the maximum for the applicable pay range.
An example of this is the accounting manager who is paid $95,000 per year, a point less than 5 percent from the top of the range. Based on job performance, the manager would be entitled to a 7 percent increase. The next promotion step is the CFO job. In this case, the company may decide to process the 7 percent increase as a red circle rate 2 percent above the range maximum for an accounting manager. Typically when this is done, the new pay level is frozen until the maximum of the pay range moves upward to exceed the accounting manager’s pay level. This would usually happen when the comparative market numbers increase, thereby allowing a change to the pay range.
Green Circle Rates   Green circle rates occur when a new employee is hired at a pay rate lower than the minimum rate for the applicable grade. It can also happen when a “fast-track” employee is promoted to a new job in a high pay grade under circumstances where the percentage pay increase needed to reach the new grade is excessive and might create an unwanted precedent. In this case, the pay increase may result in a pay level below the minimum level of the new pay grade, thus creating a “green circle rate.”
Situations such as this should be avoided whenever possible and should be allowed only as a last resort because they can create serious morale issues and, even worse, may create an arguable case of pay discrimination. In any case, such actions should be carefully considered and justified in writing after all of the possible consequences are considered.
Pay Compression   Pay compression is the situation that occurs when there is only a small difference in pay between employees regardless of their skills or experience. Pay compression is the result of the market rate for a given job outpacing the increases historically given by the organization to high-tenure employees. As a result, employers can only hire newcomers by offering them as much, or sometimes even more, than much more senior professionals.
Pay inequities exist to some degree in all organizations. The most common causes are the result of talent acquisition, overtime, demotions, the demand for technical expertise, reorganizations, reassignments, and seniority. Some organizations conduct wage compression or parity studies to identify pay compression issues and their causes in an effort to achieve levels of internal equity so that people in relatively similar jobs receive equal pay.

Pay Adjustments
This is a term that can be used to signify a pay increase for a number of reasons. In this section, we will examine cost of living adjustments, general pay increases, seniority increases, lump-sum increases, and market-based increases.
Cost-of-Living Increase   Technically, a cost-of-living adjustment (COLA) is an adjustment in pay, usually upward, linked to a predetermined scale, measure, or condition. Employment contracts, pension benefits, and government entitlements, such as Social Security, are linked to a cost-of-living index, typically to the consumer price index (CPI). A COLA adjusts salaries based on changes in a cost-of-living index. Salaries, which are typically adjusted annually, may also be tied to a cost-of-living index that varies by geographic location if the employee moves.
General Pay Increase   In some circumstances, nonunion employers may want to provide a general pay increase to their employees without the potentially precedent-setting basis of a COLA. A general pay increase is a pay increase given to all employees regardless of their job performance and not linked to market pressures. Usually, the only criteria is the desire to provide all employees with a pay increase subject only to the ability to fund the increase. Walmart’s recent general pay increase to all of its employees is an example.
Seniority Pay Increase   Whenever a pay increase is given based solely on length of service, it is considered a seniority pay increase. As with a general pay increase, it is simply a basis on which to award a pay increase. Seniority pay increases are common in a unionized setting. In a nonunion setting, pay increases usually combine seniority with performance.
Lump-Sum Increase   A lump-sum increase (LSI) can be either a stand-alone performance bonus or part of an annual pay increase. Because a lump-sum increase is a single lump-sum payment, it has some advantages that other pay increases don’t have. Most other pay increases impact a series of wage and benefits actions such as base wage, overtime, shift differentials, sick leave, vacation pay, and holiday pay in that each increases in proportion to the size of the increase. This is because most pay increases are added to base pay and paid over a number of pay periods in a year, in other words, creating a proportional increase in all of these wage and benefits categories.
A lump-sum increase is a single lump-sum payment subject to applicable tax and withholding that is not added to the employee’s base rate of pay because of its character as a single lump-sum payment. This provides the full cash payment to the employee in a single lump-sum payment. In a red circle rate situation, the lump-sum increase can be used for the amount that would otherwise exceed the range maximum without increasing the employee’s base rate of pay beyond the range maximum.
Market-Based Increase   When employee retention is threatened because employee pay is not competitive with the market, employers can respond by creating a market-based increase to adjust an employee’s pay to better match market levels.

Differential Pay
Differential pay is additional compensation paid to an employee as an incentive to accept what would normally be considered adverse working conditions usually based on time, location, or situational conditions. The same differential pay is paid to all employees under the same circumstances or conditions. Differential pay benefits the employer by incentivizing employees to accept work they might not otherwise accept; it benefits the employee as additional compensation for accepting the work.
Time-Based Differential Pay   Also called a shift differential, generally time-based differential pay rewards the employee who works hours normally considered undesirable such as a night shift or hours that are in addition to the employee’s regular work schedule, i.e., overtime. Time-based differential pay may be a specified amount per hour or a percentage of the employee’s regular rate of pay. Except for overtime, federal law does not legally require employers to pay a differential rate of pay, although state requirements may differ.
Geographic Differential Pay   Sometimes locations are undesirable because of their remoteness, a lack of amenities, climatic conditions, and other adverse conditions. To attract workers, in some cases employers will add a location-based differential to the employee’s pay package. A geographic pay differential is additional compensation paid to an employee to account for variations in cost of labor and/or cost of living between locations. Some companies use the cost of goods and services as a factor to determine geographic pay differentials, but most companies use cost of labor as the primary factor to determine pay differences among locations.

Incentive Pay
Incentive pay is a form of direct compensation where employers pay for performance beyond normal expectations to motivate employees to perform at higher levels. In structured incentives, sometimes called production incentives, workers understand ahead of time the precise relationship between performance and the incentive reward. In a casual approach, sometimes called discretionary incentives, workers do not know in advance when or how much of a reward will be given.
Types of Incentives   Typically incentives are effective only if they are designed to a specific organization’s operational conditions. To accomplish their objective, incentives need to add value to an organization’s business objectives. Because of this, incentives generally are grouped into individual, group, and organization-wide applications.

Types of incentives include the following:
- Individual The objective of an individual incentive program is to improve job performance. As such, the individual incentive program must be available to all employees in a particular group. An individual incentive program must be clearly designed and implemented as an incentive separate from an individual’s base pay. Individual incentive programs can be either cash-based or non-cash-based.
- Cash awards Cash award programs reward performance with extra pay based on job performance. The rewards are usually lump-sum rewards such as discretionary bonuses based on the judgment of a supervisor or manager, a performance-based bonus based on predetermined performance criteria, and formula-based bonuses based on a percentage of profits or other pre-established measurement.
- Noncash awards Noncash awards include prizes, gifts, recognition awards, and other similar noncash items of value to the recipient. Sometimes these awards can be for length of service or contributions in addition to job performance. Although giving cash and noncash awards appears to be pretty straightforward, in fact, it can be more complicated than circumstances suggest. Some awards have tax implications, so advice might be required from accounting or your legal counsel as part of developing a cash or noncash incentive program.
- Group Used when teamwork is being rewarded, these programs are designed for groups of employees with the objective of rewarding group job performance considered necessary to accomplish a unit of work or when the desired result requires a team approach to the work. Group incentive programs can reward both short- and long-term work effort. Often, these programs include financial and nonfinancial measures as criteria for success. Group incentive programs include profit-sharing plans, gainsharing plans, and group performance incentives—for example, employee stock ownership plans (ESOPs).
- Profit-sharing plans Profit sharing refers to various incentive plans that provide direct or indirect payments to employees that depend on a company’s profitability. These payments are in addition to the employees’ regular salary and bonuses. In profit-sharing plans, the employer has the discretion to determine when and how much the company will pay into the plan. The contribution and any investment earnings accumulate in the plan on a tax-deferred basis. The IRS taxes these benefits only when employees receive distributions from the plan. A profit-sharing plan can be set up where all or some of the employee’s profit-sharing amount can be contributed to a retirement plan. These are often used in conjunction with 401(k) plans.
- Gainsharing plans Gainsharing plans are similar to profit-sharing plans except that gainsharing plans measure the gain achieved from one performance period to the next while profit-sharing plans measure the profit to be shared from period to period. In a gainsharing plan, each member of the unit receives the same reward. Gainsharing measures usually apply to productivity terms while profit-sharing plan measures typically apply to profitability. Three types of gainsharing plans are the Scanlon Plan, the Rucker Plan, and the Improshare Plan.
- The Scanlon Plan The Scanlon Plan is the oldest and most widely used type of gainsharing plan. It’s based on the historical ratio of labor cost to sales value of production. And, because it rewards labor savings, it is most appropriate for companies that have a “high touch labor” content. The distinctive characteristics of the Scanlon Plan are its philosophy of participative management, administration by a committee of employees and management, and its percentage method of payment. A distinguishing characteristic is that the organization does not have to be profitable for workers to receive an incentive.
- The Rucker Plan The Rucker Plan is based on the premise that the ratio of labor costs to production value is historically stable in manufacturing. The Rucker Plan tracks the value added to a product as a measure of productivity. In the Scanlon Plan, a ratio is calculated that expresses the value of production required for each dollar of the total wage cost.
- Improshare Plan Improshare measures change in the relationship between outputs and the time required to produce them. This plan uses past production records to establish base performance standards. A standard is developed that identifies the expected number of hours to produce something. Any savings between this standard and actual production are shared between the company and the workers. The organization and its employees share 50/50 in all productivity gains. It is minimally affected by changes in sales volume, technology and capital equipment, product mix, or price and wage increases. It’s the easiest of the gainsharing plans to understand and install.
- Executive incentives Executives are the people who run the business. Executives form the highest level of management within their organization. In addition to their substantial management responsibilities within their organizations, they develop relationships with people outside their organization with the purpose of improving growth opportunities for their organizations. Their scope of activities and responsibilities impacts their compensation plans in two ways. First, their total compensation package includes their annual cash compensation plus the value of long-term incentives that usually accounts for the larger share of their total package. Second, their incentives are generally linked to the performance of the entire organization’s profitability and, in some cases, other nonfinancial measures such as customer satisfaction and/or meeting certain other strategic objectives.

While there is no single compensation package designed for executives, their pay usually consists of a base salary that is “guaranteed,” with other forms of variable (incentive) compensation dependent on performance factors.
- Perquisites Special privileges for executives are referred to as perks. These privileges include club memberships, company cars, reserved parking, and a host of other noncash benefits. The 1973 Tax Act greatly diminished these perks, but they remain a substantial element in an executive’s compensation package.
- Golden parachutes These are provisions included in executive employment contracts that provide special payments or benefits to executives under certain adverse conditions such the loss of their position or if they are otherwise adversely impacted by organizational changes. Most often, these impacts are the result of an organizational merger in which there is a change of control that displaces a senior executive. These “golden parachutes” may provide for accelerated payments or early vesting in nonqualified retirement plan options, among other possibilities.
- Long-term incentives Long-term incentive plans reward employees for attaining results over a long measurement period. For this purpose, long-term generally means more than 1 year and typically is between 2 and 5 years. Tax-deferred compensation plans, long-term cash plans, and certain stock-based plans are all considered long-term incentives.
The form of payment from a long-term incentive plan is typically cash or equity. An employer might choose one or the other based on the goals of the plan, the recipients of the awards, and the availability of cash or equity for payment.
- Organization Profit-sharing and stock ownership plans
- ESOPs An employee stock ownership plan (ESOP) is a retirement plan in which the company contributes its stock (or money to buy its stock) to the plan for the benefit of the company’s employees. The plan maintains an account for each employee participating in the plan. Shares of stock vest over time before an employee is entitled to them. With an ESOP, you never buy or hold the stock directly while still employed with the company. If an employee is terminated, retires, becomes disabled, or dies, the plan will distribute the shares of stock in the employee’s account.
- Incentive stock options There are several varieties of stock options, all of which share some basic characteristics. A stock option is a right to purchase a share of stock in the future at a price determined at the grant (or based on a formula defined at the grant). Incentive stock options (ISOs) are a special subset of stock options, satisfying certain criteria promulgated by the Internal Revenue Service and discussed in Internal Revenue Code Section 422.

One of the primary restrictions is that an ISO can be granted only to an employee; ISOs cannot be granted to outside directors, independent contractors, consultants, or any other nonemployees. Also, the recipient must exercise the ISO within three months of terminating employment.
- Employee stock purchase plans (ESPPs) An ESPP is a company-run program in which participating employees can purchase company shares at a discounted price. Employees contribute to the plan through payroll deductions, which build up between the offering date and the purchase date. At the purchase date, the company uses the accumulated funds to purchase shares in the company on behalf of the participating employees. The amount of the discount depends on the specific plan but can be as much as 15 percent lower than the market price.
Depending on when you sell the shares, the disposition will be classified as either qualified or not qualified. If the position is sold 2 years after the offering date and at least 1 year after the purchase date, the shares will fall under a qualified disposition. If the shares are sold within 2 years of the offering date or 1 year after the purchase date, the disposition will not be qualified. These positions will have different tax implications.
- Phantom stock plan A phantom stock plan is an employee benefit plan that gives selected employees (senior management) many of the benefits of stock ownership without actually giving them any company stock. This is sometimes referred to as shadow stock.
Rather than getting physical stock, the employee receives “pretend” stock. Even though it’s not real, the phantom stock follows the price movement of the company’s actual stock, paying out any resulting profits.4
- Restricted stock unit A restricted stock unit is compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock immediately but instead receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time. The restricted stock units (RSUs) are assigned a fair market value when they vest. Upon vesting, they are considered income, and a portion of the shares are withheld to pay income taxes. The employee receives the remaining shares and can sell them at any time.
- Performance grants Public companies can also benefit from linking stock-based compensation to organizational performance. If done properly, such an arrangement can qualify as performance-based compensation, which avoids the deduction limits that can be imposed under Code Section 162(m). Such arrangements can also motivate recipients to achieve goals that are valuable to the organization and its shareholders. The accounting consequences of such arrangements can be tricky, and care should be taken to get the views of the organization’s accountants.
All incentive plans must meet the following criteria:
- They must fit with other programs. For example, individual sales reward programs must be compatible with larger team recognition and reward programs.
- They must be in the employee’s “line of sight.” Job performance measures should reflect the results the employee actually controls. For example, a laboratory technician’s zero-defect completion of a prescribed number of test results within a specified period of time would be a “line of sight” accomplishment.
- They must have a “sunset clause.” The incentive plan should be in effect for a specific time period with an identified end date for tracking and measurement purposes.
- They must incorporate both short- and long-term perspectives. It should be structured to reward short-term goals (i.e., increased production capacity) and long-term results (i.e., achieving a strategic growth objective). The short-term perspective may be easier to visualize and achieve, but that may not encourage employees to think about long-term results.
Organizational requirements include the following:
- A stable base pay plan A plan must be fair and equitable with long-term stability. Staff must be compensated competitively. An incentive plan will not support a base compensation system that is internally or externally inequitable.
- An existing strategic plan Long-term organizational goals, as expressed in the organization’s strategic plan, must be clear, consistent, and measurable. There must be stability as measured through the organization’s sales volume, expenses, profitability, and customer satisfaction.
- Complete commitment A great deal of effort goes into creating an incentive plan. The plan must be accepted at all levels of management. Continued coaching and training are necessary for long-term stability. Learning must be reinforced by strong support and commitment to achieve desired results using measured output to evaluate performance.
Challenges in Cross-Border Situations   In addition to being organization-specific, a successful incentive program has to be culturally sensitive. Cultural attitudes can vary widely from country to country. In addition, incentive programs are impacted by the laws and regulations that govern their application that also vary significantly from one country to another.
Direct Sales Personnel   There are several ways to compensate personnel who are responsible for sales, depending on the circumstances surrounding the sales activities. Compensation usually is both direct, that is, paid by cash or by cash and incentives (in turn, incentives can be cash-driven—for example, bonuses and commissions), or indirect, that is, paid through perks and entitlements (for example, cars and expense accounts, club membership, and allowances).

Factors that influence the design of a salesperson’s compensation plan include the following:
- The time involved servicing the account as compared to the time spent in the sale of goods or services
- The ability to objectively measure the sales activity
- The nature of the sales activity is difficult to distinguish from the activity spent providing support services
- The degree and type of motivation associated with the sales activity
- The significance of the sales cost involved in the transaction
- The comparative market place practice

Three types of compensation plans are most commonly used.
- Straight salary Of the three types of plans, the straight salary plan is the least used, but it more than likely will be found in situations where most of the time involved is spent servicing the account rather than selling the account. It is also more likely when sales costs would otherwise be higher than acceptable to management and finally when, by comparison, the marketplace is more likely to compensate sales on a straight salary basis.
- Straight commission This is the other extreme of the sales compensation spectrum. In this case, a person’s entire salary is paid by commission. This most often occurs when the ultimate objective is the increase sales volume with less emphasis or need for service as well as when the marketplace approach is also to compensate by way of a straight commission plan.

In some cases, organizations that use a straight commission form of compensation will provide what is called a draw for novice or entry-level sales personnel. Typically, the draw consists of a nonrecoverable or guaranteed commission for a defined period of time, usually not more than 1 year. If, during this period, a salesperson does not earn a commission equal to or exceeding the draw, the salesperson does not owe the organization the difference. The period of time the draw is in place usually conforms with the organization’s experience in developing the salesperson’s selling capabilities to a point the individual is able to earn at least as much or more than the draw provides.

- Salary plus commission and/or bonus In a salary plus commission arrangement, a portion of the total salary is a fixed salary; the remainder is commission. This is the most popular form of sales compensation in that it incorporates parts of both the fixed salary (thus some stability with the individual’s income flow) and the commission or the reward for sales success (thus the incentive for greater future success).
Professionals   The characteristics unique to professional employees include a focus on their chosen fields of endeavor along with their interest career progression within their chosen field. This requires a company’s pay system to provide opportunity and recognize their career progression. Two “tools” enhance management’s capability to recognize professional growth.
- The dual career ladder Typically describes the progression from entry-level positions to higher levels of pay, skill, responsibility, or authority. The traditional career ladder allows employees to be promoted along either a supervisory or technical track. This program helps retain top talent by offering extended career opportunities with appropriate salary growth to employees in their chosen careers.
- Maturity curve Measures salaries based on years of directly related experience since the first educational degree or formal training requirement for job entry was earned. This is most often used to measure market pay for employees engaged in technical work such as engineering, and in particular in research and development, although they are also useful in many other areas. The process assumes that spending more years in the profession equates with more highly valued competencies.
Outside Directors   Any member of a company’s board of directors who is not an employee or stakeholder in the company is an “outside director.” Outside directors are paid an annual retainer fee in the form of cash, benefits, and/or stock options. Corporate governance standards require public companies to have a certain number or percentage of outside directors on their boards as they are more likely to provide an “outside” perspective and offer unbiased opinions.

Metrics
Although there are many metrics applied to the subject of compensation, the following are two of the most common metrics:
- Compensation ratio Also known as compa-ratio, this is a measure of the relationship of current pay to the midpoints of the applicable pay ranges. Compa-ratios are computed by dividing a worker’s pay rate by the midpoint of the range.

 

Example: Compensation ratio data enables managers to comparatively determine whether employees are equitably paid for their job performance.

- Total company compensation expense This identifies all employment-related costs as a percentage of total operating costs.

Example: Tracking total compensation as a percentage of total costs helps organizations manage the costs associated with human capital including the use of fixed versus variable compensation.

Benefits and Perquisites
Benefit programs, also called indirect compensation, are designed to promote organizational loyalty, reward continued employment, enable employees to live healthy lives, help them care for their families, and help provide for retirement benefits. Examples of benefits include housing (employer-provided or employer-paid), group insurance (health, dental, life, etc.), disability income protection, retirement benefits, daycare, tuition reimbursement, sick leave (paid sick leave in a few states), vacation (paid and non-paid), Social Security, profit sharing, funding of education, and other specialized benefits.
The term perquisites, sometimes referred to as perks, is often used to refer to benefits that are more discretionary in nature. Perks often are given to employees who are doing notably well, hold senior positions, and/or have seniority. Common perks are take-home vehicles, hotel stays, free refreshments, leisure activities on work time (golf, etc.), and personal stationery.

Benefits Structure
Employee benefits represent a significant financial investment on the part of the employer. To effectively meet its purpose, the employer’s total benefits programs must be cost-effective, meet their stated purpose, must be affordable for both the employer and the employee, and must comply with local, state, and federal law. To accomplish these objectives, data must be collected and analyzed to determine whether the employer’s benefits programs actually meet its objectives. This process is known as a benefits needs assessment (i.e., needs analysis).
Deciding Which Benefits to Offer   Employers must provide monetary compensation as well as certain legally mandated benefits to employees, but most benefits are optional. Providing benefits to your employees also allows you to offer benefits to yourself, and contributions that you make for benefit premiums are often tax-deductible for your business. In addition, if you need to attract employees with a special skill or talent, you’re going to have to compete with other employers to get them, which may mean you’ll need to offer some benefits to be successful.
So, how do you decide which benefits you should offer? Understanding which benefits you are required to offer is your first consideration because of the impact these requirements can have on your ability to offer optional benefits.
Some of the benefits employers are required to offer include time off to vote, serve on a jury, and perform military service. You must also comply with all of the requirements of workers’ compensation, withhold for payroll taxes such as FICA and FUTA, and contribute to state disability programs in states where such programs exist.
Employers don’t have to provide paid holidays, vacation, or paid sick leave (except where required by state law), health benefits (except where required by state law), life insurance, or retirement plans.

The pros of offering benefits include the following:
- Tax advantages You may be able to deduct plan contributions.
- Recruiting advantages You can use benefits packages to attract good employees, and you can structure them in such a way to reward and thus retain your best employees.
- Personal gain You may be able to get benefits for yourself for less money, if you also offer them to your employees, than you would procuring them privately for yourself.
- Alternatives to pay Sometimes employees will accept benefits in lieu of higher salaries.
Cost is the biggest “con.” Other challenges, particularly for smaller employers, include the following:
- You may have to pay higher rates than larger employers for group health care coverage because there are fewer employees among whom to spread risk.
- There may be difficulty providing life insurance coverage to certain employee groups.
- You may have fewer design choices when offering a retirement plan because of high administrative costs.
- You may be less likely to offer fringe benefits because of administrative complexity.
What benefits should be offered depends on the following:
- What you can afford
- What other businesses are offering
- How the benefit can help your business
 

Benefits Needs Assessment   A benefits needs analysis consists of several steps that include data collection and analysis culminating in a report called a gap analysis.
 

Gap Analysis   The steps in this analysis are as follows:
- Review the organization’s overall culture and strategy. The results of this effort will determine the potential coverage and scope of its benefits programs.
- Collect and analyze the employer’s workforce demographics. This data is key to determining potential benefits needs.
- Analyze the utilization and costs of existing benefits plans and programs. The results of this data, coupled with the demographics data, will help determine the nature of coverage desired.
- Determine the potential benefits coverage and costs. This analysis will be an important factor for comparing the demographics and benefits utilization data.
The final step is to compare the organizational needs and budget with employee needs and any existing benefits coverage. The end result is a gap analysis, a document that will indicate what a benefits package should and should not include.

Types of Benefits
Employers have found that paid time off as a reward for service provides the employee with relief from the ongoing demands of work as well as benefits the employer with increased morale and commitment. Types of paid leaves are described in the sections that follow.
Paid Time Off   Many employers combine vacation and sick leave into a single program called paid time off (PTO). PTO is a concept that allows employees to earn, typically by accrual over time, credits that the employee can then use whenever circumstances require that they be absent from work. PTO does not require justification for an absence; it requires simply an approval in the event of a planned absence or the accrued balance to be used in an unplanned absence. In some states, where PTO is offered, PTO accrual is treated in the same manner as vacation; that is, PTO is subject to the same rules that are applicable to vacation.
 

Vacation or Holiday Leave in the United States  

In the United States, there are paid holidays and vacations.
- Paid holidays While paid holidays are not legally required, employers find that both employers and employees benefit from them. The number of paid holidays vary from 6 to 12 a year, including New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Paid holidays are generally paid on the basis of the employer’s schedule for a regular workday.
- Paid vacation The standard vacation is based on an accrual system measured on an employee’s length of service. State laws vary on the management of vacation accrual. Some states do not allow a “use-it-or-lose-it” policy, while others are silent on the subject. In some cases, vacation can be carried over from year to year with a provision for a reasonable cap. Many employers have a cash-out policy that allows an employee in states in which there is no rollover who hasn’t taken their accrued vacation by the end of the year to receive cash back for their unused accrued vacation. Generally, employees must receive advance approval to use their vacation so as not to disrupt the employer’s workflow.
Public or National or Bank Holidays   Most countries provide vacation or holiday time to all employees regardless of job or status. Even in emerging countries, it is common for all employees to be provided a number of days for annual leave plus holidays. Generally, each country has paid public or national or bank holidays, during which firms are required to close. Certain holidays may be observed on a local basis or only by certain industries. Public holidays may be required or they may be only customary. In some Western European countries, most businesses shut down in August when most of their employee take their vacation.
Maternity and Paternity or Parental Leave   At least some portion of maternity leave is paid in most countries. In addition to maternity leave, some countries offer paternity and parental leave. A distinction is sometimes made between the two terms; they can, however, have the same meaning. Generally, parental leave is available to both mothers and fathers.
Leave Related to Illness   There is leave related to illness.
- Leave in the United States Organizations that otherwise have paid vacation policies usually also have paid sick leave policies to provide for time off because of illness or injury. These sick leave programs are primarily intended for the benefit of the employee, although in recent years sick leave programs have often been expanded to cover an employee’s time off to care for a family member. Some states mandate that a portion of the employee’s sick leave accrual must be allowed for family care.
- Leave in other countries In most countries, it is common to take time off because of illness. Policies vary in terms of the number of days allowed away from work; the amount of ages paid, if any; and in some cases, the applicable waiting period. Sick leave policies may be legally required, may be the result of collective bargaining, or may be determined by the employer.
 

Other Types of Leave   

Some examples of other types of leave available in certain countries include the following:
- Paid leave to trade union officials for participating in trade union duties, union projects, or other activities.
- Paid leave to undergo training.
- In some cases, paid days off when workers get married. This extends to parents who are given paid time off when their children get married.
- In countries predominantly Muslim, paid time off for prayer.
- Time off to carry out specified public duties such as campaigning as an official candidate in an election, voting, or jury duty.
Paid time off is mostly dictated by local laws. As such, it is important to know these laws and practices.
 

Family-Oriented Benefits   

The composition of families in the United States has changed significantly in the past few decades. The number of traditional families, in which the man went to work and the woman stayed home to raise children, has declined significantly, while the percentage of two-worker families has more than doubled.
The growth in dual-career couples, single-parent households, and increasing work demands on many workers has accelerated the emphasis employers are placing on family-oriented benefits. Balancing family and work demands is a major challenge facing many workers at all levels of organizations. To provide assistance, employers have established a variety of family-oriented benefits.
Some of the family oriented benefits offered in recent years include: adoption benefits, child care and elder care, flexible work hours, compressed workweeks, and telecommuting.
 

Flexible Work Hours   

Flexible work schedules are those that vary from the standard work schedules of an organization. Since flexible schedules must meet the needs of both the employer and the employee, flexible work schedules are based on worker needs within set parameters approved by a supervisor.

This table lists some of the benefits and challenges of a flexible work schedule.

Table:     Flexible Schedule: Benefits and Challenges
 

Compressed Workweeks   

The compressed workweek is a special type of flexible schedule that involves working 40 hours per week but in fewer days than found in a typical 9-to-5, 5-day workweek. There are many different configurations to the compressed workweek. For instance, an employee can work 40 hours in 4 days (a 4/40 schedule) or 80 hours in 9 days (a 9/80 schedule).

This table describes some different configurations of a compressed workweek.

Table:      Compressed Workweek: Benefits and Challenges
 

Health and Welfare   A group health plan is an employee welfare benefit plan established or maintained by an employer or by an employee organization (such as a union), or both, that provides medical care for participants or their dependents directly or through insurance, reimbursement, or otherwise.

Health plan coverage varies in other countries as indicated here:

- Australia In Australia, public coverage is guaranteed to all, but the state encourages wealthier individuals to use a private system by enforcing an additional 1 percent tax on those who fall above a certain income level but use the public system anyway. The Australian government’s innovative techniques are evident in their death rate from conditions amenable to medical care, which was a startling 50 percent less than America’s in 2003 and 25 percent less than the United Kingdom’s.

- Sweden Sweden’s low health care expenditures ($5,331 USD per capita) in 2011 can in part be attributed to government initiatives that disincentivize sending patients to specialists when their illnesses can be treated by general practitioners. The Swedish government’s success with cost efficiency explains why even though public funding accounts for 85 percent of total Swedish health expenditure, this does not place an unreasonable constraint on taxpayers or the government.

- United Kingdom The United States and the United Kingdom are worlds apart in terms of health care. In the United Kingdom, the National Health Service (NHS) publicly covers various costs, including preventative services and mental health care. About 88 percent of prescriptions there are exempt from charges. Despite American efforts to increase affordability and equity, the United Kingdom ranked first on indicators of efficiency in a recent Commonwealth Fund study. America could learn a lesson from the United Kingdom’s successes at cutting administrative costs and closing loopholes that would otherwise cost the government millions.

- Germany With the oldest universal health care system in the world, 90 percent of Germans happily use the public system offered there, and just 10 percent of the population voluntarily uses the private system. Moving past the mythical trade-off between time and cost, Germany is one of the few countries to have quick access to specialty services with very little out-of-pocket costs. Germany spends around half as much as America does on health care per capita, with few differences in quality of services between the two countries.

- Netherlands Interestingly, health insurance coverage is statutory in Holland but provided by private insurers competing for business. Insurers can decide by whom and how the care is delivered, which, to capitalists’ great relief, allows the insured to choose between alternatives based on quality and costs. This system has proven to be very effective. In 2010, 72 percent of Dutch adults saw their doctor the same or next day when they were sick, compared with only 57 percent of adults in America. And, whereas one third of U.S. adults did not see a doctor when sick, went without recommended care, or failed to fill prescriptions because of costs, only 6 percent of adults in the Netherlands faced these issues.

- Canada In the realm of health care, America and its neighbor couldn’t be more different. Canada’s national health care system consists of a centralized body that sets standards that the 13 Canadian provinces must follow to receive funding. Hospitals are mainly private nonprofit organizations with their own governance structures, lending Canada an interesting balance between privatization and public ownership.97
 

Private Health Insurance   In other countries, health care is generally paid for through social insurance funded either by employers, by employees, through general taxation, or by some combination of these sources. By comparison, the United States is ahead of other countries in the use of high-end equipment and procedures. The United States also leads in the use of magnetic resonance imaging (MRI) machines, but the monetary cost of this technology is much higher in the United States than in other countries.
Other comparisons indicate that it is much harder for Americans to get same-day or next-day appointments and to get after-hour appointments. As a result, Americans use high-cost emergency rooms more frequently than in other countries.
Most other countries have a single-payer system but the United States has many different insurance companies with many different plans plus overlapping programs such as Medicare, Medicaid, state plans, and programs for veterans.
 

Employee Assistance Programs   The employee assistance program (EAP) is an employee benefit programs offered by many employers. EAPs are intended to help employees deal with personal problems that might adversely impact their job performance, health, and well-being. EAPs generally include short-term counseling and referral services for employees and their families. Supervisors may also refer employees (management referral) based upon unacceptable performance or conduct issues.
EAP resources typically provide employees with confidential expert advice and support 24 hours a day, 7 days a week. Nearly all EAPs are outsourced, and most are priced on a “per head” basis. EAPs address a broad and complex body of issues affecting mental and emotional well-being, such as alcohol and other substance abuse, stress, grief, family problems, and psychological disorders. Many EAPs are active in helping organizations prevent and cope with workplace violence, trauma, and other emergency response situations.
 

Wellness Programs   These are programs intended to improve and promote health and fitness that are usually offered through the workplace, although insurance plans can offer them directly to their enrollees. Wellness programs allow employers to offer premium discounts, cash rewards, gym memberships, and other incentives to participate. Some examples of wellness programs include programs to help employees stop smoking, participate in diabetes management programs, weight loss programs, and preventative health screenings.
 

Disability   The term disability represents a range of conditions differently measured not only from country to country but from program to program within a country. Yet the general characteristics of the disabled are remarkably similar overall. They tend to be the older workers and those with relatively low educational levels and occupational status. When a country has a racial or national minority, members of the minority are more likely to be disabled than members of the majority population. Except in the aftermath of war, women have a higher incidence of disability than do men. The disabled are more likely to be unmarried and live alone than others in the working-age population.
Disability benefits have different meanings in different countries. Generally, disability benefits take the form of payments to employees who are unable to work because of an illness or injury. Benefits may be short-term, long-term, or permanent, sometimes all of these choices.
Short-term benefits usually last up to 6 months; long-term benefits are longer. They usually start where short-term benefits end. Permanent disability may mean the same as a retirement income under health or medical circumstances.
Payments may come from employee contributions, employer contributions, government funding, or a combination of these sources. In some cases, funding may come from multiple agencies depending on factors such as level of income, degree of disability, or even family status.
 

Life Insurance  

In most countries, life insurance is provided by Social Security. Life insurance is mandated in some countries; in many cases, just a small amount is sufficient to cover burial but not sufficient to support a beneficiary. A majority of employers provide life insurance payable upon the death of the employee to a beneficiary as a voluntary company-provided benefit. Additional life insurance can often be purchased through an organization-sponsored group plan.

The situation in third-world countries is very different from the norm in the United States and other richer countries. Poverty, disease, and living conditions directly affect the rate of mortality in many villages in third-world countries. Many people in those countries do not have sufficient food, live in war zones, and have to endure poor working conditions that are physically demanding. Money is used for basic needs such as food and clothing and maybe a roof over their head.
Employees in many Latin American countries receive life insurance that pays for up to 2 years’ pay in the case of death. Employees in Peru with 4 or more years of service receive company-provided life insurance. Employees in the United Kingdom receive three to four times their annual salary as a life insurance benefit. Employees in the United States typically receive company-provided life insurance up to the equivalent of 1 year’s salary with an option to personally purchase higher amounts of their choosing.
 

Workers’ Compensation   

Workers’ compensation is a type of insurance paid for by the employer that provides wage replacement income and medical care benefits to employees who suffer work-related injuries or illnesses in return for giving up the employee’s right to sue his or her employer for negligence. Benefits are regulated by the states, not the federal government. Individual states prescribe the rules governing coverage, eligibility, types of benefits, and the funding of benefits.
Workers’ compensation defines a work-related disability as a physical condition that can result in an accident or illness and is caused, aggravated, precipitated, or accelerated by a work activity or environment. Workers’ compensation only covers worker health problems that are identified as work-related disabilities, injuries, or illnesses.

Workers’ compensation benefits include the following:
- Paid medical expenses and wage replacement benefits under certain circumstances
- There are four types of workers’ wage replacement benefits.
- Income benefits These benefits replace income that might be lost because of a work-related injury or illness. Income benefits can include temporary income benefits, impairment income benefits, supplemental income benefits, and lifetime income benefits.
- Medical benefits These benefits pay for necessary medical care to treat a work-related injury or illness.
- Death benefits These benefits replace a portion of lost family income for eligible family members of employees who are killed on the job.
- Burial benefits These benefits pay for some of the deceased employee’s funeral expenses to the person who paid the expenses.
- Vocational rehabilitation or, in some cases, supplemental job displacement benefits
- Permanent and temporary partial or total disability benefits
- Survivor’s benefits in cases of fatal work injuries or illnesses

Workers’ compensation law in the United States is derived from European social insurance. It has evolved at the federal and state levels over the past century through a long series of reform (or redesign) initiatives.

Workers’ compensation is a European concept, dating back to German Chancellor Otto von Bismarck. By the turn of the twentieth century, all European countries had workers’ compensation laws. The German law required employees to pay part of the costs and called for highly centralized administration. Its coverage was broad, was compulsory, and provided for nonprofit mutual employers’ insurance funds. Most industrialized nations now have national workers’ compensation programs based on the German model.
In European Union (EU) countries, all workers are covered against the risk of wage loss because of temporary sickness through government agencies. Wage-replacement schemes consist of social insurance covering the loss of earnings because of old age, unemployment, temporary sickness, or permanent disability. Coverage typically lasts up to a year, with transition to longer-term disability insurance programs if needed.
 

Severance Packages   

A severance package is pay and benefits an employee receives when leaving employment at a company. In addition to the employee’s remaining regular pay, it may include some of the following:
- An additional payment based on length of service.
- Payment for unused vacation time (unless mandated by state law) or sick leave.
- Medical, dental, or life insurance.
- Assistance in searching for new work, such as access to employment services or help in producing a résumé.
- The package may require the severed employee to sign a general release.

Severance pay programs exist in most countries around the world. They typically provide lump-sum cash payments to workers who involuntarily or voluntarily separate from their employers. The size of the payment is usually related to the number of years worked with the last employer and is linked to the last salary in the job. Such payments were provided in many countries by employers before they were required by law. Organization-based severance pay schemes often also exist in parallel to legislated provisions.
Severance packages are required by law in many countries. Employers need to have a thorough understanding of the legal requirements associated with terminating an employee in countries where severance payments are a legal requirement. Some of the issues to address include the following:
- Requirements applicable to warnings for misbehavior or inadequate job performance
- Clearly stated reasons for the termination
- Specifically described severance payments with applicable conditions, if any
 

Compensation for Termination  

Support is required for terminated employees in some countries even when they have been terminated for cause. This can become expensive as it often happens at least some degree. If support requirements are ignored, it can be even more expensive because fines and penalties for noncompliance can be costly.
The amount of compensation paid to a terminated employee varies by country, but there may be some similarities within regions. Years of service is often a key factor when determining termination terms and end-of-service calculations. As an example, both Argentina and Bolivia require that a terminated employee receive 1 month’s salary for each year worked, up to a defined maximum. Colombia also links the amount paid to the length of service. An employee who worked for a company 10 years is entitled to 45 days’ pay, plus an additional 40 days’ pay for each full year employed after that up to a defined maximum. Other considerations include the employee’s position, any employment agreements, and the employer’s current policies and practices. Finally, organizations are responsible for ensuring that severance pay is compliant and fairly compensates terminated employees to avoid discrimination lawsuits and regulatory fines and penalties.
 

Retirement   

At some point, employees will reach an age where they no longer desire or are able to work. Retirement plans allow current employees to make financial provisions for the future. Retirement plans differ widely by country. Many retirement programs are mandated by the government and paid for through employee and employer contributions. Supplemental government support is sometimes provided.

The main goal is to provide retirement income to employees with some type of income payable periodically.

Characteristics of the two most common types of plans, defined benefit plans and defined contribution plans, are summarized in this table.

Table:     Types of Retirement Plans
 

Payments   Most often, payments vary in terms of how they are made. They usually are made in the form of an annuity, paid monthly until death. In other countries, an amount may be paid in a single lump sum. The particular formulas for payment of retirement vary and are often complicated. They may be affected by the nature of the government funding strategies or variations that depend on such factors as age, level in the organization, and family characteristics.
Unemployment Insurance   Unemployment insurance (UI) is a federally mandated program administered by the states that provides unemployment benefits to eligible workers who are unemployed through no fault of their own and who meet other eligibility requirements of applicable state law. UI benefits are designed to provide temporary financial assistance to unemployed workers. Each state administers its own unemployment insurance program within guidelines established by federal law. Eligibility for unemployment insurance, benefit amounts, and the length of time benefits are available are determined by state law. In the majority of states, benefit funding is based solely on a tax imposed on employers. The amount a person receives is based on the person’s salary up to a monthly maximum amount.
- Eligibility To qualify for UI, individuals must meet requirements for wages earned or time worked during an established period of time referred to as the base period. In most cases, the individual must be unemployed through no fault of their own, must be available and actively seeking work, cannot be terminated for misconduct, and must not be unemployed because of a labor dispute.
Individuals must file weekly or biweekly claims and respond to questions concerning their continuing unemployment. Any job offers or refusal of work must be reported for the period claimed.
- Duration Most states grant UI benefits for up to 26 weeks, but this is often extended during periods of high unemployment by Congress with the approval of the president.
 

Social Security   

First adopted in Germany in the 1880s, to benefit the workers, Social Security was initially a compulsory sickness insurance for which the worker paid two-thirds of the cost and the employer one-third. In Great Britain, the National Insurance Act was passed in 1911, and a compulsory unemployment insurance program as well as old-age insurance and sickness insurance programs were established. France adopted a program of voluntary unemployment insurance in 1905 and in 1928 made insurance plans for old age and sickness mandatory.

The following are the basic concepts behind Social Security:
- Social insurance in which people receive benefits or services in recognition of their contributions to an insurance program. These services typically include a provision for retirement pensions, disability insurance, survivor benefits, and unemployment insurance.
- Services that are provided by government or by a designated agency responsible for specific Social Security services. While this varies from country to country, it generally covers medical care; financial support during unemployment, sickness, or retirement; health and safety at work; aspects of social work; and even, in some cases, industrial relations.
- Basic security irrespective of participation in specific insurance programs where eligibility would otherwise be an issue. An example is assistance given to newly arriving refugees for basic necessities such as food, clothing, housing, education, money, and medical care.

Perquisites
There are several definitions of perquisites; perhaps the most common is “Any monetary or other incidental benefit beyond salary; a gratuity; a privilege or possession held or claimed exclusively by a certain person, group or class.”98
 

These are some of the more common perquisites identified by the Society for Human Resource Management (SHRM):
- Free/discounted products or services Employees may be eligible for free products and services or discounts.
- Mobile devices A cell phone, smartphone, personal digital assistant (PDA), or laptop may be provided for business needs.
- Professional organizations/certifications Employee membership in professional associations and fees for professional certifications may be paid.
- Training programs Employer payment for training programs may be available to many levels of employees.
- Education fees Tuition assistance may be provided to employees. An employer may pay all or part of an employee’s cost to attend college or university or technical school classes, allowing employees to continue to expand their knowledge and skills while working.
Some of the less common perquisites include the following:
- Housing Accommodations or related allowances are awarded to certain employees; these may be company-owned or company-leased. Allowances may be a fixed monetary amount or a percentage of basic salary. The specifics often depend on employee level. Furnishings may be provided.
- Company car and/or cash car allowances Cars are typically provided on status basis. Some countries offer a car allowance in lieu of a company car. In addition to the cost of the car, organizations often finance car maintenance, taxes, and insurance. Fuel costs are typically reimbursed for business purposes (except for senior executives, where all fuel costs are typically reimbursed).
- Club memberships Entrance fees as well as annual subscriptions for social or sports club memberships are paid by the employer.
- Meal allowances Lunch vouchers, meal tickets, meal subsidies, or subsidized/free lunches in the company restaurant/canteen may be granted to employees.
Some additional perquisites include financial and legal counseling and, to a lesser extent, medical check-ups, vaccinations, and immunizations; subsidized/low interest loans for the purchase of a house or car; and travel allowances.

Metrics
As with other aspects of HR, knowing how to use metrics as it applies to employee benefits is an important capability for every HR professional.

This table identifies three metrics applicable to determining the cost of benefits.

Table:     Benefits Cost Metrics

Legislation Affecting Compensation and Benefits
A great many things influence the compensation of the employees of any organization. Some of these are external to the organization, such as the labor market and the law. Some are internal to the organization, such as organizational culture and policies. Some are part of the employee, such as skill and performance.

Complexities of Legal Compliance
The legal environment in which U.S. compensation administration is practiced consists of federal and state legislation and the regulations imposed by executive branches of these governments. In the case of some developing legal concepts, case law (court decisions) represents the public position. In these forms, government is stating public intentions or guides to decision-makers. Although private organizations tend to characterize these laws, regulations, and court decisions as constraints, they may also represent opportunities. In essence, the “rules” state that compensation must not be too low or (at times) too high but that within these limits compensation decisions should be left to the parties involved. Also, in the interest of fairness, certain groups have been protected, and all must be paid when wages are due.
As minimum and prevailing-wage laws place a floor under wage rates, Social Security, unemployment insurance, and workers’ compensation can be described as placing a floor under benefits. Likewise, the Employee Retirement Income Security Act of 1974 and the 1980 amendments of it applying to multi-employer pensions can be considered assurance-of-benefit-payment laws.
Finally, in the United States, the network of state and federal laws is extensive. Some of the regulations apply only to firms with a specified minimum number of employees; others apply to all employee/employer relationships, regardless of enterprise size. Further, state laws may differ from federal laws. The general rule is to follow the regulation that most benefits or protects the employee when state laws differ from federal laws. (An organization can often do more than the law requires but cannot do less.)
Ultimately, HR practitioners must understand the employment laws, codes, and practices applicable in each of the countries and regions in which the organization operates. This necessitates due diligence on the part of HR practitioners that should include an understanding of the following:
- Standards and regulations set forth by international organizations, such as the International Labor Organization, the Organisation for Economic Cooperation and Development, the United Nations, and the European Union, as well as treaties and agreements, such as the North American Free Trade Agreement or Mercosur (a trade organization of Argentina, Brazil, Paraguay, Uruguay, and Venezuela)
- Country laws and regulations
- Regional and local laws and practices
- Extraterritorial application of national law
- Application of national laws to international-owned subsidiaries operating within a nation’s borders

Legal Areas for Compliance
The following legal areas for compliance represent key compensation and benefits topics applicable both in the United States and on a global scale. Keeping in mind the HR professional’s responsibility to know, understand, and create compliance with the plethora of applicable laws, the following sections summarize these key topics.
Wage and Hour   To be compliant, employers need to understand the terms and conditions of wage and hour laws and how they apply to various classifications of workers wherever the operations are located. Basic wage and hour terms and conditions and key considerations include the following:
- Minimum wage and increases How are minimum wages set (e.g., hourly or monthly)? If any collective bargaining agreements are in force, do they impose different minimums or minimum wage increases?
- Overtime pay and holiday pay What are the requirements for computing pay for legal overtime and locally worked holiday time (e.g., time-and-a-half, less than time-and-a-half, double-time, or quadruple-time for overtime and holiday work)? If there are no statutory requirements for overtime and holiday pay, do collective bargaining agreements impose any? Who is entitled to overtime (e.g., only hourly employees or managers as well)?
- Equal pay What provisions are there to ensure that individuals doing the same work receive the same compensation?
- Exemption What is the definition of “exempt” work under local law? Does the host country offer any special exemptions?
- Cap on hours worked Is there a flat cap on hours worked (e.g., weekly flat caps or hours of overtime per year)? Are there nominal caps that serve merely as reference points (e.g., a 40-hour “standard” week but with “reasonable additional hours” allowed)?
- Special issues under local law What miscellaneous local wage and hour rules are in place (e.g., paid meal breaks, rules on break time, regulations on night work)?
 

Tax   

Tax systems vary widely around the globe, from no-tax to high-tax regimes. Two commonly withheld taxes are national or federal tax and social tax. In some countries, income tax is dependent upon whether an individual is considered a resident or a nonresident. Bonus payments may be treated differently from other taxable income. Many other variations exist.
Tax issues are quite complex for the employee on an international assignment as well as for the employee’s organization. An employee may be subject to both host- and home-country taxes, depending on the countries involved and their tax treaties. Some countries permit residents to “break residency” while on an international assignment, thereby eliminating the need for them to pay into their home-country tax program. Generally, the structure of an employee’s remuneration package should take into account various tax arrangements that are available.
Leave   This generally describes an employee benefit that provides paid or unpaid time off work. Country law may require employers to provide specific types of leave, such as time off for legal holidays, a certain amount of vacation each year, maternity and paternity or parental leave, and leave for an illness. Terms and conditions of minimum leave benefits are often stipulated by law. Many countries have generous leave laws. HR must be aware of the organization’s legal obligations.
Social Security   Social Security (or social insurance) provides individuals with some level of income when faced with the contingencies of old age, survivorship, incapacity, disability, unemployment, or rearing children. Social Security may also offer access and coverage for curative or preventive health care. According to the International Social Security Association, Social Security can include social insurance programs, social assistance programs, universal programs, mutual benefit schemes, national provident funds, and other arrangements such as market-oriented approaches that, in accordance with national law or practice, form part of a country’s Social Security system.
Health Care   Health care laws and regulations are complex. For example, some countries have a statutory universal access/universal coverage health care system. In other countries, employers offer employer-sponsored health insurance. Additionally, health care laws and regulations are often interlocking. Compliance typically cuts across government requirements and labor relations.
To varying degrees, health care affects all organizations, whether they conduct business in one location or multiple jurisdictions worldwide. Simply stated, employers must comply with health care regulations afforded their employees in a given country. Organizations must also comply with the medical privacy protections that are in force.
Disability   The concept of disability benefits varies across the globe. Generally, disability refers to payments made to employees who are physically unable to perform their jobs because of illness or injury. Sometimes it covers only incapacitation because of job-related injuries or illnesses; other times it also covers causes outside the workplace.
Short-term, long-term, and permanent disability are usually differentiated, and the source of funding and the length and amount of the benefit for each disability category may vary.
In addition, employers in some countries may be required to provide unpaid leave as a reasonable accommodation under disability antidiscrimination laws.
Severance   To be compliant, a separation pay policy requires a detailed understanding of the complex laws governing severance and restructuring practices and protections for employees in different markets. Many countries have statutory protections regarding severance provisions. Where country laws dictate the terms of termination and end-of-service calculations, organizations have little room for discretion even if the payments and benefits are significantly more generous than company policy would award in unregulated jurisdictions.
Pensions   Upon retirement, workers in many countries continue to receive monetary compensation from their employer, the government, or a combination of both in the form of a pension. The provision of financial remuneration in retirement is critical for both individuals and societies. There is tremendous diversity in pension systems worldwide, as they are the unique product of each country’s particular economic, social, cultural, political, and historical circumstances. Likewise, global pension funding issues are highly complicated.
Fiduciary Responsibility   A fiduciary duty (or fiduciary obligation) implies a legal obligation of one party to act in the best interest of another. The obligated party is typically referred to as a fiduciary (e.g., an individual or party entrusted with the care of money or property).

Countries worldwide regard fiduciary duties differently. Some regulations, for example, stipulate a broad view of fiduciary obligation, while other laws adopt more conservative approaches.